UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-19125

Isis Pharmaceuticals, Inc.

(Exact name of Registrant as specified in its charter)

Delaware		33-0336973
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1896 Rutherford Road, Carlsbad, CA 92008

(Address of principal executive offices, including zip code)

760-931-9200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 Par Value

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Securities Exchange Act of 1934). Yes o No x

The number of shares of voting common stock outstanding as of November 3, 2008 was 97,002,050.

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ISIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	September 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	264,682		$	138,614
Short-term investments	247,341			55,105
Contracts receivable	5,021			6,177
Inventories	5,511			2,817
Other current assets	6,988			4,604
Total current assets	529,543			207,317

Property, plant and equipment, net	14,019			7,131
Licenses, net	17,447			19,100
Patents, net	18,126			17,759
Deposits and other assets	5,557			7,551
Total assets	$	584,692		$	258,858

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	6,885		$	4,507
Accrued compensation	3,956			10,461
Accrued liabilities	5,979			6,794
Derivative instrument related to Abbott’s call option	1,069			—
Current portion of long-term obligations	—			7,238
Current portion of deferred contract revenue	99,794			33,205
Total current liabilities	117,683			62,205

25/8% convertible subordinated notes	162,500			162,500
Long-term obligations, less current portion	5,478			362
Long-term deferred contract revenue	191,279			23,548
Total liabilities	476,940			248,615

Noncontrolling interest in Regulus Therapeutics LLC	6,315			9,371
Noncontrolling interest in Ibis Biosciences, Inc.	33,359			—

Stockholders’ equity:
Common stock, $0.001 par value; 200,000,000 shares authorized, 96,148,212 and 87,239,423 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively	96			87
Additional paid-in capital	900,303			827,992
Accumulated other comprehensive income	(1,271		)	538
Accumulated deficit	(831,050		)	(827,745		)
Total stockholders’ equity	68,078			872
Total liabilities, noncontrolling interest and stockholders’ equity	$	584,692		$	258,858

See accompanying notes

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ISIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Revenue:
Research and development revenue under collaborative agreements	$	31,240		$	11,921		$	78,739		$	17,404
Licensing and royalty revenue	975			26,710			7,790			27,489
Total revenue	32,215			38,631			86,529			44,893

Expenses:
Research and development	31,968			24,296			89,611			64,629
Selling, general and administrative	4,571			4,278			13,206			10,769
Total operating expenses	36,539			28,574			102,817			75,398

Income (loss) from operations	(4,324		)	10,057			(16,288		)	(30,505		)

Other income (expense):
Investment income	7,546			2,603			13,061			9,058
Interest expense	(1,509		)	(1,488		)	(4,297		)	(6,132		)
Gain on investments	—			—			—			3,510
Loss on early retirement of debt	—			—			—			(3,212		)
Loss attributed to noncontrolling interest in Symphony GenIsis, Inc.	—			8,748			—			23,157
Loss attributed to noncontrolling interest in Regulus Therapeutics LLC	1,208			87			3,056			87
Loss attributed to noncontrolling interest in Ibis Biosciences, Inc.	267			—			1,163			—

Net income (loss)	3,188			20,007			(3,305		)	(4,037		)

Excess purchase price over carrying value of noncontrolling interest in Symphony GenIsis, Inc.	—			(125,311		)	—			(125,311		)

Net income (loss) applicable to common stock	$	3,188		$	(105,304	)	$	(3,305	)	$	(129,348	)

Basic and diluted net income (loss) per share	$	0.03		$	(1.25	)	$	(0.04	)	$	(1.57	)

Shares used in computing basic net income (loss) per share	95,863			83,942			93,786			82,650

Shares used in computing diluted net income (loss) per share	100,181			83,942			93,786			82,650

See accompanying notes.

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ISIS PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
Net cash provided by (used in) operating activities	$	231,207		$	(9,762	)

Investing activities:
Purchases of short-term investments	(305,998		)	(61,052		)
Proceeds from the sale of short-term investments	112,227			96,876
Purchases of property, plant and equipment	(7,050		)	(1,452		)
Acquisition of licenses and other assets	(2,585		)	(2,407		)
Proceeds from the sale of strategic investments	—			5,181
Acquisition of Symphony GenIsis, Inc.	—			(80,400		)
Net cash used in investing activities	(203,406		)	(43,254		)

Financing activities:
Net proceeds from issuance of equity	10,543			6,522
Proceeds from issuance of convertible promissory note to GSK	5,000			—
Proceeds from issuance of 25/8% convertible subordinated notes, net of issuance costs	—			157,056
Principal and redemption premium payment on prepayment of the 51/2% convertible subordinated notes	—			(127,021		)
Principal payments on debt and capital lease obligations	(7,238		)	(5,657		)
Proceeds from stock purchase by Genzyme Corporation, net of fees	49,962			—
Proceeds from capital contributions to Ibis Biosciences, Inc.	40,000			—
Proceeds from capital contribution to Regulus Therapeutics LLC	—			10,000
Net cash provided by financing activities	98,267			40,900

Net increase (decrease) in cash and cash equivalents	126,068			(12,116		)
Cash and cash equivalents at beginning of period	138,614			114,514
Cash and cash equivalents at end of period	$	264,682		102,398

Supplemental disclosures of cash flow information:
Interest paid	$	4,482		5,987

Supplemental disclosures of non-cash investing and financing activities:
Amounts accrued for capital and patent expenditures	$	2,657		25
Common stock issued for Symphony GenIsis, Inc. acquisition	$	—		51,093

See accompanying notes.

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ISIS PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)

1. Basis of Presentation

The unaudited interim condensed consolidated financial statements for the three and nine month periods ended September 30, 2008 and 2007 have been prepared on the same basis as the audited financial statements for the year ended December 31, 2007. The financial statements include all normal recurring adjustments, which we consider 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, 2007 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

The condensed consolidated financial statements include the accounts of Isis Pharmaceuticals, Inc. (“we”, “us” or “our”), our wholly owned subsidiaries, Isis Pharmaceuticals Singapore Pte Ltd., Isis USA Ltd. and Symphony GenIsis, Inc. In addition to our wholly owned subsidiaries, our condensed consolidated financial statements include two variable interest entities, Ibis Biosciences, Inc. and Regulus Therapeutics LLC, for which we are the primary beneficiary as defined by Financial Accounting Standards Board Interpretation (“FIN”) 46R (revised 2003), Consolidation of Variable Interest Entities, an Interpretation of ARB 51. All significant intercompany balances and transactions have been eliminated.

2. Significant Accounting Policies

Revenue recognition

We follow the provisions as set forth by Staff Accounting Bulletin (“SAB”) 101, Revenue Recognition in Financial Statements, SAB 104, Revenue Recognition, and Financial Accounting Standards Board Emerging Issues Task Force (“EITF”) 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.

We generally recognize revenue when we have satisfied all contractual obligations and are reasonably assured of collecting the resulting receivable. We are often entitled to bill our customers and receive payment from our customers in advance of recognizing the revenue under current accounting rules. In those instances where we have received payment from our customers in advance of recognizing revenue, the amounts are included in deferred revenue on the consolidated balance sheet.

Research and development revenue under collaborative agreements

We often enter into collaborations where we receive non-refundable upfront payments for prior or future expenditures. We recognize revenue related to upfront payments ratably over our period of performance relating to the term of the contractual arrangements. Occasionally, we are required to estimate our period of performance when the agreements we enter into do not clearly define such information. Should different estimates prevail, revenue recognized could be materially different. To date our estimates have not required material adjustments. We have made estimates of our continuing obligations on several agreements. Our collaborative agreements typically include a research and/or development project plan that includes activities to be performed during the collaboration and the party responsible for performing them. We estimate the period of time over which we will complete the activities for which we are responsible and use that period of time as our period of performance for purposes of revenue recognition and amortize revenue over such period. When our collaborators have asked us to continue performing work in a collaboration beyond the initial period of performance, we have extended our amortization period to correspond to the new extended period of performance. In no case have adjustments to date to performance periods and related adjustments to revenue amortization periods had a material impact on our revenue.

Our collaborations often include contractual milestones. When we achieve these milestones, we are entitled to payment, as defined by the underlying agreements. We generally recognize revenue related to milestone payments upon completion of the milestone’s substantive performance requirement, as long as we are reasonably assured of collecting the resulting receivable and we are not obligated for future performance related to the achievement of the milestone.

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We generally recognize revenue related to the sale of our drug inventory as we ship or deliver drugs to our partners. In several instances, we completed the manufacturing of drugs, but our partners asked us to deliver the drug on a later date. Under these circumstances, we ensured that the provisions in SAB 104 were met before we recognized the related revenue.

We often enter into revenue arrangements that contain multiple deliverables. In these cases, we recognize revenue from each element of the arrangement as long as we are able to determine a separate fair value for each element, we have completed our obligation to deliver or perform on that element and we are reasonably assured of collecting the resulting receivable.

In the fourth quarter of 2006, we started to sell the Ibis T5000 Biosensor System commercially. The sale of each Ibis T5000 Biosensor System contains multiple elements. Since we had no previous experience commercially selling the Ibis T5000 Biosensor System, we had no basis to determine the fair values of the various elements included in each system; therefore, we account for the entire system as one deliverable and recognize revenue over the period of performance. The assay kits, which are sold separately from the instrument, are considered part of the system from an accounting perspective because the assay kits and the instrument are dependent on each other. For a one-year period following the sale, we have ongoing support obligations for the Ibis T5000 Biosensor System; therefore, we are amortizing the revenue for the entire system, including related assay kits, over a one-year period. Once we obtain a sufficient number of sales to enable us to identify each element’s fair value, we will be able to recognize revenue separately for each element.

As part of our Genzyme strategic alliance, in February 2008 Genzyme Corporation made a $150 million equity investment in us by purchasing 5 million shares of our common stock at $30 per share. The price Genzyme paid for our common stock represented a significant premium over the fair value of our stock. Using a Black-Scholes option valuation model, we determined that the value of the premium was $100 million, which represents value Genzyme gave to us to help fund the companies’ research collaboration, which began in January 2008. We accounted for this premium as deferred revenue and are amortizing it along with the $175 million licensing fee ratably into revenue until June 2012, which represents the end of our performance obligation based on the research and development plan included in the agreement. See further discussion about our collaboration with Genzyme in Note 5, Collaborative Arrangements and Licensing Agreements.

Licensing and royalty revenue

We often enter into agreements to license our proprietary patent rights on an exclusive or non-exclusive basis in exchange for license fees and/or royalties. We generally recognize as revenue immediately those licensing fees and royalties for which we have no future significant performance obligations and are reasonably assured of collecting the resulting receivable.

Short-term investments

We have equity investments in privately- and publicly-held biotechnology companies. We hold ownership interests of less than 20% in each of the respective entities. In determining if and when a decrease in market value below our cost in our equity positions is temporary or other-than-temporary, we examine historical trends in the stock price, the financial condition of the issuer, near term prospects of the issuer and our current need for cash. Unrealized gains and losses related to temporary declines are recorded as a separate component of stockholders’ equity. When we determine that a decline in value is other-than-temporary, we recognize an impairment loss in the period in which the other-than-temporary decline occurs. We determined that there were no other-than-temporary declines in value of our investments in the first nine months of 2008 and 2007. During the first nine months of 2007, we sold the remainder of our equity securities of Alnylam Pharmaceuticals, Inc. that we owned resulting in a realized gain of $3.5 million.

Inventory valuation

In accordance with Statement of Financial Accounting Standards (“SFAS”) 2, Accounting for Research and Development Costs, we capitalize the costs of raw materials that we purchase for use in producing our drugs because until we use these raw materials they have alternative future uses. We include in inventory raw material costs and related manufacturing costs for drugs that we manufacture for our partners under contractual terms and that we use primarily in our clinical development activities and drug products. Each of our raw materials can be used in multiple products and, as a result, has future economic value independent of the development status of any single drug. For example, if one of our drugs failed, the raw materials allocated for that drug could be used to manufacture our other drugs. We expense these costs when we deliver the drugs to our partners, or as we provide these drugs for our own clinical trials. Also included in inventory are material costs, labor costs and manufacturing overhead costs associated with the Ibis T5000 Biosensor System and related assay kits. We reflect our inventory on the balance sheet at the lower of cost or market value under the first-in, first-out method. We review inventory periodically and reduce the carrying value of items considered to be slow moving or obsolete to their estimated net realizable value. We consider several factors in estimating the net realizable value, including shelf life of raw materials, alternative uses for our drugs and clinical trial materials and historical write-offs. We did not record any inventory write-offs during the first nine months of 2008 and 2007.

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Total inventory includes the following as of September 30, 2008 and December 31, 2007 (in thousands):

	September 30, 2008		December 31, 2007
Raw materials	$	5,151	$	2,679
Work-in-process	360		138

	$	5,511	$	2,817

Patents

We capitalize costs consisting principally of outside legal costs and filing fees related to obtaining patents. We review our capitalized patent costs regularly to determine that they include costs for patent applications that have future value. We evaluate costs related to patents that we are not actively pursuing and write off any of these costs, if appropriate. We amortize patent costs over their estimated useful lives of ten years, beginning with the date the patents are issued. For the first nine months of 2008 and 2007, we recorded a non-cash charge of $1.6 million and $515,000, respectively, which was included in research and development expenses and was related to the assignment of patents to certain of our partners and the write-down of our patent costs to their estimated net realizable values.

Long-lived assets

We assess the value of our long-lived assets, which include property, plant and equipment, patent costs, and licenses acquired from third parties, under the provisions set forth by SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and we evaluate our long-lived assets for impairment on at least a quarterly basis.

Use of estimates

The preparation of condensed consolidated 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 condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Historically, our estimates have been accurate as we have not experienced any material differences between our estimates and our actual results.

Basic and diluted net income (loss) per share

We follow the provisions of SFAS 128, Earnings per Share. We compute basic net income (loss) per share by dividing the net income (loss) applicable to common stock by the weighted-average number of common shares outstanding during the period. We compute diluted net income (loss) per share using the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period. Diluted common equivalent shares for the three months ended September 30, 2008 consisted of 3.3 million shares issuable upon exercise of stock options and 1.0 million shares issuable upon exercise of warrants. The calculation excludes the 25/8% convertible subordinated notes, the convertible promissory note to GlaxoSmithKline and 2.9 million stock options because the effect on diluted earnings per share would be anti-dilutive. As we incurred a loss for the three months ended September 30, 2007 and nine months ended September 30, 2008 and 2007, we did not include diluted common equivalent shares in the computation of diluted net loss per share because the effect would be anti-dilutive.

