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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-K

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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

COMMISSION FILE NUMBER 0-19125



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ISIS PHARMACEUTICALS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



<TABLE>

<S>                                            <C>

DELAWARE                                      33-0336973

(STATE OR OTHER JURISDICTION OF               (IRS EMPLOYER IDENTIFICATION NO.)

INCORPORATION OR ORGANIZATION)

</TABLE>



2292 FARADAY AVE., 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 and Exchange Act

of 1934 during the preceding 12 months (or for such shorter period that the

Registrant was required to file such reports), and (2) has been subject to such

filing requirements for the past 90 days.  Yes  [X]  No  [ ]



Indicate by check mark if disclosure of delinquent filers pursuant to Item

405 of Regulation S-K is not contained herein, and will not be contained to the

best of Registrant's knowledge, in definitive proxy or information statements

incorporated by reference in Part III of this Form 10-K or any amendment to this

Form 10-K.  Yes  [X]  No  [ ]



The approximate aggregate market value of the common stock held by

non-affiliates of the Registrant, based upon the last sale price of the common

stock reported on the National Association of Securities Dealers Automated

Quotation National Market System was $533,724,000 as of March 24, 2000.*



The number of shares of common stock outstanding as of March 24, 2000 was

35,094,199.



DOCUMENTS INCORPORATED BY REFERENCE

(To the extent indicated herein)



Registrant's definitive Proxy Statement which will be filed on or before

April 24, 2000 with the Securities and Exchange Commission in connection with

Registrant's annual meeting of stockholders to be held on June 8, 2000 is

incorporated by reference into Part III of this Report.

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

* Excludes 4,265,360 shares of common stock held by directors and officers and

stockholders whose beneficial ownership exceeds 10 percent of the shares

outstanding at February 25, 2000. Exclusion of shares held by any person

should not be construed to indicate that such person possesses the power,

direct or indirect, to direct or cause the direction of the management or

policies of the Registrant, or that such person is controlled by or under

common control with the Registrant.



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THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS REGARDING THE

COMPANY'S BUSINESS AND THE THERAPEUTIC AND COMMERCIAL POTENTIAL OF ITS

TECHNOLOGIES AND PRODUCTS IN DEVELOPMENT. SUCH STATEMENTS ARE SUBJECT TO CERTAIN

RISKS AND UNCERTAINTIES, PARTICULARLY THOSE RISKS OR UNCERTAINTIES INHERENT IN

THE PROCESS OF DISCOVERING, DEVELOPING AND COMMERCIALIZING DRUGS THAT CAN BE

PROVEN TO BE SAFE AND EFFECTIVE FOR USE AS HUMAN THERAPEUTICS, AND THE ENDEAVOR

OF BUILDING A BUSINESS AROUND SUCH POTENTIAL PRODUCTS. ACTUAL RESULTS COULD

DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS FORM 10-K. FACTORS THAT COULD

CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE

DISCUSSED IN THIS FORM 10-K INCLUDING THOSE IDENTIFIED IN THE SECTION OF ITEM 1

ENTITLED "RISK FACTORS." AS A RESULT, THE READER IS CAUTIONED NOT TO RELY ON

THESE FORWARD-LOOKING STATEMENTS.

3



PART I



ITEM 1. BUSINESS



OVERVIEW



Isis Pharmaceuticals, Inc. is a leading genomics-based drug discovery

and development company that is focused on RNA. Our goal is to create important

new drug discovery technology platforms that will improve the productivity of

the pharmaceutical industry and will enable our discovery and development of

important new drugs to treat disease and improve the lives of patients. RNA is a

novel target for drug discovery, and Isis has established a dominant position in

RNA research. We have integrated our expertise in molecular and cellular

biology, medicinal chemistry, RNA biochemistry, bioinformatics, pharmacology and

clinical development to create two exciting technologies, antisense and Ibis, a

robust pipeline of drugs in development and genomics services.



Our technologies have reached a level of maturity to be of substantial

value to the company and to industry partners. Additionally, our technologies

are protected by a broad patent estate covering inventions in areas such as

antisense chemistries, gene sequences, antisense drugs in specific diseases and

manufacturing methods.



ANTISENSE. Our leading technology, antisense, is a science based on the

direct application of gene sequence information. We have pioneered and reduced

to practice the synthesis of antisense inhibitors to the RNA of genes. Antisense

inhibitors can be used directly as drugs or as genomics tools. Based on the

specificity of antisense, we believe we can design antisense drugs that are

safer and more effective than traditional drugs. We have succeeded in bringing

the first antisense drug to market, Vitravene(TM), for CMV retinitis. Our

development pipeline includes five compounds presently in clinical trials, of

which at least one will advance to Phase III before year-end. We have

successfully leveraged our antisense technology through corporate collaborations

with Elan Corporation, Merck & Co., Astra-Zeneca PLC, Abbott Laboratories, Inc.,

Aventis S.A. (formerly Rhone-Poulenc Rorer), CIBA Vision, Novartis Pharma AG and

Boehringer Ingelheim International GmbH. These collaborations increase our

financial resources, improve our technological strength and establish valuable

development and commercial relationships.



GENETROVE(TM) GENOMICS. In the company's GeneTrove division, we are

leveraging our antisense expertise to provide pharmaceutical and biotechnology

companies gene function and target validation information about genes that they

are interested in targeting for drug development. We can provide this

information rapidly and efficiently for partners with the proprietary methods

and systems that we have developed for our own use in creating antisense

inhibitors as drugs, because the scientific process is identical. We have

collaborations in place with three major pharmaceutical partners for these

services and plan to grow this business in the near term.



IBIS THERAPEUTICS(TM) TECHNOLOGY. With recently acquired knowledge of

RNA structures and new sequence data from the gene sequence ("genomic")

databases, Isis is developing a new drug discovery paradigm: specific targeting

of RNA with small molecule drugs. We are creating and using new software to

identify particular RNA structures to serve as targets for drugs. Our

proprietary molecular modeling techniques can be used to predict the shape of

drug binding pockets in RNA structures. With a working approximation of the

shape of the target, our Ibis Therapeutics division is designing libraries of

drug-like molecules that can bind to the RNA targets. We use mass spectrometry

to screen large numbers of small molecules against multiple RNA targets

simultaneously. We are applying this drug discovery approach initially to

anti-bacterials, and we believe that the technology will be useful in a broad

range of diseases.



ANTISENSE RESEARCH, DRUG DISCOVERY, DEVELOPMENT AND MANUFACTURING



Antisense research involves the following process: We identify a target

gene, learn its precise genetic sequence, or code, and then assemble a synthetic

strand of genetic code to complement the code of its RNA precisely. The product

we've created, the synthetic strand of DNA, is called an antisense inhibitor to

the target gene. Antisense inhibitors can be used in two ways: 1) directly as a

drug, because production of a disease-







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causing protein is prevented when the inhibitor binds to the gene and 2) as a

tool to understand a gene's function and value as a drug target.



Our antisense drug research programs focus on targets associated with

infectious, inflammatory, cardiovascular and metabolic diseases and cancer. Our

expertise in molecular biology and drug discovery enables rapid identification

of potent antisense inhibitors of disease causing proteins. We are then able to

specifically tailor the inhibitor to the particular disease indication targeted

through our medicinal chemistry expertise. Additionally, our medicinal chemistry

programs have developed novel chemistries that allow us to design new antisense

compounds that are potentially safer and more active than current antisense

drugs and which have the potential to allow more convenient forms of dosing,

including oral delivery.