Consolidation of variable interest entities

We have implemented the provisions of FIN 46R, which addresses consolidation by business enterprises of variable interest entities either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. As of September 30, 2008, we had collaborative arrangements with nine entities that we consider to be variable interest entities under FIN 46R. For the first nine months of 2008, our condensed consolidated financial statements included two variable interest entities, Ibis and Regulus, for which we are the primary beneficiary. Until our acquisition of Symphony GenIsis in September 2007, our condensed consolidated financial statements for the first nine months of 2007 included two variable interest entities, Ibis and Symphony GenIsis, for which we were the primary beneficiary. Beginning in September 2007, our condensed consolidated financial statements also include the financial condition and results of operations of Regulus as we treat Regulus as a variable interest entity for which we are the primary beneficiary.

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Comprehensive income (loss)

SFAS 130, Reporting Comprehensive Income, requires us to report, in addition to net income (loss), comprehensive income (loss) and its components. A summary follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008			2007
Comprehensive income (loss):
Unrealized holding gains (losses)	$	(4,001	)	$	93	$	(1,809	)	$	(620	)
Reclassification adjustment for realized gains included in net loss	—			—		—			(3,147		)
Net income (loss)	3,188			20,007		(3,305		)	(4,037		)
Comprehensive income (loss)	$	(813	)	$	20,100	$	(5,114	)	$	(7,804	)

Stock-based compensation expense

We account for our stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123R, Share-Based Payment. We estimate the fair value of each stock option granted to employees and the employee stock purchase plan (“ESPP”) purchase rights on the date of grant using the Black-Scholes model. The expected term of stock options granted represents the period of time that they are expected to be outstanding. For the stock options granted on or after January 1, 2008, we estimated the expected term of options granted based on historical exercise patterns. For the stock options granted prior to January 1, 2008, the estimated expected term is a derived output of the simplified method, as allowed under SAB 107.

For the nine months ended September 30, 2008 and 2007, we used the following weighted-average assumptions in our Black-Scholes calculations:

Employee Stock Options:

	Nine Months Ended September 30,
	2008		2007
Risk-free interest rate	3.1	%	4.7	%
Dividend yield	0.0	%	0.0	%
Volatility	55.1	%	63.4	%
Expected Life	4.6 years		4.6 years

Board of Director Stock Options:

	Nine Months Ended September 30,
	2008		2007
Risk-free interest rate	3.8	%	4.9	%
Dividend yield	0.0	%	0.0	%
Volatility	62.2	%	65.5	%
Expected Life	7.6 years		7.4 years

ESPP:

	Nine Months Ended September 30,
	2008		2007
Risk-free interest rate	2.8	%	5.1	%
Dividend yield	0.0	%	0.0	%
Volatility	61.4	%	51.1	%
Expected Life	6 months		6 months

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We record stock options granted to non-employees, which consist primarily of options granted to Regulus’ Scientific Advisory Board, at their fair value in accordance with the requirements of SFAS 123R, then periodically remeasure them in accordance with EITF 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and recognize the expense over the service period.

Stock-based compensation expense for the three and nine months ended September 30, 2008 and 2007 (in thousands, except per share data) was allocated as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007

Research and development	$	3,105		$	1,956		$	9,372		$	5,834
Selling, general and administrative	945			499			2,443			1,374
Non-cash compensation expense related to stock options included in operating expenses	$	4,050		$	2,455		$	11,815		$	7,208
Stock-based compensation expense, per share:
Basic and diluted	$	(0.04	)	$	(0.03	)	$	(0.13	)	$	(0.09	)

As part of the Regulus joint venture, both we and Alnylam issued our own company’s stock options to members of Regulus’ Board of Directors and Scientific Advisory Board. The expenses associated with these options are recorded on Regulus’ books. Since we are consolidating the financial results of Regulus, $752,000 and $1.8 million of non-cash stock based compensation expense associated with these options for the three and nine months ended September 30, 2008 was included in our consolidated expenses compared to $80,000 for the same periods in 2007.

As of September 30, 2008, total unrecognized compensation cost related to non-vested stock-based compensation plans was $18.0 million. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize this cost over a weighted average period of 1.3 years.

Impact of recently issued accounting standards

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment to ARB No. 51. This statement states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 applies to all entities that prepare consolidated financial statements, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective for fiscal years beginning after December 15, 2008, and will be effective for our fiscal year 2009. We do not expect the adoption of SFAS 160 to have a material impact on our results of operations and financial position but the retrospective presentation requirements of SFAS 160 will impact how noncontrolling interests are presented in our previously filed consolidated financial statements.

In May 2008, FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement), (“FSP No. APB 14-1”). This standard states that entities with convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separate the liability and equity components of the instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP No. APB 14-1 will require that the value assigned to the debt component be equal to the estimated fair value of a similar debt instrument without the conversion feature, which results in the debt being recorded at a discount. The resulting debt discount will be amortized over the period during which the debt is expected to be outstanding as additional non-cash interest expense. This standard is effective for fiscal years beginning on or after December 15, 2008, will be effective for our fiscal year 2009, and must be applied retrospectively to all periods presented. The adoption of FSP No. APB 14-1 will not impact our cash, cash equivalents and short-term investments but we anticipate that it will significantly increase the amount of interest expense that is recorded in our statement of operations due to the non-cash amortization of the debt discount. Additionally, we anticipate that the adoption of this standard will significantly decrease our debt balance as of December 31, 2008, with a corresponding increase to shareholders’ equity.

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In June 2008, the EITF issued EITF 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. EITF 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. EITF 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and will be effective for our fiscal year 2009. Early adoption for an existing instrument is not permitted. We do not expect this new guidance to have a material impact on our consolidated financial statements.

3. Fair Value Measurements

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. We have adopted the provisions of SFAS 157 as of January 1, 2008. Although the adoption of SFAS 157 did not impact our financial condition, results of operations, or cash flow, we are now required to provide additional disclosures as part of our financial statements.

SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets, which includes our available-for-sale securities and equity securities in publicly-held biotechnology companies; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, which includes our auction rate security and commercial paper classified as available-for-sale securities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, which includes the derivative instruments related to the subscription right and call option granted to Abbott Molecular Inc.

The fair value of the assets and liabilities required to be measured at fair value on a recurring basis was determined using the following inputs in accordance with SFAS 157 at September 30, 2008 (in thousands):

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities (1)	$	482,543	$	402,738	$	79,805	$	—
Derivative instrument (2)	1,069		—		—		1,069		(4)
Equity securities (3)	2,648		2,648		—		—
Total	$	486,260	$	405,386	$	79,805	$	1,069

(1) Included in cash and cash equivalents and short term investments on our Condensed Consolidated Balance Sheets.

(2) Included in current liabilities on our Condensed Consolidated Balance Sheets.

(3) Included in other current assets on our Condensed Consolidated Balance Sheets.

(4) Represents the derivative instrument related to the call option granted to Abbott. As of September 30, 2008, the derivative instrument line item did not include the subscription right as it was exercised on June 27, 2008 (see additional discussion in Note 5, Collaborative Arrangements and Licensing Agreements).

The following table presents a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from December 31, 2007 to September 30, 2008 (in thousands):

	Derivative Instruments
Balance at December 31, 2007	$	—
Issuance of derivative instruments	5,376		(1)
Adjustment to fair value included in earnings	(4,257		)(2)
Exercise of subscription right	(50		)(3)
Balance at September 30, 2008	$	1,069

(1) Represents the derivative instruments related to the subscription right and call option granted to Abbott (see additional discussion in Note 5, Collaborative Arrangements and Licensing Agreements).

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(2) The subscription right and call option granted to Abbott are revalued at the end of each reporting period until they expire or are exercised. The resulting difference in fair value is included in our results of operations. For the first nine months of 2008, the adjustment to fair value resulted in a gain and was included in investment income.

(3) The subscription right was exercised by Abbott on June 27, 2008 (see additional discussion in Note 5, Collaborative Arrangements and Licensing Agreements).

Additionally, in February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. This statement allows entities to account for most financial instruments at fair value rather than under other applicable GAAP, such as historical cost. Under SFAS 159, an asset or liability is required to be marked to fair value every reporting period with the gain or loss from a change in fair value recorded in the statement of operations. We adopted the provisions of SFAS 159 in the first quarter of 2008. SFAS 159 permits companies to make an election to carry certain eligible financial assets and liabilities at fair value. We have made the election not to measure any additional assets and liabilities at fair value other than our available-for-sale and equity securities that are currently required by SFAS 115, Accounting for Certain Investments in Debt and Equity Securities and our derivative instruments that are currently required under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, to be revalued at fair value each reporting period. Therefore, the adoption of SFAS 159 did not impact our results of operations, financial position or cash flows.

4. Long-Term Obligations

In January 2007, we completed a $162.5 million convertible debt offering, which raised proceeds of approximately $157.1 million, net of $5.4 million in issuance costs. We included the issuance costs in our balance sheet and are amortizing these costs to interest expense over the life of the debt. The $162.5 million convertible subordinated notes mature in 2027 and bear interest at 25/8%, which is payable semi-annually. The 25/8% notes are convertible, at the option of the note holders, into approximately 11.1 million shares of our common stock at a conversion price of $14.63 per share. We will be able to redeem the 25/8% notes at a redemption price equal to 100.75% of the principal amount between February 15, 2012 and February 14, 2013; 100.375% of the principal amount between February 15, 2013 and February 14, 2014; and 100% of the principal amount thereafter. Holders of the 25/8% notes also are able to require us to repurchase these notes on February 15, 2014, February 15, 2017 and February 15, 2022, and upon the occurrence of certain defined conditions, at 100% of the principal amount of the 25/8% notes being repurchased plus accrued interest and unpaid interest.

In 2007, we used the net proceeds from the issuance of the 25/8% notes to repurchase our 51/2% convertible subordinated notes due in 2009 for a redemption price of $127.0 million plus accrued but unpaid interest. As a result of the repayment of these notes, we recognized a $3.2 million loss on the early extinguishment of debt in the first nine months of 2007, which included a $1.2 million non-cash write-off of unamortized debt issuance costs.

In December 2003, we obtained a $32.0 million term loan from Silicon Valley Bank. The term loan was payable in monthly payments of principal and interest and was to mature in December 2008. In September 2008, we paid off the remaining principal balance of $1.8 million plus accrued but unpaid interest.

5. Collaborative Arrangements and Licensing Agreements

The information discussed below represents partnerships we entered into during 2008 and any material changes to partnerships entered into prior to 2008. There are no other material changes from the information provided in Note 6, Collaborative Arrangements and Licensing Agreements of the Consolidated Financial Statements section, included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Pharmaceutical Alliances and Licensing

Genzyme Corporation

In January 2008, we entered into a strategic alliance with Genzyme focused on the licensing of mipomersen and a research relationship. The transaction included a $175 million licensing fee, a $150 million equity investment in us (5 million shares of our common stock at $30 per share), over $1.5 billion in potential milestone payments and a share of profits on mipomersen and follow-on drug(s) ranging from 30 to 50 percent of all commercial sales. Under this alliance, we will over time transition the development responsibility to Genzyme and Genzyme will be responsible for the commercialization of mipomersen. We will contribute up to the first $125 million in funding for the development costs of mipomersen. Thereafter we and Genzyme will share development costs equally. Our initial development funding commitment and the shared funding will end when the program is profitable.

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Genzyme has agreed that it will not sell its equity investment in Isis stock that it purchased in February 2008 until the earlier of four years from the date of our mipomersen license agreement, the first commercial sale of mipomersen and the termination of our mipomersen license agreement. Thereafter, Genzyme will be subject to monthly limits on the number of shares it can sell. In addition, Genzyme has agreed that until the earlier of the 10 year anniversary of the mipomersen license agreement and the date Genzyme holds less than 2% of our issued and outstanding common stock, Genzyme will not acquire any additional shares of our common stock without our consent.

The price Genzyme paid for our common stock represented a significant premium over the fair value of our common stock. Using a Black-Scholes option valuation model, we determined that the value of the premium was $100 million, which represents value Genzyme gave to us to help fund the companies’ research collaboration that began in January 2008. We are amortizing this premium along with the $175 million licensing fee that we received in the second quarter of 2008 ratably into revenue until June 2012, which represents the end of our performance obligation based on the research and development plan included in the agreement. For the three and nine months ended September 30, 2008, we recognized revenue of $16.6 million and $31.6 million, respectively, related to the $100 million premium and the $175 million licensing fee, which represented 36% of our total revenue for the first nine months of 2008. Our Condensed Consolidated Balance Sheet at September 30, 2008 included deferred revenue of $243.4 million, which represents the remaining premium and licensing fee.

Drug Discovery and Development Satellite Company Collaborations

Antisense Therapeutics Limited

In December 2001, we licensed ATL/TV1102 to ATL, an Australian company publicly traded on the Australian Stock Exchange and in February 2008, ATL licensed ATL/TV1102 to Teva Pharmaceutical Industries Ltd. As part of our licensing agreement with ATL, we will receive one third of sublicense fees and milestone payments ATL receives from Teva as well as a percentage of any royalties. As a result of the encouraging data that ATL and Teva reported from a Phase 2a study on ATL/TV1102 in patients with relapsing and remitting multiple sclerosis, we earned $1.4 million as our portion of ATL’s licensing fee and milestone payment from Teva which we included in revenue in the second quarter of 2008.

In addition to ATL/TV1102, ATL is currently developing ATL1103 for growth and sight disorders. ATL1103 is a product of our joint antisense drug discovery and development collaboration, which we extended for an additional two years in January 2007. ATL pays us for access to our antisense expertise and for research and manufacturing services we may provide to ATL during the collaboration. Additionally, ATL will pay royalties to us on any antisense drugs discovered and developed within the partnership.

In connection with this collaboration, we received 30.0 million shares of ATL common stock upon completion of ATL’s initial public offering, representing an initial ownership percentage of approximately 14%. The initial ATL common stock we received had a value of $2.8 million, and we recognized this amount into revenue ratably over the five-year period of performance under the collaboration, which ended in November 2006. There were no changes in our period of performance. Our Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007 included deferred revenue of $432,000 and $250,000, respectively, related to our agreements with ATL. For the three and nine months ended September 30, 2008, we recorded revenue of $0 and $1.4 million related to this collaboration, compared to $3,000 and $58,000 for the same periods in 2007. As of September 30, 2008 and December 31, 2007, our ownership percentage in ATL, including 10.3 million shares we purchased subsequent to shares we acquired in ATL’s initial public offering, was less than 10% of ATL’s equity. Our balance sheets at September 30, 2008 and December 31, 2007 included a short-term investment at fair market value of $1.7 million and $1.4 million, respectively, related to this equity investment.

OncoGenex Pharmaceuticals, formerly OncoGenex Technologies Inc.

In November 2001, we established a drug development collaboration with OncoGenex, a biotechnology company committed to the development of cancer therapeutics for patients with drug resistant and metastatic cancers, to co-develop and commercialize OGX-011, an anti-cancer antisense drug that targets clusterin. In July 2008, we amended and restated the original agreement and OncoGenex has elected to independently develop OGX-011. Under the amended agreement, OncoGenex is solely responsible for all future development activities, costs and partnering decisions related to OGX-011. We will receive single digit royalties on future revenues of OGX-011 and a portion of license fees and milestone payments received by OncoGenex from any future partner.

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In September 2003, the companies expanded their antisense drug development partnership to include the development of the second-generation antisense anti-cancer drug, OGX-225. OncoGenex is responsible for the preclinical and clinical development of the drug and we have no performance obligations. OncoGenex issued to us $750,000 of OncoGenex securities as payment for an upfront fee. In addition, OncoGenex will pay us milestone payments totaling up to $3.5 million for the achievement of clinical and regulatory milestones, and royalties on product sales. As of September 30, 2008, OncoGenex had not triggered any of the milestone payments related to OGX-225.

In January 2005, we further broadened our antisense drug development partnership with OncoGenex to allow for the development of two additional second-generation antisense anti-cancer drugs. Under the terms of the agreement, OncoGenex is responsible for the preclinical and clinical development of the drugs and we have no performance obligations. In April 2005, OncoGenex selected its first drug under this expansion, OGX-427 which targets Hsp27. OncoGenex paid us an upfront fee of $750,000 with a convertible note, which, in August 2005, converted into 244,300 shares of OncoGenex’s preferred stock. OncoGenex will also pay us milestone payments totaling up to $5 million for the achievement of key clinical and regulatory milestones, and royalties on future product sales of these drugs. As of September 30, 2008, OncoGenex had not triggered any of the milestone payments related to OGX-427.

For the three and nine months ended September 30, 2008, we did not earn any revenue relating to our collaboration with OncoGenex, compared to $0 and $4,000 for the same periods in 2007. Our balance sheet at December 31, 2007 included an investment of $1.5 million related to our equity investment in OncoGenex. In August 2008, OncoGenex merged into Sonus Pharmaceuticals, a publicly traded company, and began doing business under the name OncoGenex Pharmaceuticals. Prior to finalizing the merger, OncoGenex effected a 1:18 reverse stock split. As a result of this merger, our equity investment in OncoGenex is now traded on a publicly traded exchange and at September 30, 2008 had a fair value of $227,000. The carrying value of our equity investment in OncoGenex has been negatively affected by the unusually poor conditions of the financial markets recently. As a result, we do not believe an impairment charge is appropriate at this time. As of September 30, 2008 and December 31, 2007, our ownership interest in OncoGenex was less than 10%.

Ibis Collaborations

Abbott Molecular Inc.

In January 2008, we, Ibis and Abbott entered into a strategic alliance master agreement pursuant to which:

· Abbott purchased Ibis common stock representing approximately 10.25% of the issued and outstanding common stock of Ibis for a total purchase price of $20 million;

· Ibis granted Abbott a subscription right to purchase an additional $20 million of Ibis common stock before July 31, 2008, which when combined with Abbott’s initial investment would represent approximately 18.6% of the issued and outstanding common stock of Ibis. On June 27, 2008, Abbott exercised this subscription right by purchasing an additional $20 million of Ibis common stock;

· We granted Abbott a call option to acquire from us all remaining Ibis capital stock for a purchase price of $175 million, which, subject to Ibis satisfying a defined set of objectives, may be increased to as much as $190 million;

· If Abbott ultimately acquires Ibis under the call option agreement, Abbott will make the earn out payments described below, which will enable our shareholders to continue to benefit from Ibis’ success.

The investment by Abbott provides Ibis the funding to take the key next steps in enhancing its value, while allowing it to remain independent and focused during the option period so as to best enable this progress. This alliance with Abbott also provides Ibis the benefit of an experienced partner in molecular diagnostics and will focus Ibis on commercial success.

If Abbott acquires from us all of the remaining Ibis capital stock under the call option, Abbott will pay us earn out payments equal to a percentage of Ibis’ revenue related to sales of Ibis T5000 Biosensor Systems, including instruments, assay kits and successor products from the date of the final acquisition through December 31, 2025. These earn out payments equal 5% of Ibis’ cumulative net sales over $150 million and up to $2.1 billion, and 3% of Ibis’ cumulative net sales over $2.1 billion. The earn out payments may be reduced from 5% to as low as 2.5% and from 3% to as low as 1.5%, respectively, upon the occurrence of certain events. In addition, as part of the final acquisition, Ibis will distribute to us, immediately prior to the closing, all of Ibis’ cash on hand and any receivables or other payments due to Ibis under government contracts and grants held by Ibis as of the closing.

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The call option initially expires on December 31, 2008. Until the expiration of the call option, we and Ibis must obtain Abbott’s consent before we or Ibis can take specified actions, such as amending Ibis’ certificate of incorporation, redeeming, repurchasing or paying dividends on Ibis’ capital stock, issuing any Ibis capital stock, entering into a transaction for the merger, consolidation or sale of Ibis, creating any Ibis indebtedness, or entering into any Ibis strategic alliance, joint venture or joint marketing agreement. In addition, the strategic alliance contains a make whole provision such that in the event of a liquidation or change of control of Ibis, Abbott will receive a payment equal to the price paid per share of the capital stock of Ibis acquired by Abbott in the initial investment and under the subscription right, plus a yield of 3% annually from the date Abbott purchased the Ibis common stock, prior to the distribution of any proceeds to any other holders of Ibis capital stock.

We valued each element of the initial transaction and as a result allocated $14.6 million to the initial stock purchase with the remaining $5.4 million allocated to the call option and the subscription right (the “derivative instruments”). On June 27, 2008, Abbott exercised its subscription right and purchased an additional $20 million of Ibis’ common stock. As a result of Abbott’s investments in Ibis, Abbott is a minority owner of Ibis. Therefore, the cumulative value attributed to the initial and subsequent stock purchase of $34.6 million was recorded as a “Noncontrolling Interest in Ibis Biosciences, Inc.” on our Condensed Consolidated Balance Sheet. As the strategic alliance progresses, this line item will be reduced by Abbott’s share of Ibis’ net losses, which were $1.2 million in the first nine months of 2008, until the balance becomes zero or until Abbott acquires Ibis. The reductions to the Noncontrolling Interest in Ibis will be reflected in our Condensed Consolidated Statement of Operations using a similar caption and will improve our reported net loss. At the close of the initial transaction, $5.4 million of combined value attributed to the derivative instruments was included in the current liabilities section of our Condensed Consolidated Balance Sheet. As required by current accounting rules, we revalue the derivative instruments at the end of each quarter until they expire or are exercised. Since Abbott exercised the subscription right on June 27, 2008, the remaining liability of $1.1 million represents the fair value of only the call option at September 30, 2008.

In addition to the previously mentioned items, Ibis and Abbott have entered into two other important transactions, which enhance the two companies’ strategic alliance. In the second quarter of 2008, Abbott entered into a distribution agreement with Ibis by paying Ibis $480,000 in the form of an up-front payment for the right to be a non-exclusive distributor for the marketing, promotion, solicitation, sales and distribution of Ibis assay kits and Ibis T5000 Biosensor Systems to customers worldwide. In the third quarter of 2008, Ibis entered into a consulting agreement with Abbott primarily focused on advancing the regulatory work and implementing the quality systems necessary for Ibis to enter into the clinical diagnostics market.

Regulus Collaborations

In April 2008, Regulus entered into a strategic alliance with GSK to discover, develop and market novel microRNA-targeted therapeutics to treat inflammatory diseases such as rheumatoid arthritis and inflammatory bowel disease. The alliance utilizes Regulus’ expertise and intellectual property position in the discovery and development of microRNA-targeted therapeutics and provides GSK with an option to license drug candidates directed at four different microRNA targets with relevance in inflammatory disease. Regulus will be responsible for the discovery and development of the microRNA antagonists through completion of clinical proof of concept, unless GSK chooses to exercise its option earlier. After exercise of the option, GSK will have an exclusive license to drugs developed under each program by Regulus for the relevant microRNA target for further development and commercialization on a worldwide basis. Regulus will have the right to further develop and commercialize any microRNA therapeutics which GSK chooses not to develop or commercialize.

Regulus received $20 million in upfront payments from GSK, including a $15 million option fee and a $5 million note. The note plus interest will convert into Regulus common stock in the future if Regulus achieves a minimum level of financing with institutional investors. In addition, we and Alnylam are guarantors of the note, and if the note does not convert or is not repaid in cash after three years, we, Alnylam and Regulus may elect to repay the note plus interest with shares of each company’s common stock. Regulus could also be eligible to receive up to $144.5 million in development, regulatory and sales milestone payments for each of the four microRNA-targeted drugs discovered and developed as part of the alliance. In addition to the potential of up to nearly $600 million Regulus could receive in option, license and milestone payments, Regulus would also receive tiered royalties up to double digits on worldwide sales of drugs resulting from the alliance.

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The $15 million option fee is being amortized into revenue over Regulus’ six year period of performance. The $5 million note is shown as a liability on our Condensed Consolidated Balance Sheet. For the three and nine months ended September 30, 2008, we recognized revenue of $681,000 and $1.4 million, respectively, compared to $41,000 for the same periods in 2007. The increase in 2008 is primarily due to the $15 million option fee received from GSK. Our Condensed Consolidated Balance Sheets at September 30, 2008 included deferred revenue of $14.1 million compared to $214,000 at December 31, 2007.

6. Segment Information and Concentration of Business Risk

Segment information

We report our financial results in three reportable segments, Drug Discovery and Development, Ibis and Regulus. Segment income (loss) from operations includes revenue less research and development expenses, cost of commercial revenue for our Ibis subsidiary, selling, general and administrative expenses, and other charges attributable to each segment. See the Business Segments discussion within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 below for additional information on the segments.

Our Drug Discovery and Development segment generates revenue from collaborations with corporate partners and from licensing proprietary patent rights. Revenue from collaborations with corporate partners may consist of upfront payments, funding for research and development activities, milestone payments and royalties or profit sharing payments. This segment’s proprietary technology to discover and characterize novel antisense inhibitors has enabled our scientists to modify the properties of our antisense drugs for optimal use with particular targets and thus, to produce a broad proprietary portfolio of drugs applicable to many disease targets.

Our Ibis subsidiary generates revenue from grants and contracts from United States government agencies, from sales of its Ibis T5000 Biosensor System and related assay kits and the analysis of samples within its assay services laboratory.

Our Regulus joint venture generates revenue from research grants and collaborations with corporate partners such as its strategic alliance with GSK.

The following is information for revenue, income (loss) from operations and total assets by segment (in thousands):

	Drug Discovery and Development			Ibis			Regulus			Total
Three Months Ended September 30, 2008
Revenue:
Research and development	$	27,807		$	2,128		$	681		$	30,616
Commercial revenue (1)	—			624			—			624
Licensing and royalty	975			—			—			975
Total segment revenue	$	28,782		$	2,752		$	681		$	32,215
Income (loss) from operations	$	3,316		$	(5,430	)	$	(2,210	)	$	(4,324	)

Three Months Ended September 30, 2007
Revenue:
Research and development	$	7,242		$	3,589		$	41		$	10,872
Commercial revenue (1)	—			1,049			—			1,049
Licensing and royalty	26,710			—			—			26,710
Total segment revenue	$	33,952		$	4,638		$	41		$	38,631
Income (loss) from operations	$	11,393		$	(1,248	)	$	(88	)	$	10,057

Nine Months Ended September 30, 2008
Revenue:
Research and development	$	68,321		$	6,072		$	1,429		$	75,822
Commercial revenue (1)	—			2,917			—			2,917
Licensing and royalty	7,790			—			—			7,790
Total segment revenue	$	76,111		$	8,989		$	1,429		$	86,529
Income (loss) from operations	$	3,646		$	(14,743	)	$	(5,191	)	$	(16,288	)
Total assets as of September 30, 2008	$	523,381		$	35,239		$	26,072		$	584,692

Nine Months Ended September 30, 2007
Revenue:
Research and development	$	9,258		$	5,615		$	41		$	14,914
Commercial revenue (1)	—			2,490			—			2,490
Licensing and royalty	27,489			—			—			27,489
Total segment revenue	$	36,747		$	8,105		$	41		$	44,893
Loss from operations	$	(23,165	)	$	(7,252	)	$	(88	)	$	(30,505	)
Total assets as of December 31, 2007	$	239,099		$	9,313		$	10,446		$	258,858

(1) Ibis’ commercial revenue has been classified as research and development revenue under collaborative agreements on our Condensed Consolidated Statements of Operations.

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Concentrations of business risk

We have historically funded our operations in part from collaborations with corporate partners and as it relates to Ibis, from collaborations with various government agencies. Additionally, beginning in the second half of 2006, Ibis began selling commercial products and services. A relatively small number of partners historically have accounted for a significant percentage of our revenue. Revenue from significant partners, which is defined as 10% or more of our total revenue, was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Partner A	52	%	0	%	36	%	0	%
Partner B	23	%	13	%	28	%	11	%
Partner C	10	%	5	%	11	%	7	%
Partner D	0	%	69	%	5	%	59	%

For the three months ended September 30, 2008 and 2007, we derived approximately 9% and 12%, respectively, of our revenue from agencies of the United States Government in aggregate, compared to 11% and 18% for the nine months ended September 30, 2008 and 2007, respectively. For the first nine months of 2008 and 2007, none of our significant partners were agencies of the United States Government.

Contract receivables from three significant partners comprised approximately 25%, 19% and 14% of contract receivables at September 30, 2008. Contract receivables from three significant partners comprised approximately 25%, 19% and 11% of contract receivables at December 31, 2007.

7. Subsequent Event

On October 15, 2008, we entered into a loan agreement related to an equipment financing. Under the loan agreement, we may borrow up to $10 million in principal to finance the purchase of equipment. Each loan under the loan agreement will have a term of approximately 3 years, with principal and interest payable monthly. Interest on amounts we borrow under the loan agreement will be calculated based upon the 3 year interest rate swap at the time each draw down is made plus 4%. We are using the equipment purchased under the loan agreement as collateral. In October 2008, we had drawn approximately $7.2 million in principal under this equipment financing.

ITEM 2.

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

In this Report on Form 10-Q, unless the context requires otherwise, “Isis,” “Company,” “we,” “our,” and “us,” means Isis Pharmaceuticals, Inc. and its subsidiaries.