In 1998, the U.S. Food and Drug Administration approved Vitravene(TM)

(fomivirsen) to treat CMV retinitis in AIDS patients. Vitravene(TM) is the first

antisense drug to be approved for marketing. CIBA Vision, our distribution

partner for this drug, launched Vitravene(TM) in November 1998. CIBA Vision is

the eye care unit of life sciences leader Novartis Pharma AG. In 1999,

Vitravene(TM) also received marketing approval in Europe and Brazil. We

currently have five antisense compounds in human clinical trials, with

additional compounds arising out of our broad research program in preclinical

development which are represented in the chart below:



ISIS DEVELOPMENT PIPELINE



[GRAPH]



ISIS 3521 is a potent, selective inhibitor of protein kinase C (PKC)

- -(alpha) gene expression that has demonstrated encouraging results in Phase I

trials. Phase II trials are being conducted in patients with a range of solid

tumors.



ISIS 5132, is a potent selective inhibitor of C-raf kinase. Phase II

trials are being conducted in patients with a range of solid tumors.



ISIS 2503 is a potent, selective antisense inhibitor of Ha-ras in Phase

II clinical trials in patients with a variety of solid tumors.



ISIS 2302 inhibits expression of intercellular adhesion molecule 1

(ICAM-1), a molecule involved in a variety of inflammatory diseases and

conditions. ISIS 2302 is in Phase IIa trials of a topical formulation for

psoriasis and an enema formulation for ulcerative colitis.



ISIS 14803 is an antisense inhibitor of the Hepatitis C Virus that is in

Phase I/II clinical trials in patients with chronic Hepatitis C.



ISIS 104838 is an inhibitor of inflammatory target TNF-(alpha) which is

involved in diseases such as rheumatoid arthritis and Crohn's disease.







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ISIS 107248 is an inhibitor of CD49d, which is involved in inflammatory

diseases such as multiple sclerosis.



We have successfully leveraged our technology through supportive

corporate collaborations with Elan Corporation, Merck & Co., AstraZeneca PLC,

Abbott Laboratories, Inc., CIBA Vision, Novartis Pharma AG and Boehringer

Ingelheim International GmbH. These collaborations increase our financial

resources, improve our technological strength and establish valuable development

and commercial relationships. As a result, we have been able, and expect to

continue, to pursue drug discovery and development activities aggressively. We

have retained substantial commercial rights to all of our drug candidates,

including those funded by corporate collaborators.



Isis has established a very strong patent position to cover its diverse

portfolio of inventions and intellectual property. As of February 28, 2000 we

have been issued or allowed more than 590 patents worldwide. A particularly

important patent covering RNase H1, the key enzyme responsible for the mechanism

of action of antisense gene inhibition, was issued to Isis in December 1999.

This important patent will significantly strengthen the dominant position of

Isis in both antisense therapeutics and genomics.



We have focused significant efforts on developing cost-effective,

large-scale, Good Manufacturing Practices manufacturing capability for antisense

compounds. We currently manufacture antisense compounds to meet all of our

research and clinical needs, as well as the needs of our partners. We have

achieved significant manufacturing cost reductions through chemistry and process

improvements. We believe that, with reasonably anticipated benefits resulting

from increases in scale, we will be able to manufacture antisense compounds at

commercially attractive prices. Under the terms of our agreement with CIBA

Vision, Isis manufactures all of the commercial supplies of Vitravene(TM).



In December 1999, the unexpected failure of our pivotal clinical trial

of ISIS 2302 in Crohn's disease prompted the restructuring of the company. In

January 2000, we announced a restructuring plan to reduce expenses and focus

resources on the development of antisense drugs with significant commercial

potential. In conjunction with this restructuring, we will reduce Isis'

workforce by approximately 140 employees in the first four months of 2000. We

estimate that the costs associated with this restructuring will approximate $2

million. Under the restructuring plan, Isis will have cash and committed funds

sufficient to support activities for at least three years. We expect to make

significant progress toward our primary goals of commercializing antisense

drugs, creating value from both our Ibis and GeneTrove divisions, and building

shareholder value in that time frame.