Forward-Looking Statements

In addition to historical information contained in this Report on Form 10-Q, this Report includes forward-looking statements regarding our business, the financial outlook for Isis Pharmaceuticals, Inc. as well as our Ibis Biosciences subsidiary and our Regulus joint venture, and the therapeutic and commercial potential of our technologies and products in development. Any statement describing our goals, expectations, financial or other projections, intentions or beliefs is a forward-looking statement and should be considered an at-risk statement, including those statements that are described as Isis’ goals and projections. Such statements are subject to certain risks and uncertainties, particularly those inherent in the process of discovering, developing and commercializing drugs that are safe and effective for use as human therapeutics, in developing and commercializing systems to identify infectious organisms that are effective and commercially attractive, and in the endeavor of building a business around such products. Our forward-looking statements also involve assumptions that, if they never materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward looking statements. Although our forward-looking statements reflect the good faith judgment of our management, these statements are based only on facts and factors currently known by us. As a result, you are cautioned not to rely on these forward-looking statements. These and other risks concerning our programs are described in additional detail in our Annual Report on Form 10-K for the year ended December 31, 2007, which is on file with the U.S. Securities and Exchange Commission, and those identified within this Item entitled “Risk Factors” beginning on page 30 of this Report.

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Overview

We are a leading company in antisense technology exploiting a novel drug discovery platform to create a broad pipeline of first-in-class drugs. Through our highly efficient and prolific drug discovery platform, we can expand our drug pipeline and our partner’s drug pipelines with antisense drugs that address significant unmet medical needs. Our business strategy is to do what we do best–to discover unique antisense drugs and conduct early development on these drugs to key value inflection points. Because we can discover more drugs than we can develop, our plan is to discover new drugs, outlicense our drugs to partners and build a growing annuity of milestone payments and royalty income. In this way, we maximize the value of the drugs we discover by licensing our drugs to partners at key development points, which allows us to focus on utilizing our antisense technology platform to discover new drugs. At the same time, we benefit from our partner’s expertise to develop, commercialize and market our drugs. For example, we partner our drugs with leading pharmaceutical companies, such as Bristol-Myers Squibb Company, Genzyme and Ortho-McNeil, Inc. as well as with smaller satellite companies that have expertise in specific disease areas. In addition to our cutting edge antisense programs, we maintain technology leadership beyond our core areas of focus through collaborations with Alnylam and Regulus, our joint venture created to focus on microRNA therapeutics. We explore the technology beyond antisense with additional opportunities in infectious disease identification through our Ibis subsidiary and in the discovery and development of aminoglycoside and aptamer drugs through our technology partners, Achaogen, Inc. and Archemix, respectively. All of these aspects fit into our unique business model and create continued shareholder value.

We protect our proprietary RNA-based technologies and products through our substantial and vast patent estate of more than 1,500 issued patents. We remain one of the largest patent holders in the U.S., and with our ongoing research and development, our patent portfolio continues to grow. The patents not only protect our key assets–our technology, our drugs, and the Ibis T5000 Biosensor System–they also form the basis for lucrative licensing and partnering arrangements. We have generated more than $118 million from our intellectual property licensing program that helps support our internal drug discovery and development programs.

In addition to the important progress we and our partners made with our second generation drugs in development and the achievements of our Ibis subsidiary in commercializing the Ibis T5000 Biosensor System, to date in 2008, we have completed several transactions that significantly strengthened our financial position. In January 2008, we entered into a strategic alliance with Genzyme in which Genzyme made a $150 million equity investment in our common stock. Subsequently in June 2008, we received an additional $175 million licensing fee from Genzyme when we completed the detailed mipomersen license agreement. Furthermore in January 2008, we and Ibis entered into a strategic alliance with Abbott in which Abbott made a $20 million investment in Ibis by purchasing 10.25% of Ibis’ common stock, a subscription right to purchase an additional 8.35% of Ibis’ common stock and a call option to acquire Ibis’ remaining equity for $175 million to $190 million. Subsequently in June 2008, Abbott exercised its subscription right and made a second $20 million investment to purchase additional equity in Ibis. In April 2008, Regulus entered into a strategic partnership with GSK. These partnerships have provided us with an aggregate of approximately $385 million in cash payments to date and the potential to earn over $2.1 billion in milestone payments. We also will share in the future commercial success of the drugs resulting from these partnerships through profit sharing and royalties as well as in the commercial success of Ibis if Abbott acquires Ibis through earn out payments based on Ibis’ future cumulative sales. These transactions represent the value that we are realizing from our extensive product pipeline and the successes of our partnering strategy, and provide us with the financial strength to continue to successfully execute our goals.

As evidenced from our recent partnering successes, we continue to benefit from our business strategy that enables us to discover and develop drugs and technologies, nurturing them until the right time to progress them to partners or to satellite companies. This strategy has provided us with the financial strength and the diverse pipeline of drugs that we have today. We plan to continue to add new drugs to grow our pipeline; already in 2008 we have added two drugs, PCSK9, our development candidate with BMS for which we earned a $2 million milestone payment and EXC001, a development candidate discovered by us and being developed by Excaliard Pharmaceuticals, Inc. for the local treatment of fibrosis.

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Business Segments

We focus our business on three principal segments:

Drug Discovery and Development Within our primary business segment, we are exploiting a novel drug discovery platform to create a broad pipeline of first-in-class drugs for us and our partners. Our proprietary technology enables us to rapidly identify drugs, providing a wealth of potential targets to treat a broad range of diseases. We focus our efforts in therapeutic areas where our drugs will work best, efficiently screening many targets in parallel and selecting the best drugs. This efficiency combined with our rational approach to selecting disease targets enables us to build a large and diverse portfolio of drugs designed to treat a variety of health conditions. We currently have 19 drugs in development. Our partners are licensed to develop, with our support, 15 of these 19 drugs, which substantially reduces our development costs. We focus our internal drug development programs mainly on drugs to treat cardiovascular and metabolic diseases. Our partners focus on disease areas such as ocular, viral, inflammatory and neurodegenerative diseases, and cancer.

Ibis Biosciences, Inc. Ibis, formerly a wholly owned subsidiary of Isis and now a majority-owned subsidiary of Isis, has developed and is commercializing its biosensor technology, including the Ibis T5000 Biosensor System and assay kits. Ibis’ T5000 offers a unique solution for rapid identification and characterization of infectious agents. It can identify virtually all bacteria, viruses and fungi and provide information about drug resistance, virulence and strain type of these pathogens within several hours. Ibis is developing, manufacturing and selling the Ibis T5000 instruments along with the Ibis T5000 assay kits. Currently we are selling research use only kits for many applications. Examples of these kits include influenza surveillance, Staphylococcus aureus genotyping and characterization, antibiotic resistance determination and anthrax genotyping. We continue to develop new kits, and as defined through our agreement with Abbott, we are particularly focused on developing those applications that will be of highest commercial value for the clinical diagnostics market.

Much of the development of the Ibis T5000 Biosensor System and related applications has been funded through government contracts and grants. As of September 30, 2008, we had earned $75.1 million in revenue under our government contracts and grants, and we have an additional $9.9 million committed under our existing contracts and grants.

Regulus Therapeutics LLC In September 2007, we and Alnylam established Regulus as a joint venture focused on the discovery, development, and commercialization of microRNA therapeutics. Regulus is addressing therapeutic opportunities that arise from alterations in microRNA expression. Since microRNAs regulate the expression of broad networks of genes and biological pathways, microRNA therapeutics define a new and potentially high-impact strategy to target multiple points on disease pathways.

To date, microRNAs have been implicated in several disease areas, such as cancer, viral infection, metabolic disorders, and inflammatory diseases. Regulus is currently focusing on several of these disease areas, including microRNA therapeutics that target miR-122, an endogenous liver-specific host gene also required for viral infection by hepatitis C virus, or HCV, and metabolics. Regulus is actively exploring additional areas for development of microRNA therapeutics, including cancer, other viral diseases, metabolic disorders and inflammatory diseases.

Recent Events

Cardiovascular Program

· We initiated a Phase 3 mipomersen study in heterozygous Familial Hypercholesterolemia (FH) subjects with coronary artery disease.

· We completed enrollment of the pivotal Phase 3 mipomersen study in homozygous FH subjects.

· We were granted broad patent coverage for the therapeutic use of antisense compounds targeting apolipoprotein B, U.S. Patent No. 7,407,943 entitled “Antisense modulation of apolipoprotein B expression”.

· We initiated a Phase 1 study of ISIS 353512, an antisense drug that targets C-reactive protein.

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Other Drug Programs

· ATL and Teva reported encouraging Phase 2 results for ATL/TV1102 at the World Congress on Treatment and Research in Multiple Sclerosis.

· Atlantic Healthcare received U.S. orphan drug designation for alicaforsen for the treatment of pouchitis.

· Excaliard selected a development compound, EXC001, for the local treatment of fibrosis and scarring.

· iCo Therapeutics Inc. reported interim data from an ongoing Phase 1 study of iCo-007 in patients with diffuse diabetic macular edema that showed that iCo-007 appears to be well tolerated.

· OncoGenex was granted Fast Track Designation from the U.S. Food & Drug Administration for OGX-011 in combination with docetaxel for progressive metastatic prostate cancer.

· OncoGenex reached an agreement with the FDA on the design of a Phase 3 registration trial of OGX-011 in patients with hormone refractory prostate cancer, via the Special Protocol Assessment process.

Ibis Biosciences

· Ibis received an additional $20 million investment from Abbott in June 2008 for a total investment of $40 million and 18.6 percent equity in Ibis, retaining Abbott’s exclusive option to purchase the remaining equity in Ibis.

· To date, in 2008, Ibis was awarded up to $11.6M in government grants and contracts to fund the expansion of applications of the Ibis technology.

· Ibis presented seven research studies highlighting the power of the Ibis T5000 to rapidly and accurately detect and characterize pathogens at the International Conference on Antimicrobial Agents and Chemotherapy (ICAAC) and the Annual Infectious Disease Society of America.

· Ibis provided the development plan for the next-generation instrument platform, which will build upon Ibis’ current technology and be tailored for use in a clinical diagnostic setting.

Regulus Therapeutics (microRNA Joint Venture)

· Regulus published research in Molecular and Cellular Biology demonstrating that the microRNA, miR-21, plays a key role in the regulation of certain cancer cells, including an aggressive form of brain cancer.

· Regulus published research in Cancer Cell showing that the microRNA, miR-296, is involved in promoting the formation of new blood vessels in cancer cells.

· Regulus added Stelios Papadopoulos to its Board of Directors and appointed Garry Menzel as Executive Vice President.

Additional Highlights

· We were granted patents that significantly expand the scope of Isis’ “Crooke” patent estate. U.S. Patent No. 7,432,250 and U.S. Patent No. 7,432,249 add broad claims that cover RNA-based product compositions and methods of treatment.

Critical Accounting Policies

We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable, based upon the information available to us. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our quarterly or annual results of operations and financial condition. Each quarter, our senior management discusses the development, selection and disclosure of such estimates with our audit committee of our Board of Directors. There are specific risks associated with these critical accounting policies and we caution that future events rarely develop exactly as expected, and that best estimates routinely require adjustment.

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The following table sets forth information on our revenue by segment (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Drug Discovery and Development:
Research and development revenue	$	27,807	$	7,242	$	68,321	$	9,258
Licensing and royalty revenue	975		26,710		7,790		27,489
	$	28,782	$	33,952	$	76,111	$	36,747

Ibis Biosciences:
Research and development revenue	$	2,128	$	3,589	$	6,072	$	5,615
Commercial revenue (1)	624		1,049		2,917		2,490
	$	2,752	$	4,638	$	8,989	$	8,105

Regulus Therapeutics:
Research and development revenue	$	681	$	41	$	1,429	$	41
	$	681	$	41	$	1,429	$	41

Total Revenue:
Research and development revenue	$	30,616	$	10,872	$	75,822	$	14,914
Commercial revenue (1)	624		1,049		2,917		2,490
Licensing and royalty revenue	975		26,710		7,790		27,489
	$	32,215	$	38,631	$	86,529	$	44,893

(1) Ibis Biosciences’ commercial revenue has been classified as research and development revenue under collaborative agreements on Isis’ Condensed Consolidated Statements of Operations.

Drug Discovery & Development

Research and Development Revenue Under Collaborative Agreements

Research and development revenue under collaborative agreements for the three and nine months ended September 30, 2008 was $27.8 million and $68.3 million, respectively, compared to $7.2 million and $9.3 million for the same periods in 2007. The increase was primarily due to revenue from our collaborations with BMS, OMI and Genzyme.

Licensing and Royalty Revenue

Our revenue from licensing activities and royalties for the three and nine months ended September 30, 2008 was $975,000 and $7.8 million, respectively, compared to $26.7 million and $27.5 million for the same periods in 2007. Licensing and royalty revenue in 2007 was higher primarily due to the $26.5 million licensing revenue that we earned from Alnylam in the third quarter of 2007.

Ibis Biosciences, Inc.

Ibis’ revenue for the three and nine months ended September 30, 2008 was $2.8 million and $9.0 million, respectively, compared to $4.6 million and $8.1 million for the same periods in 2007. The increase in Ibis’ year to date 2008 revenue compared to the same period in 2007 was primarily a result of the government contracts awarded in late 2007 and 2008 and the increased number of Ibis’ T5000 Biosensor System placements. So far in 2008, Ibis has been awarded up to $11.6 million of new contracts that support Ibis’ continued revenue growth by expanding the applications for the T5000 Biosensor System. The decrease in revenue in the third quarter of 2008 compared to the same period in 2007 was primarily due to additional revenue that was recorded in the third quarter of 2007 resulting from a one-time favorable adjustment in our government contract rates. Ibis’ revenue in 2008 included revenue from the distribution agreement Ibis and Abbott entered into in March 2008. Because Ibis provides a full year of support for each Ibis T5000 Biosensor System following installation, Ibis is amortizing the revenue for instrument and assay kits over the period of this support obligation.

From inception through September 30, 2008, Ibis has earned $75.1 million in revenue from various government agencies to further the development of our Ibis T5000 Biosensor System and related assay kits. An additional $9.9 million is committed under existing contracts and grants. Ibis may receive additional funding under these contracts based upon a variety of factors, including the accomplishment of program objectives and the exercise of contract options by the contracting agencies. These agencies may terminate these contracts and grants at their convenience at any time, even if we have fully performed our obligations. Consequently, we may never receive the full amount of the potential value of these awards.

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Regulus Therapeutics

Regulus’ revenue for the three and nine months ended September 30, 2008 was $681,000 and $1.4 million respectively, compared to $41,000 for the same periods in 2007. The increase was primarily due to revenue from its collaboration with GSK. As part of Regulus’ strategic alliance with GSK, Regulus received a $15 million upfront fee, which Regulus began amortizing into revenue in the second quarter of 2008 and will continue to amortize over Regulus’ six year period of performance under the agreement.

Operating Expenses

Operating expenses for the three and nine months ended September 30, 2008 were $36.5 million and $102.8 million, respectively, compared to $28.6 million and $75.4 million for the same periods of 2007. Although operating expenses have increased in 2008 compared to 2007, our operating expenses in the third quarter of 2008 were essentially flat compared to operating expenses in the second quarter of 2008.

The higher year to date expenses in 2008 compared to 2007 were primarily due to increased activity levels related to our planned investment to fill our pipeline and the expansion of our clinical development programs, including increased expenses for manufacturing of drug supplies for our corporate partners and our internal drug development programs. Additionally, Ibis’ operating expenses have increased by $8.2 million, excluding non-cash compensation expense related to stock options, in the first nine months of 2008 compared to the same period in 2007 to support the growth of its commercial business and the cost of activities to achieve milestones as part of Abbott’s investment and purchase option. Also contributing to the increase in operating expenses in the first nine months of 2008 compared to the same period in 2007 was an increase of $4.5 million, excluding non-cash compensation expense related to stock options, in expenses associated with our joint venture, Regulus.

Furthermore, contributing to the increase in operating expenses was an increase in non-cash compensation expense related to stock options. Non-cash compensation expense related to stock options was $4.1 million and $11.8 million for the three and nine months ended September 30, 2008 compared to $2.5 million and $7.2 million for the same periods in 2007, primarily reflecting the increase in our stock price from the first nine months of 2007 to the first nine months of 2008.

Our operating expenses by segment were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Drug Discovery and Development	$	22,739	$	20,581	$	64,148	$	53,996
Ibis Biosciences	7,743		5,489		22,351		14,145
Regulus Therapeutics	2,007		49		4,503		49
Non-cash compensation expense related to stock options	4,050		2,455		11,815		7,208
Total operating expenses	$	36,539	$	28,574	$	102,817	$	75,398

In order to analyze and compare our results of operations to other similar companies, we believe that it is important to exclude non-cash compensation expense related to stock options. We believe non-cash compensation expense related to stock options is not indicative of our operating results or cash flows from our operations. Further, we internally evaluate the performance of our operations excluding it.

Research and Development Expenses

Our research and development expenses consist of costs for antisense drug discovery, antisense drug development, manufacturing and operations and R&D support costs. Also included in research and development expenses are Ibis’ and Regulus’ research and development expenses. The following table sets forth information on research and development costs (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007

Research and development expenses	$	28,863	$	22,340	$	80,239	$	58,795
Non-cash compensation expense related to stock options	3,105		1,956		9,372		5,834
Total research and development expenses	$	31,968	$	24,296	$	89,611	$	64,629

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Our research and development expenses by segment were as follows (in thousands):

	Three Months Ended September 30,				Six Months Ended September 30,
	2008		2007		2008		2007

Drug Discovery and Development	$	20,841	$	18,014	$	58,801	$	47,626
Ibis Biosciences	6,207		4,278		17,545		11,121
Regulus Therapeutics	1,815		48		3,893		48
Non-cash compensation expense related to stock options	3,105		1,956		9,372		5,834
Total research and development expenses	$	31,968	$	24,296	$	89,611	$	64,629

For the three and nine months ended September 30, 2008, we incurred total research and development expenses, excluding non-cash compensation expense, of $28.9 million and $80.2 million, respectively, compared to $22.3 million and $58.8 million for the same periods in 2007. We attribute the increase to the expansion of our key programs, activities required to commercialize the Ibis T5000 Biosensor System and achieve milestones as part of the Abbott transaction and Regulus’ research activities. Expenses related to Ibis and Regulus are discussed in separate sections below.

Drug Discovery & Development

Antisense Drug Discovery

Using proprietary antisense oligonucleotides to identify what a gene does, called gene functionalization, and then determining whether a specific gene is a good target for drug discovery, called target validation, are the first steps in our drug discovery process. We use our proprietary antisense technology to generate information about the function of genes and to determine the value of genes as drug discovery targets. We use this information to direct our own antisense drug discovery research, and that of our antisense drug discovery partners. Antisense drug discovery is also the function within Isis that is responsible for advancing antisense core technology.

As we continue to advance our antisense technology, we are investing in our antisense drug discovery programs to expand our and our partners’ drug pipeline. We anticipate that our existing relationships and collaborations, as well as prospective new partners, will continue to help fund our research programs, as well as contribute to the advancement of the science by funding core antisense technology research.

Antisense drug discovery costs, excluding non-cash compensation expense, for the three and nine months ended September 30, 2008 were $4.6 million and $13.4 million, respectively, compared to $3.6 million and $10.1 million for the same periods in 2007. The higher expenses in 2008 compared to 2007 were primarily due to increased activity levels related to our planned investment to fill our pipeline and additional spending to support collaborative research efforts, which required an increase in personnel and lab supplies.

Antisense Drug Development

The following table sets forth research and development expenses for our major antisense drug development projects (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007

Mipomersen	$	2,611	$	3,165	$	9,193	$	7,387
Other antisense development projects	3,417		3,402		10,206		9,059
Development overhead costs	910		1,850		2,657		4,177
Non-cash compensation expense related to stock options	818		693		2,596		2,033
Total antisense drug development	$	7,756	$	9,110	$	24,652	$	22,656

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R&D Support

In our research and development expenses, we include support costs such as rent, repair and maintenance for buildings and equipment, utilities, depreciation of laboratory equipment and facilities, amortization of our intellectual property, information technology costs, procurement costs and waste disposal costs. We call these costs R&D support costs.

The following table sets forth information on R&D support costs (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008			2007		2008		2007
Personnel costs	$	2,678		$	1,602	$	5,545	$	4,606
Occupancy	1,814			1,546		4,911		4,524
Depreciation and amortization	1,961			1,193		4,645		3,584
Insurance	227			227		680		715
Other	(98		)	305		938		1,219
Non-cash compensation expense related to stock options	561			188		1,776		558
Total R&D support costs	$	7,143		$	5,061	$	18,495	$	15,206

R&D support costs, excluding non-cash compensation expense related to stock options, for the three and nine months ended September 30, 2008 were $6.6 million and $16.7 million, respectively, compared to $4.9 million and $14.6 million for the same periods in 2007. The increase in the first nine months of 2008 compared to the first nine months of 2007 was primarily a result of the increase in additional expenses to support the continued development of our key programs and an increase in amortization associated with a non-cash charge for patents assigned to certain of our partners, offset by the $750,000 we received from Ercole in March 2008 as repayment of a convertible note that we had previously expensed.

Our R&D support costs by segment were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Drug Discovery and Development	$	6,010	$	4,272	$	14,695	$	12,648
Ibis Biosciences	572		601		2,024		2,000
Non-cash compensation expense related to stock options	561		188		1,776		558
Total R&D support costs	$	7,143	$	5,061	$	18,495	$	15,206

Selling, General and Administrative Expenses

Selling, general and administrative expenses include corporate costs required to support our company, our employees and our stockholders. These costs include personnel and outside costs in the areas of business development, legal, human resources, investor relations, finance, Ibis’ selling, general and administrative and Regulus’ general and administrative expenses, which began in September 2007 when Regulus was formed. Additionally, we include in selling, general and administrative expenses such costs as rent, repair and maintenance of buildings and equipment, depreciation, utilities, information technology and procurement costs that we need to support the corporate functions listed above. Until the acquisition of Symphony GenIsis in September 2007, selling, general and administrative expenses also included Symphony GenIsis’ general and administrative expenses.

The following table sets forth information on selling, general and administrative expenses (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Selling, general and administrative expenses	$	3,626	$	3,779	$	10,763	$	9,395
Non-cash compensation expense related to stock options	945		499		2,443		1,374
Total selling, general and administrative expenses	$	4,571	$	4,278	$	13,206	$	10,769

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Our selling, general and administrative expenses by segment were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Drug Discovery and Development	$	1,898	$	2,566	$	5,347	$	6,370
Ibis Biosciences	1,536		1,212		4,806		3,024
Regulus Therapeutics	192		1		610		1
Non-cash compensation expense related to stock options	945		499		2,443		1,374
Total selling, general and administrative expenses	$	4,571	$	4,278	$	13,206	$	10,769

Selling, general and administrative expenses, excluding non-cash compensation expense related to stock options, for the three and nine months ended September 30, 2008 were $3.6 million and $10.8 million, respectively, compared to $3.8 million and $9.4 million for the same periods in 2007. The increase was primarily due to additional sales and customer support costs to maintain the commercial growth of the Ibis T5000 Biosensor System and expenses related to Regulus. Expenses related to Ibis and Regulus are discussed in separate sections below.

Ibis Biosciences, Inc.

Ibis’ operating expenses include cost of commercial revenue for its commercial activities, research and development expenses and selling, general and administrative expenses. Ibis’ research and development expenses are primarily the result of its performance under government contracts in support of the ongoing development of the Ibis T5000 Biosensor System and related assay kits. Ibis’ research and development expenses include all contract-related costs it incurs on behalf of government agencies in connection with the performance of its obligations under the respective contracts, including costs for equipment to which the government retains title. Research and development expenditures in Ibis also include costs for scientists, laboratory supplies, chemicals and highly specialized consultants to advance the research and development of the Ibis T5000 Biosensor System. Further, we allocate a portion of R&D support costs to Ibis and include this allocation in Ibis’ research and development expenses. Ibis’ selling, general and administrative expenses include personnel and outside costs in the areas of business development, customer support, human resources, and finance. In addition, we allocate a portion of corporate expenses required to support Ibis to Ibis’ selling, general and administrative expenses.

The following table sets forth information on Ibis’ operating expenses (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Cost of commercial revenue	$	203	$	767	$	1,751	$	2,004
Research and development expenses	6,004		3,510		15,794		9,117
Selling, general and administrative expenses	1,536		1,212		4,806		3,024
Non-cash compensation expense related to stock options	439		397		1,381		1,212
Total Ibis operating expenses	$	8,182	$	5,886	$	23,732	$	15,357

Ibis’ operating expenses, excluding non-cash compensation expense related to stock options, were $7.7 million and $22.4 million for the three and nine months ended September 30, 2008, compared to $5.5 million and $14.1 million for the same periods in 2007, respectively. The increase in operating expenses primarily reflected an increase in costs to support the growth of Ibis’ commercial business including selling and support costs for the Ibis T5000 Biosensor System and the cost to achieve milestones as part of the Abbott transaction. We expect expenses for Ibis to increase as we continue to expand this business.

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Regulus Therapeutics

In September 2007, we and Alnylam formed Regulus, a joint venture focused on the discovery, development, and commercialization of microRNA therapeutics. Under accounting rules, we are considered the primary beneficiary of Regulus and consolidate the financial results of Regulus. As a result, our condensed consolidated financial statements include a line item called “Noncontrolling Interest in Regulus Therapeutics LLC.” On our Condensed Consolidated Balance Sheet, this line reflects Alnylam’s minority ownership of Regulus’ equity. As the joint venture progresses, this line item will be reduced by Alnylam’s share of Regulus’ net losses, which were $3.1 million and $87,000 for the first nine months of 2008 and 2007, respectively, until the balance becomes zero. The reductions to the Noncontrolling Interest in Regulus will be reflected in our Condensed Consolidated Statement of Operations using a similar line item and will provide a positive adjustment to our net loss equal to Alnylam’s share of Regulus’ losses. We anticipate Regulus’ expenses to increase as Regulus continues to advance its research and development activities, consisting primarily of increases to its staffing levels and outside research activities to achieve the milestones under its GSK collaboration.

Investment Income

Investment income for the three and nine months ended September 30, 2008 totaled $7.5 million and $13.1 million, respectively, compared to $2.6 million and $9.1 million for the same periods in 2007. Included in investment income for 2008 are non-cash adjustments related to the value of the call option and subscription right that we granted to Abbott. The non-cash adjustments increased investment income by $4.1 million and $4.3 million for the three and nine months ended September 30, 2008, respectively. Excluding these non-cash adjustments, interest income would have been $3.4 million and $8.8 million for the three and nine months ended September 30, 2008. Although we have a significantly higher average cash balance in 2008 because we received $325 million from Genzyme, $40.5 million from Abbott and $20 million from GSK, we anticipate interest income, without non-cash adjustments, to only be moderately higher in future quarters due to the current conditions in the financial markets.

Interest Expense

Interest expense for the three and nine months ended September 30, 2008 totaled $1.5 million and $4.3 million, respectively, compared to $1.5 million and $6.1 million for the same periods in 2007. The decrease in year to date interest expense was due to the effect of a lower average debt balance in the first nine months of 2008 compared to the first nine months of 2007 primarily related to the fact that a portion of our old 51/2% notes was outstanding until we repaid the remaining balance in May 2007.

In 2009, when we adopt the new convertible debt accounting standard, FSP No. APB 14-1, we anticipate that the amount of interest expense that is recorded in our statement of operations will increase due to the non-cash amortization of the debt discount. For additional information about FSP No. APB 14-1, see Note 2, Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements.

Gain on Investments

Gain on investments for the first nine months ended September 30, 2007 was $3.5 million, reflecting a gain realized on the sale of the remaining equity securities of Alnylam that we owned. We did not recognize any gain on investments for the first nine months of 2008.

Loss on Early Retirement of Debt

Loss on early retirement of debt for the first nine months ended September 30, 2007 was $3.2 million, reflecting the early extinguishment of our 51/2% convertible subordinated notes in the first half of 2007. We did not recognize any loss on early retirement of debt for the first nine months of 2008.

Net Income (Loss)

Net income for the three months ended September 30, 2008 was $3.2 million and net loss for the nine months ended September 30, 2008 was $3.3 million, respectively, compared to net income of $20.0 million and net loss of $4.0 million for the same periods in 2007. Our net loss for the first nine months of 2008 was lower than the first nine months of 2007 primarily due to a decrease in our loss from operations offset by the $23.2 million benefit that we recognized for nine months ended September 30, 2007 in the loss attributed to noncontrolling interest in Symphony GenIsis, Inc., resulting from our collaboration with Symphony GenIsis. We did not record this benefit in 2008 because we purchased all of the equity of Symphony GenIsis in the third quarter of 2007, saving $75 million in the predetermined purchase price.

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Net Income (Loss) Applicable to Common Stock

Net income applicable to common stock for the three months ended September 30, 2008 was $3.2 million and net loss applicable to common stock for the nine months ended September 30, 2008 was $3.3 million, compared to net loss applicable to common stock of $105.3 million and $129.3 million for the same periods in 2007. In the third quarter of 2007, we purchased the equity of Symphony GenIsis. The $125.3 million on our Condensed Consolidated Statement of Operations in the line item called Excess Purchase Price over Carrying Value of Noncontrolling Interest in Symphony GenIsis, Inc. represents a deemed dividend paid to the previous owners of Symphony GenIsis. This deemed dividend only impacts our net loss applicable to common stock and our net loss per share calculations for the three and nine months ended September 30, 2007 and does not affect our net income (loss).

Net Income (Loss) Per Share

Basic and diluted net income per share for the three months ended September 30, 2008 was $0.03 per share. Basic and diluted net loss per share for the nine months ended September 30, 2008 was $0.04 per share, compared to $1.25 per share and $1.57 per share for the three and nine months ended September 30, 2007. The decrease in net loss per share for the first nine months of 2008 compared to the first nine months of 2007 was primarily a result of the decrease in net loss applicable to common stock discussed above.

Liquidity and Capital Resources

We have financed our operations with revenue primarily from research and development under collaborative agreements. Additionally, we have earned licensing and royalty revenue from the sale or licensing of our intellectual property. We have also financed our operations through the sale of our equity securities and the issuance of long-term debt. From our inception through September 30, 2008, we have earned approximately $663.8 million in revenue from contract research and development, the sale and licensing of our intellectual property and commercial revenue from sales of Ibis T5000 Biosensor Systems and assay kits, as well as revenue from Ibis’ assay services business. From the time we were founded through September 30, 2008, we have raised net proceeds of approximately $800.7 million from the sale of our equity securities and we have borrowed approximately $548.8 million under long-term debt arrangements to finance a portion of our operations.

At September 30, 2008, we had cash, cash equivalents and short-term investments of $512.0 million and stockholders’ equity of $68.1 million. In comparison, we had cash, cash equivalents and short-term investments of $193.7 million and stockholders’ equity of $872,000 as of December 31, 2007. As of September 30, 2008, we had consolidated working capital of $411.9 million compared to $145.1 million at December 31, 2007. The cash we received in the first half of 2008 from Genzyme ($325.0 million), Abbott ($40.5 million) and GSK ($20.0 million) primarily led to the increase in our consolidated working capital offset by $68.9 million of deferred revenue from Genzyme and GSK that is included in current liabilities.

As of September 30, 2008, our debt and other long-term obligations totaled $168.0 million, compared to $170.1 million at December 31, 2007. The decrease in our debt and other obligations was due to the full payment of the Silicon Valley Bank term loan in September 2008 partly offset by the $5 million convertible promissory note Regulus issued to GSK. In October 2008, we also financed $7.2 million in capital additions under an equipment financing arrangement. This equipment financing arrangement allows us to borrow up to $10 million in principal to finance the purchase of equipment. We expect to use the remaining amount available under this arrangement over time to fund capital equipment acquisitions required to support our business. We will continue to use equipment financing as long as the terms remain commercially attractive.

Based on our existing and committed cash, not including the cash we could receive from Abbott if Abbott completes its purchase of Ibis, we remain on track to meet our cash guidance with a 2008 year end cash balance greater than $450 million, which is sufficient to fund our activities for at least five years.

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The following table summarizes our contractual obligations as of September 30, 2008. The table provides a breakdown of when obligations become due. A more detailed description of the major components of our debt is provided in the paragraphs following the table:

	Payments Due by Period (in millions)
Contractual Obligations (selected balances described below)	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
25/8% Convertible Subordinated Notes	$	162.5	$	—	$	—	$	—	$	162.5
GSK Convertible Promissory Note, including accrued interest	$	5.1	$	—	$	5.1	$	—	$	—
Other Obligations	$	0.4	$	—	$	—	$	—	$	0.4
Operating Leases	$	22.9	$	3.5	$	5.8	$	3.9	$	9.7

Our contractual obligations consist primarily of our publicly traded convertible debt. In addition, we also have a convertible promissory note from GSK and other obligations.

In December 2003, we obtained a $32.0 million term loan from Silicon Valley Bank which was to mature in December 2008. The term loan was payable in monthly payments of principal and interest and bore interest at the prime interest rate less applicable discounts based on the balances in the cash and investment accounts that we maintain at Silicon Valley Bank. The loan was secured by substantially all of our operating assets, excluding intellectual property, real estate, and certain equity investments. In September 2008, we paid off the remaining principal balance of $1.8 million plus accrued but unpaid interest.

In January 2007, we completed a $162.5 million convertible debt offering, which raised proceeds of approximately $157.1 million, net of $5.4 million in issuance costs. The $162.5 million convertible subordinated notes bear interest at 25/8%, which is payable semi-annually, and mature in 2027. The 25/8% notes are convertible, at the option of the note holders, into approximately 11.1 million shares of common stock at a conversion price of $14.63 per share. We will be able to redeem these notes at a redemption price equal to 100.75% of the principal amount between February 15, 2012 and February 14, 2013; 100.375% of the principal amount between February 15, 2013 and February 14, 2014; and 100% of the principal amount thereafter. Holders of the 25/8% notes are also able to require us to repurchase the 25/8% notes on February 15, 2014, February 15, 2017 and February 15, 2022, and upon the occurrence of certain defined conditions, at 100% of the principal amount of the 25/8% notes being repurchased plus accrued interest and unpaid interest. Using the net proceeds from the issuance of our 25/8% notes, in 2007 we repaid the entire $125 million of our 51/2% convertible subordinated notes due 2009.

In connection with the strategic alliance with GSK in April 2008, Regulus issued a convertible promissory note to GSK in exchange for $5 million in cash. The convertible note bears interest at the prime rate, which was 5.00% at September 30, 2008. The note plus interest will convert into Regulus common stock in the future if Regulus achieves a minimum level of financing with institutional investors. In addition, we and Alnylam are guarantors of the note, and if the note does not convert or is not repaid in cash after three years, we, Alnylam and Regulus may elect to repay the note plus interest with shares of each company’s common stock.

In addition to contractual obligations, we had outstanding purchase orders as of September 30, 2008 for the purchase of services, capital equipment and materials as part of our normal course of business.

We plan to continue to enter into collaborations with partners to provide for additional revenue to us and we may be required to incur additional cash expenditures related to our obligations under any of the new agreements we may enter into. We currently intend to use our cash and short-term equivalents to finance our activities. However, we may also pursue other financing alternatives, like issuing additional shares of our common stock, issuing debt instruments, refinancing our existing debt, or securing lines of credit. Whether we use our existing capital resources or choose to obtain financing will depend on various factors, including the future success of our business, the prevailing interest rate environment and the condition of financial markets generally.

Primarily as a result of the significant upfront funding that we received from our strategic alliance with Genzyme in 2008, we anticipate having significant taxable income in 2009. To minimize our federal income tax liability, we plan to use our net operating loss carryforwards to offset a majority of our taxable income, subject to the completion of our Section 382 analysis. For our California taxes, the recent tax law changes that were enacted with the 2008/2009 California Budget have suspended the use of net operating loss carryforwards in 2008 and 2009. We intend to offset our California income tax liability to the full extent allowed under the tax regulations with our research and development tax credits, which is limited to 50 percent. As a result, we anticipate having a large tax liability in 2009, which will require us to make an estimated tax payment in December 2009.

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RISK FACTORS

Investing in our securities involves a high degree of risk. In addition to the other information in this report on Form 10-Q, you should carefully consider the risks described below before purchasing our securities. If any of the following risks actually occur, our business could be materially harmed, and our financial condition and results of operations could be materially and adversely affected. As a result, the trading price of our securities could decline, and you might lose all or part of your investment. We have marked with an asterisk those risk factors that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2007.

Risks Associated with our Businesses as a Whole

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

Because product discovery and development require substantial lead-time and money prior to commercialization, our expenses have exceeded our revenue since we were founded in January 1989. As of September 30, 2008, we had accumulated losses of approximately $831.1 million and stockholders’ equity of approximately $68.1 million. Most of the losses resulted from costs incurred in connection with our research and development programs and from selling, general and administrative costs associated with our operations. Most of our revenue has come from collaborative arrangements, with additional revenue from research grants and the sale or licensing of patents as well as interest income. We currently have only one product, Vitravene, approved for commercial use. This product has limited sales potential, and Novartis, our exclusive distribution partner for this product, no longer markets it. We expect to incur additional operating losses over the next several years, and these losses may increase if we cannot increase or sustain revenue. We may not successfully develop any additional products or services, or achieve or sustain future profitability.

Since corporate partnering is a key part of our strategy to fund the development and commercialization of our development programs, if any of our collaborative partners fail to fund our collaborative programs, or if we cannot obtain additional partners, we may have to delay or stop progress on our product development programs.

To date, corporate partnering has played a key role in our strategy to fund our development programs and to add key development resources. We plan to continue to rely on additional collaborative arrangements to develop and commercialize our products, including ISIS 113715. However, we may not be able to negotiate additional attractive collaborative arrangements.

Many of the drugs in our development pipeline are being developed and/or funded by corporate partners, including Altair Therapeutics Inc., Antisense Therapeutics Limited, Atlantic Healthcare (UK) Limited, Bristol-Myers Squibb Company, iCo Therapeutics Inc., Eli Lilly and Company, Merck & Co., Inc., OncoGenex Technologies Inc., Ortho-McNeil, Inc. and Teva Pharmaceutical Industries Ltd. In addition, in January 2008 we entered a major strategic alliance with Genzyme in which Genzyme will develop and commercialize mipomersen. If any of these pharmaceutical companies stop funding and/or developing these products, our business could suffer and we may not have, or be willing to dedicate, the resources available to develop these products on our own.

Our collaborators can terminate their relationships with us under certain circumstances, some of which are outside of our control. For example, in November 2004 based on the disappointing results of the Phase 3 clinical trials, Lilly discontinued its investment in Affinitak.

In addition, the disappointing results of the two Affinitak clinical trials, our Phase 3 clinical trials of alicaforsen in patients with active Crohn’s disease, or any future clinical trials could impair our ability to attract new collaborative partners. If we cannot continue to secure additional collaborative partners, our revenues could decrease and the development of our drugs could suffer.

Even with funding from corporate partners, if our partners do not effectively perform their obligations under our agreements with them, it would delay or stop the progress of our product development programs.

In addition to receiving funding, we enter into collaborative arrangements with third parties to:

· conduct clinical trials;

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· seek and obtain regulatory approvals; and

· manufacture, market and sell existing and future products.

Once we have secured a collaborative arrangement to further develop and commercialize one of our development programs such as our collaborations with Genzyme, OMI and BMS, these collaborations may not continue or result in commercialized drugs, or may not progress as quickly as we anticipated.

For example, a collaborator such as Genzyme, OMI, or BMS, could determine that it is in its financial interest to:

· pursue alternative technologies or develop alternative products that may be competitive with the product that is part of the collaboration with us;

· pursue higher-priority programs or change the focus of its own development programs; or

· choose to devote fewer resources to our drugs than it does for its own drugs under development.

If any of these occur, it could affect our partner’s commitment to the collaboration with us and could delay or otherwise negatively affect the commercialization of our drugs.

If we cannot protect our patents or our other proprietary rights, others may compete more effectively against us.

Our success depends to a significant degree upon our ability to continue to develop and secure intellectual property rights to proprietary products and services. However, we may not receive issued patents 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 provide us with a competitive advantage. Furthermore, our issued patents or patents licensed to us may be successfully challenged, invalidated or circumvented so that our patent rights would not create an effective competitive barrier or revenue source.

In addition, our Ibis business relies in part on trade secret laws and nondisclosure, confidentiality and other agreements to protect some of the proprietary technology that is part of the Ibis T5000 Biosensor System. However, these laws and agreements may not be enforceable or may not provide meaningful protection for Ibis’ trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of these agreements.

Until recently, virtually all of Ibis’ research and development activities have been funded under contracts from the U.S. government (either directly or through subcontracts from prime contractors or higher-tier subcontractors). As a general matter, subject to certain disclosure, notice, filing, acknowledgement and reporting obligations, Ibis is entitled to retain title to any inventions conceived or first reduced to practice under government contracts, but the government will have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced these inventions for or on behalf of the United States.

Intellectual property litigation could be expensive and prevent us from pursuing our programs.

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

For example, in October 2008, Sequenom, Inc. filed a complaint in the U.S. District Court in Delaware alleging patent infringement by Ibis.

As a further example, in December 2006, the European Patent Office (EPO) Technical Board of Appeal reinstated with amended claims our Patent EP0618925 which claims a class of antisense compounds, any of which is designed to have a sequence of phosphorothioate-linked nucleotides having two regions of chemically modified RNA flanking a region of DNA. Prior to its reinstatement, this patent was originally opposed by several parties and revoked by an EPO Opposition Division in December of 2003. We intend to fully exercise our rights under this patent by pursuing licensing arrangements, but if licensing efforts are unsuccessful we may choose to assert our rights through litigation.

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If a third party claims that our products or technology infringe its patents or other intellectual property rights, we may have 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 needed intellectual property on favorable terms, if at all. There are many patents issued or applied for in the biotechnology industry, and we may not be aware of patents or applications held by others that relate to our business. This is especially true since patent applications in the United States are filed confidentially. Moreover, the validity and breadth of biotechnology patents involve complex legal and factual questions for which important legal issues remain unresolved.

If we fail to obtain timely funding, we may need to curtail or abandon some of our programs.*

All of our drugs are undergoing clinical trials or are in the early stages of research and development. All of our drugs under development will require significant additional research, development, preclinical and/or clinical testing, regulatory approval and a commitment of significant additional resources prior to their commercialization. Based on our existing and committed cash, not including the cash we could receive from Abbott if Abbott completes its purchase of Ibis, we remain on track to meet our cash guidance with a 2008 year end cash balance greater than $450 million, which we expect will last for at least five years. If we do not meet our goals to commercialize our products, or to license our drugs and proprietary technologies, we will need additional funding in the future. Our future capital requirements will depend on many factors, such as the following:

· changes in existing collaborative relationships and our ability to establish and maintain additional collaborative arrangements;

· continued scientific progress in our research, drug discovery and development programs;

· the size of our programs and progress with preclinical and clinical trials;

· the time and costs involved in obtaining regulatory approvals;

· competing technological and market developments, including the introduction by others of new therapies that address our markets;

· success in developing and commercializing a business based on our Ibis T5000 Biosensor System to identify infectious organisms; and

· the profile and launch timing of our drugs.

If we need additional funds, we may need to raise them through public or private financing. Additional financing may not be available at all or on acceptable terms. If we raise additional funds by issuing equity securities, the shares of existing stockholders will be diluted and their price, as well as the price of our other securities, may decline. If adequate funds are not available or not available on acceptable terms, we may have to cut back on one or more of our research, drug discovery or development programs. For example, in January 2005 we decided to terminate the development of two lower priority drugs, ISIS 14803 and ISIS 104838. Alternatively, we may obtain funds through arrangements with collaborative partners or others, which could require us to give up rights to certain of our technologies, drugs or products.

If we do not progress in our programs as anticipated, the price of our securities could decrease.*

For planning purposes, we estimate and may disclose the timing of a variety of clinical, regulatory and other milestones, such as when we anticipate a certain drug will enter the clinic, when we anticipate completing a clinical trial, or when we anticipate filing an application for marketing approval. We base our estimates on present facts and a variety of assumptions. Many underlying assumptions are outside of our control. If we do not achieve milestones in accordance with our or investors’ expectations, the price of our securities would likely decrease.

For example, in April 2008 the FDA provided guidance regarding approval requirements for mipomersen. The FDA indicated that reduction of LDL-cholesterol is an acceptable surrogate endpoint for accelerated approval of mipomersen for use in patients with homozygous familial hypercholesterolemia, or hoFH. The FDA will require data from two ongoing preclinical studies for carcinogenicity to be included in the hoFH filing, which is now anticipated to take place in 2010. The FDA also indicated that for broader indications in high risk, high cholesterol patients an outcome study would be required for approval. This FDA guidance caused us to revise our development plans and timelines to accelerate our planned outcome trial.

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The loss of key personnel, or the inability to attract and retain highly skilled personnel, could make it more difficult to run our business and reduce our likelihood of success.

We are dependent on the principal members of our management and scientific staff. We do not have employment agreements with any of our executive officers that would prevent them from leaving us. 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. In addition, failure to succeed in clinical trials may make it more challenging to recruit and retain qualified scientific personnel.

If the price of our securities continues to be highly volatile, this could make it harder for you to liquidate your investment and could increase your risk of suffering a loss.

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. These fluctuations in our common stock price may significantly affect the trading price of our securities. During the 12 months preceding September 30, 2008, the market price of our common stock ranged from $10.91 to $20.15 per share. Many factors can affect the market price of our securities, including, for example, fluctuations in our operating results, announcements of collaborations, clinical trial results, technological innovations or new 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.

Because we use biological materials, hazardous materials, chemicals and radioactive compounds, if we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

Our research, development and manufacturing activities involve the use of potentially harmful biological materials as well as materials, chemicals and various radioactive compounds that could be hazardous to human health and safety or the environment. These materials and various wastes resulting from their use are stored at our facilities in Carlsbad, California pending ultimate use and disposal. We cannot completely eliminate the risk of contamination, which could cause:

· interruption of our research, development and manufacturing efforts;

· injury to our employees and others;

· environmental damage resulting in costly clean up; and

· liabilities under federal, state and local laws and regulations governing health and human safety, as well as the use, storage, handling and disposal of these materials and resultant waste products.

In such an event, we may be held liable for any resulting damages, and any such liability could exceed our resources. Although we carry insurance in amounts and type that we consider commercially reasonable, we do not have insurance coverage for losses relating to an interruption of our research, development or manufacturing efforts caused by contamination, and we cannot be certain that the coverage or coverage limits of our insurance policies will be adequate. In the event our losses exceed our insurance coverage, our financial condition would be adversely affected.

If a natural or man-made disaster strikes our research and development facilities, it could delay our progress developing and commercializing our drugs or our Ibis T5000 Biosensor System.

We are developing our Ibis T5000 Biosensor System in our facility located in Carlsbad, California. Additionally, we manufacture our research and clinical supplies in a separate manufacturing facility located in Carlsbad, California. The facilities and the equipment we use to develop the Ibis T5000 Biosensor System and manufacture our drugs would be costly to replace and could require substantial lead time to repair or replace. Either of our facilities may be harmed by natural or man-made disasters, including, without limitation, earthquakes, floods, fires and acts of terrorism, and in the event they are affected by a disaster, our development and commercialization efforts would be delayed. Although we possess insurance for damage to our property and the disruption of our business from casualties, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

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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 66% 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, only our board of directors, chairman of the board or chief executive officer can call special meetings of our stockholders. We also have implemented a stockholders’ rights plan, also called a poison pill, which could make it uneconomical for a third party to acquire our company on a hostile basis. These provisions, as well as Delaware law and other of our agreements, 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 our company without action by our stockholders.

The provisions of our convertible subordinated notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, holders of the notes will have the right, at their option, to require us to repurchase all of their notes or a portion of their notes, which may discourage certain types of transactions in which our stockholders might otherwise receive a premium for their shares over the then current market prices.

In addition, our collaboration agreement with Genzyme regarding mipomersen provides that if we are acquired, Genzyme may elect to purchase all of our rights to receive payments under the mipomersen collaboration agreement for a purchase price to be mutually agree to by us and Genzyme, or, if we cannot agree, a fair market value price determined by an independent investment banking firm. This provision may make it more difficult or complicated for us to enter into an acquisition agreement with a potential acquirer.

Future sales of our common stock in the public market could adversely affect the trading price of our securities.

Future sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect trading prices of our securities. For example, we registered for resale 12,000,000 shares of our common stock and 2,999,998 shares of our common stock issuable upon the exercise of the warrants we issued as part of our August 2005 private placement as well as 4.25 million shares of our common stock issuable upon the exercise of the warrant we issued to Symphony GenIsis Holdings. In addition, on December 22, 2005, we filed a Form S-3 shelf registration statement with the SEC to register up to $200,000,000 worth of our common stock for possible issuance. Finally, we have registered for resale our 25/8% convertible subordinated notes, including the approximately 11,111,116 shares issuable upon conversion of the notes. The addition of any of these shares into the public market may have an adverse effect on the price of our securities.

Our business is subject to changing regulations for corporate governance and public disclosure that has increased both our costs and the risk of noncompliance.

Each year we are required to evaluate our internal controls systems in order to allow management to report on and our Independent Registered Public Accounting Firm to attest to, our internal controls as required by Section 404 of the Sarbanes-Oxley Act. As a result, we will incur additional expenses and will suffer a diversion of management’s time. In addition, if we cannot continue to comply with the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC, the Public Company Accounting Oversight Board (PCAOB) or the Nasdaq Global Market. Any such action could adversely affect our financial results and the market price of our common stock.

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Risks Associated with our Drug Discovery and Development Business

If we or our partners fail to obtain regulatory approval for our drugs, we will not be able to sell them.

We and our partners must conduct time-consuming, extensive and costly clinical trials to show the safety and efficacy of each of our drugs, including mipomersen and ISIS 113715, before a drug can be approved for sale. We must conduct these trials in compliance with FDA regulations and with comparable regulations in other countries. If the FDA or another regulatory agency believes that we or our partners have not sufficiently demonstrated the safety or efficacy of our drugs, including mipomersen and ISIS 113715, it will not approve them or will require additional studies, which can be time consuming and expensive and which will delay commercialization of a drug. We and our partners may not be able to obtain necessary regulatory approvals on a timely basis, if at all, for any of our drugs, including mipomersen and ISIS 113715. Failure to receive these approvals or delays in these approvals could prevent or delay commercial introduction of a product, including mipomersen and ISIS 113715, and, as a result, could negatively impact our ability to generate revenue from product sales. In addition, following approval of a drug, we and our partners must comply with comprehensive government regulations regarding how we manufacture, market and distribute drug products. If we fail to comply with these regulations, regulators could force us to withdraw a drug from the market or impose other penalties or requirements that also could have a negative impact on our financial results.

We have only introduced one commercial drug product, Vitravene. We cannot guarantee that any of our other drugs, including mipomersen and ISIS 113715, will be safe and effective, will be approved for commercialization or that our partners or we can successfully commercialize these drugs.

If the results of clinical testing indicate that any of our drugs under development are not suitable for commercial use we may need to abandon one or more of our drug development programs.

Drug discovery and development has inherent risks and the historical failure rate for drugs is high. Antisense technology in particular is relatively new and unproven. If we cannot demonstrate that our drugs, including mipomersen and ISIS 113715, are safe and effective drugs for human use, we may need to abandon one or more of our drug development programs.

In the past, we have invested in clinical studies of drugs that have not met the primary clinical end points in their Phase 3 studies. In March 2003, we reported the results of a Phase 3 clinical trial of Affinitak in patients with late-stage non-small cell lung cancer and in October 2004, we reported the results of a second similar Phase 3 clinical trial. In each case, Affinitak failed to demonstrate improved survival sufficient to support an NDA filing. In December 2004, we reported the results of our Phase 3 clinical trials of alicaforsen in patients with active Crohn’s disease, in which alicaforsen did not demonstrate statistically significant induction of clinical remissions compared to placebo. Similar results could occur with the clinical trials for our other drugs, including mipomersen and ISIS 113715. If any of our drugs in clinical studies, including mipomersen and ISIS 113715, do not show sufficient efficacy in patients with the targeted indication, it could negatively impact our development and commercialization goals for these and other drugs and our stock price could decline.

Even if our drugs are successful in preclinical and early human clinical studies, these results do not guarantee the drugs will be successful in late-stage clinical trials.

Successful results in preclinical or early human clinical trials, including the Phase 2 results for mipomersen and ISIS 113715, may not predict the results of late-stage clinical trials. There are a number of factors that could cause a clinical trial to fail or be delayed, including:

· the clinical trial may produce negative or inconclusive results;

· regulators may require that we hold, suspend or terminate clinical research for noncompliance with regulatory requirements;

· we, our partners, the FDA or foreign regulatory authorities could suspend or terminate a clinical trial due to adverse side effects of a drug on subjects or patients in the trial;

· we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials;

· enrollment in our clinical trials may be slower than we anticipate;

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· the cost of our clinical trials may be greater than we anticipate; and

· the supply or quality of our drugs or other materials necessary to conduct our clinical trials may be insufficient, inadequate or delayed.

Any failure or delay in one of our clinical trials, including our Phase 2 or Phase 3 development programs for mipomersen and ISIS 113715, could reduce the commercial viability of our drugs, including mipomersen and ISIS 113715.

If the market does not accept our products, we are not likely to generate revenues or become profitable.

Our success will depend upon the medical community, patients and third-party payors accepting our products as medically useful, cost-effective and safe. We cannot guarantee that, if approved for commercialization, doctors will use our products to treat patients. We currently have one commercially approved drug product, Vitravene, a treatment for cytomegalovirus, or CMV, retinitis in AIDS patients, which addresses a small market. Our partners and we may not successfully commercialize 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 efficacy and safety of our drugs and their potential advantages over competing products;

· the cost and effectiveness of our drugs compared to other available therapies;

· the patient convenience of the dosing regimen for our drugs; and

· reimbursement policies of government and third-party payors.

Based on the profile of our drugs, physicians, patients, patient advocates, payors or the medical community in general may not accept and use any products that we may develop.

If we cannot manufacture our drug products or contract with a third party to manufacture our drug products at costs that allow us to charge competitive prices to buyers, we will not be able to market products profitably.

If we successfully commercialize any of our drugs, we would be required to establish large-scale commercial manufacturing capabilities either on our own or through a third party manufacturer. In addition, as our drug development pipeline increases and matures, we will have a greater need for clinical trial and commercial manufacturing capacity. We have limited experience manufacturing pharmaceutical products of the chemical class represented by our drugs, called oligonucleotides, on a commercial scale for the systemic administration of a drug. There are a small 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. Further, we must continue to improve our manufacturing processes to allow us to reduce our product costs. We may not be able to manufacture at a cost or in quantities necessary to make commercially successful products.

Also, manufacturers, including us, must adhere to the FDA’s current Good Manufacturing Practices regulations, which the FDA enforces through its facilities inspection program. We and our contract manufacturers may not be able to comply or maintain compliance with Good Manufacturing Practices regulations. Non-compliance could significantly delay or prevent our receipt of marketing approval for potential products or result in FDA enforcement action after approval that could limit the commercial success of our potential products.

If our drug discovery and development business fails to compete effectively, our drugs will not contribute significant revenues.

Our competitors are engaged in all areas of drug discovery throughout the world, are numerous, and include, among others, major pharmaceutical companies and specialized biopharmaceutical firms. Other companies are engaged in developing antisense technology. Our competitors may succeed in developing drugs that are:

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· priced lower than our drugs;

· safer than our drugs; or

· more effective than our drugs.

These competitive developments could make our products obsolete or non-competitive.

Certain of our partners are pursuing other technologies or developing other drugs 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. Competition may negatively impact a partner’s focus on and commitment to our drugs and, as a result, could delay or otherwise negatively affect the commercialization of our drugs.

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 marketing and sales capabilities, areas in which we have limited or no experience.

Disagreements between Alnylam and us regarding the development of our microRNA technology may cause significant delays and other impediments in the development of this technology, which could negatively affect the value of the technology and our investment in Regulus.

Regulus is our joint venture with Alnylam focused on the discovery, development, and commercialization of microRNA. As part of this joint venture, we exclusively licensed to Regulus our intellectual property rights covering microRNA. Regulus is operated as an independent company and governed by a managing board comprised of an equal number of directors appointed by each of Alnylam and us. Regulus researches and develops microRNA projects and programs pursuant to an operating plan that is approved by the managing board. Any disagreements between Alnylam and us regarding a development decision or any other decision submitted to Regulus’ managing board may cause significant delays in the development and commercialization of our microRNA technology and could negatively affect the value of our investment in Regulus.

We depend on third parties in the conduct of our clinical trials for our drugs and any failure of those parties to fulfill their obligations could adversely affect our development and commercialization plans.

We depend on independent clinical investigators, contract research organizations and other third-party service providers in the conduct of our clinical trials for our drugs and expect to continue to do so in the future. For example, Medpace is the primary clinical research organization for clinical trials for mipomersen. We rely heavily on these parties for successful execution of our clinical trials, but do not control many aspects of their activities. For example, the investigators are not our employees. However, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Third parties may not complete activities on schedule, or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations or a termination of our relationship with these third parties could delay or prevent the development, approval and commercialization of our drugs, including mipomersen.

Risks Associated With Our Ibis Biosciences Business

We may not successfully develop or derive revenues from our business based on our Ibis T5000 Biosensor System.

Our Ibis T5000 Biosensor System is subject to the risks inherent in developing tools based on innovative technologies. Our product is at an early stage of development and requires continued research and development to achieve our business objectives. For Ibis to be commercially successful, we must convince potential customers that our Ibis T5000 Biosensor System is an attractive alternative to existing methods of identifying pathogens. If our potential customers fail to purchase our Ibis T5000 Biosensor System due to competition or other factors, or if we fail to develop applications that lead to market acceptance, we may not recover our investment in this technology and our Ibis T5000 Biosensor System business could fail to meet our business and financial objectives.

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If we fail to sell the Ibis T5000 Biosensor System to a minimum customer base, our ability to generate revenues from sales of assay kits will be negatively affected.

A key element of our business plan for Ibis calls for us to deploy the Ibis T5000 Biosensor System to a broad customer base. If we cannot create a broad installed base of our Ibis T5000 Biosensor System, our ability to sell assay kits, the consumables used to operate the system, may be significantly and adversely affected. Even if we successfully achieve broad installation of the Ibis T5000 Biosensor System, customers may not perform as many analyses as we anticipate, which may affect the assumptions underlying our business plan for Ibis and lead to lower-than-expected revenues.

We will depend on Bruker Daltonics to manufacture the Ibis T5000 Biosensor System and any failure of Bruker Daltonics to fulfill its obligations could harm or delay our commercialization efforts.*

In July 2006, we entered into a strategic alliance with Bruker Daltonics to manufacture and distribute the Ibis T5000 Biosensor System. Bruker Daltonics will be the exclusive, worldwide manufacturer of the Ibis T5000 Biosensor System and will also be responsible for order processing, system installations and service in North America, Europe and the Middle East. In Europe and the Middle East, Bruker Daltonics will have exclusive rights to sell Ibis T5000 Biosensor Systems and Ibis assay kits for various government applications, and non-exclusive rights to sell to customers for all other applications except diagnostics. As such, we rely heavily on Bruker Daltonics to successfully manufacture, distribute and service our Ibis T5000 Biosensor System, but do not control many aspects of Bruker Daltonics activities. We believe Bruker Daltonics has failed to satisfactorily perform its obligations under the agreement. We have an active dispute with Bruker regarding its performance under the agreement. If Bruker Daltonics continues to fail to carry out its obligations under our alliance, its failure could harm or delay the commercialization of our Ibis T5000 Biosensor System.

Ibis’ strategic alliance with Abbott may restrict the way Ibis conducts its business and may not result in the ultimate sale of Ibis to Abbott.

On January 30, 2008, we and Ibis entered into a Strategic Alliance Master Agreement with Abbott. As part of this transaction, we granted Abbott an exclusive option to acquire from us all remaining Ibis capital stock. Under the exclusive option, we and Ibis must obtain Abbott’s consent before we or Ibis can take specified actions, such as amending Ibis’ certificate of incorporation, redeeming, repurchasing or paying dividends on Ibis capital stock, issuing any Ibis capital stock, entering into a transaction for the merger, consolidation or sale of Ibis, creating any Ibis indebtedness, or entering into any Ibis strategic alliance, joint venture or joint marketing agreement. These consent requirements may restrict the way Ibis conducts its business and may discourage others from trying to collaborate with or buy our Ibis subsidiary. Abbott’s decision to exercise the exclusive option is at its sole discretion. As a result, we cannot guarantee that Abbott will exercise its option to acquire the remaining Ibis capital stock. If Abbott does not exercise its option to acquire the remaining Ibis capital stock, we will not realize the full benefit of the strategic alliance and we may need to secure a new partner to further expand the Ibis business into the areas of hospital associated infection control and infectious disease diagnostics.

We depend on government contracts for most of Ibis’ revenues and the loss of government contracts or a decline in funding of existing or future government contracts could adversely affect our revenues and cash flows.

Historically, most of Ibis’ revenues were from the sale of services and products to the U.S. government. The U.S. government may cancel these contracts at any time without penalty or may change its requirements, programs or contract budget or decline to exercise option periods, even if we have fully performed our obligations. Since a large portion of Ibis’ government contracts are milestone based, if Ibis fails to meet a specific milestone within the specified delivery date, our government partner may be more likely to reduce or cancel its contract with Ibis. Our revenues and cash flows from U.S. government contracts could also be reduced by declines in U.S. defense, homeland security and other federal agency budgets.

For the nine months ended September 30, 2008 and 2007, we derived approximately 11% and 18%, respectively, of our revenue from agencies of the U.S. government. Because of the concentration of our contracts, we are vulnerable to adverse changes in our revenues and cash flows if a significant number of our U.S. government contracts and subcontracts are simultaneously delayed or canceled for budgetary, performance or other reasons.

If U.S. defense and other federal agencies choose to reduce their purchases under our contracts, exercise their right to terminate contracts, fail to exercise options to renew contracts or limit our ability to obtain new contract awards, our revenues and cash flows could be adversely affected.

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We may be liable for penalties under a variety of procurement rules and regulations, and changes in government regulations could adversely impact our revenues, operating expenses and operating margins.

Under our agreements with the U.S. government, we must comply with and are affected by various government regulations that impact our operating costs, operating margins and our internal organization and operation of our businesses. These regulations affect how our customers and we do business and, in some instances, impose added costs on our businesses. Any changes in applicable laws could adversely affect the financial performance of Ibis. With respect to U.S. government contracts, any failure to comply with applicable laws could result in contract termination, price or fee reductions or suspension or debarment from contracting with the U.S. government. Among the most significant regulations are the following:

· the U.S. Federal Acquisition Regulations, which comprehensively regulate the formation, administration and performance of government contracts;

· the U.S. Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations; and

· the U.S. Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under certain cost-based government contracts.

If our Ibis T5000 Biosensor System’s reliability does not meet market expectations, we may be unable to retain our existing customers and attract new customers.

Complex instruments such as our Ibis T5000 Biosensor System typically require operating and reliability improvements following their initial introduction. As we continue to develop our Ibis T5000 Biosensor System and its related applications, we will need to make sure our customers are satisfied with the sensor’s reliability. Our efforts to satisfy our customer’s needs for instrument reliability could result in greater than anticipated service expenses or divert other resources. Additionally, if we fail to resolve reliability issues as they develop, we could materially damage our reputation, which could prevent us from retaining our existing customers and attracting new customers.

If we had to replace a supplier of one of the major hardware components of our Ibis T5000 Biosensor System, it could delay our commercialization efforts and lengthen our sales cycle.

We have a single supplier for each major hardware component of our Ibis T5000 Biosensor System. Although, we believe we would be able to find a replacement provider, if any of these suppliers stopped providing us with their respective components, identifying and securing a suitable replacement could delay our commercialization efforts and lengthen our sales cycle. For example, Bruker Daltonics supplies the mass spectrometer we use as part of our Ibis T5000 Biosensor System.

If Ibis fails to compete effectively, it may not succeed or contribute significant revenues.

The market for products such as Ibis’ is highly competitive. Currently, large reference laboratories, public health laboratories and hospitals perform the majority of diagnostic tests used by physicians and other health care providers. We expect that these laboratories will compete vigorously to maintain their dominance in the diagnostic testing market. To remain competitive, we will need to continually improve Ibis’ products so that, when compared to alternatives, its products:

· provide faster results;

· are cost-effective;

· deliver more accurate information;

· are more user friendly; and

· support a broad range of applications.

If Ibis cannot keep its products ahead of its competitors in these areas, Ibis’ revenues will suffer and we may not meet our commercialization goals.

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Many of Ibis’ competitors have, and in the future these and other competitors may have, significantly greater financial, marketing, sales, manufacturing, distribution and technological resources than Ibis. Moreover, these companies may have substantially greater expertise in conducting clinical trials and research and development, greater ability to obtain necessary intellectual property licenses and greater brand recognition than Ibis. In addition, Ibis’ competitors may be in a better position to respond quickly to new or emerging technologies, may be able to undertake more extensive marketing campaigns, may adopt more aggressive pricing policies and may be more successful in attracting potential customers, employees and strategic partners than Ibis.

Improvements in preventing major diseases could reduce the need for our Ibis T5000 Biosensor System and related assay kits, which in turn could reduce our revenues.

We expect to derive a significant portion of our Ibis revenues from the sale of assay kits necessary to use our Ibis T5000 Biosensor System. The need to quickly identify and contain major threats, such as the avian flu, could increase the demand for our assay kits. Conversely, improvements in containing or treating a threat, such as vaccines, would significantly reduce the need to identify and contain the threat. Any reduction in the need to identify or contain a threat could diminish the need for our assay kits, which could reduce our revenues.

Our plans to commercialize the Ibis T5000 Biosensor System internationally are subject to additional risks that could negatively affect our operating results.

Our success will depend in part on our ability and Bruker Daltonics’ ability to market and sell the Ibis T5000 Biosensor System and assay kits in foreign markets. Expanding our international operations could impose substantial burdens on our resources, divert management’s attention from domestic operations and otherwise adversely affect our business. Furthermore, international operations are subject to several inherent risks including:

· trade protective measures and import or export licensing requirements or other restrictive actions by U.S. and foreign governments could prevent or limit our international sales;

· reduced protection of intellectual property rights;

· changes in foreign currency exchange rates;

· changes in specific country’s or region’s political or economic conditions; and

· changes in tax laws.

If we cannot access or license rights to particular nucleic acid sequences for targeted diseases in the future, we may be limited in our ability to develop new products and access new markets.

Although our research staff seeks to discover particular nucleic acid sequences for targeted diseases, our ability to offer diagnostic tests for diseases may depend on the ability of third parties to discover particular sequences or markers and correlate them with disease, as well as the rate at which such discoveries are made. Our ability to design products that target these diseases may depend on our ability to obtain the necessary access to raw materials or intellectual property rights from third parties who make any of these discoveries. If we are unable to access new technologies or the rights to particular sequences or markers necessary for additional diagnostic products on commercially reasonable terms or at all, we may not be able to develop new diagnostic products or enter new markets.

The sales cycles for our Ibis T5000 Biosensor Systems are lengthy, and we may expend substantial funds and management effort with no assurance of successfully selling our Ibis T5000 Biosensor Systems or services.

The sales cycles for Ibis T5000 Biosensor Systems are typically lengthy. Our sales and licensing efforts, and those of our partners, will require the effective demonstration of the benefits, value, and differentiation and validation of our products and services, and significant training of multiple personnel and departments within a potential customer organization. We or our partners may be required to negotiate agreements containing terms unique to each prospective customer or licensee, which would lengthen the sales cycle. We may expend substantial funds and management effort with no assurance that we will sell our products. In addition, this lengthy sales cycle makes it more difficult for us to accurately forecast revenue in future periods and may cause revenues and operating results to vary significantly in future periods.

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If we or our partners are required to obtain regulatory approval for our Ibis T5000 Biosensor System, we may not successfully obtain approval.

Ibis’ business plan assumes a significant portion of its revenues will come from Ibis T5000 Biosensor Systems and assay kits for in vitro diagnostic purposes, whose uses are regulated by the FDA and comparable agencies of other countries. In addition, customers may wish to utilize the Ibis T5000 Biosensor System and assay kits in manners that require additional regulatory approval. To access these markets, Ibis’ products may require either premarket approval or 510(k) clearance from the FDA and other regulatory agencies prior to marketing. The 510(k) clearance process usually takes from three to twelve months from submission, but can take longer. The premarket approval process is much more costly, lengthy, and uncertain and generally takes from six months to two years or longer from submission. In addition, commercialization of any diagnostic or other product that our licensees or collaborators or we develop would depend upon successful completion of preclinical testing and clinical trials. Preclinical testing and clinical trials are long, expensive and uncertain processes, and we do not know whether we, our licensees or any of our collaborators, would be permitted or able to undertake clinical trials of any potential products. It may take us or our licensees or collaborators many years to complete any such testing, and failure could occur at any stage. Preliminary results of clinical trials do not necessarily predict final results, and acceptable results in early clinical trials may not be repeated in later clinical trials. We or our collaborators may encounter delays or rejections of potential products based on changes in regulatory policy for product approval during the period of product development and regulatory agency review. If our Ibis T5000 Biosensor System is considered a medical device, after gaining market approval from the FDA, our Ibis T5000 Biosensor System may be subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, recordkeeping and reporting of safety and other post-market information.

If we become subject to product liability claims relating to Ibis, we may be required to pay damages that exceed our insurance coverage.

Any product liability claim brought against us with respect to Ibis, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure coverage in the future. Expenses incurred by our insurance provider in defending these claims will reduce funds available to settle claims or pay adverse judgments. In addition, we could be liable for amounts in excess of policy limits, which would have to be paid out of our cash reserves, and our cash reserves may be insufficient to satisfy the liability. Finally, even a meritless or unsuccessful product liability claim could harm Ibis’ reputation in the industry, lead to significant legal fees, and could result in the diversion of management’s attention from managing our business.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2008. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2008.

An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives.

PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

	On February 11, 2008 we notified Bruker Daltonics, Ibis’ manufacturing and commercialization partner for the T5000 System, that we were initiating the formal dispute resolution process under our agreement with them. We have asserted that Bruker’s performance of its manufacturing, commercialization and product service obligations are unsatisfactory and fail to meet their obligations under this agreement. Executive level negotiations and formal mediation efforts have failed to achieve resolution of this dispute. Litigation is being pursued in Massachusetts Superior Court.

	On October 31, 2008, Ibis received a copy of a complaint filed by Sequenom, Inc. in the U.S. District Court in Delaware. The Sequenom complaint alleges patent infringement by Ibis. We are evaluating the complaint.

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

	Not applicable

ITEM 3.	DEFAULT UPON SENIOR SECURITIES

	Not applicable

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

	Not applicable

ITEM 5.	OTHER INFORMATION

	Not applicable

ITEM 6.	EXHIBITS

	a.	Exhibits

	Exhibit Number	Description of Document

	10.1	Amended and Restated License Agreement dated July 2, 2008 between the Registrant and OncoGenex Technologies Inc. (with certain confidential information deleted).

	31.1	Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

PART I	FINANCIAL INFORMATION

ITEM 1:	Financial Statements:

	Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007	3

	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements	6

ITEM 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

	Results of Operations	21

	Liquidity and Capital Resources	29

	Risk Factors	31

ITEM 3:	Quantitative and Qualitative Disclosures about Market Risk	42

ITEM 4:	Controls and Procedures	42

PART II	OTHER INFORMATION

ITEM 1:	Legal Proceedings	43

ITEM 2:	Unregistered Sales of Equity Securities and Use of Proceeds	43

ITEM 3:	Default upon Senior Securities	43

ITEM 4:	Submission of Matters to a Vote of Security Holders	43

ITEM 5:	Other Information	43

ITEM 6:	Exhibits	43

SIGNATURES		44

Signatures	Title	Date

/s/ Stanley T. Crooke	Chairman of the Board, President,
Stanley T. Crooke, M.D., Ph.D.	and Chief Executive Officer
	(Principal executive officer)	November 10, 2008

/s/ B. Lynne Parshall	Director, Chief Operating Officer,
B. Lynne Parshall, J.D.	Chief Financial Officer and Secretary
	(Principal financial and accounting officer)	November 10, 2008

Results of Operations

(1) Ibis Biosciences’ commercial revenue has been classified as research and development revenue under collaborative agreements on Isis’ Condensed Consolidated Statements of Operations.

Drug Discovery & Development

Ibis Biosciences, Inc.

Antisense Drug Discovery

Manufacturing and Operations