GENETROVE(TM) DIVISION - ANTISENSE TARGET VALIDATION AND GENE

FUNCTIONALIZATION



Our GeneTrove division uses antisense as a tool to provide vital

information about human genes: what they do, how they behave within cells and

biological systems, whether they are important in disease, whether they would

make good drug targets. The processes involved in answering these questions are

called gene functionalization and target validation. We have created and/or

integrated proprietary systems to functionalize and validate gene targets in a

highly efficient manner, as these processes are fundamental to our core research

in identifying antisense drug candidates.



We are also performing these genomics services for three pharmaceutical

company partners. Our collaboration with Abbott Laboratories began in 1998, with

Aventis S.A. (formerly Rhone-Poulenc Rorer) began in 1999 and with Astra-Zeneca

in 2000. With the windfall of gene sequence information now available to

pharmaceutical and biotechnology companies, there is significant demand for

services such as ours in order to understand and prioritize the gene targets in

drug discovery programs and expedite discovery of drug development candidates.

We intend to grow our GeneTrove business this year by marketing the speed,

accuracy and efficiency of our genomics capabilities to new partners.



IBIS DIVISION - RNA SMALL MOLECULE DRUG DISCOVERY



Through the development of antisense technology, we have amassed

expertise in RNA structure and function. We have combined this understanding

with innovations in medicinal chemistry, bioinformatics, comparative genomics,

and mass spectrometry to develop a novel proprietary drug discovery program that







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targets the structured regions of RNA as the binding site for small molecule

drugs. In this program we have developed proprietary technologies to:



1)      Compare gene sequences across and within species to identify

target sites in structured RNA;



2)      Predict structure of RNA from genome sequence data;



3)      Quickly create and screen large libraries of small molecule

compounds designed to bind RNA; and



4)      Screen for RNA-binding molecules using novel mass spectrometry.

As an example of the power of this technology, we expect to be

able to screen 10,000 compounds against 10 RNA targets per day.



While our initial area of focus is in discovering novel antibacterial

drugs, we believe the Ibis technology has potential in cancer, central nervous

system disease, inflammation and degenerative diseases of aging. To date, we

have funded the Ibis program through grants from the Defense Advanced Research

Projects Agency. The technology has now reached an appropriate level of maturity

to enable us to market it to potential pharmaceutical industry partners, and we

plan to grow this business by establishing new collaborations.



ISIS DRUG DISCOVERY AND DEVELOPMENT



Isis' efforts as a drug discovery and development company have focused

on RNA. RNA is a novel target for drug discovery, and Isis has established a

dominant position in RNA research. We have assembled a team of world-class

scientists whose expertise in molecular and cellular biology, medicinal

chemistry, RNA biochemistry, bioinformatics and pharmacology has been centered

on RNA. When our knowledge in these core disciplines is combined with our

clinical development capabilities, we have an integrated platform from which to

develop of important new drugs to treat disease and improve the lives of

patients. Our work in RNA-based drug discovery and development work has produced

two important drug-discovery technologies: antisense and Ibis RNA-targeted small

molecule discovery. From these technologies we have developed a robust pipeline

of promising new drugs and efficient genomics tools that unlock value from gene

sequence data.



ANTISENSE TECHNOLOGY PLATFORM



ANTISENSE DRUG DISCOVERY



Almost all human diseases are a result of inappropriate protein

production or performance. Traditional drugs are designed to interact with the

proteins in the body that are supporting or causing a disease. Antisense

technology is different than traditional drug development because it targets

disease-causing proteins before they are produced. Antisense drugs can be

designed to treat a wide range of diseases, including infectious, inflammatory

and cardiovascular diseases and cancer.



Antisense technology represents a new model for drug discovery because

it focuses on compounds that interact with messenger RNA or mRNA, which has not

been a site for traditional drug interaction. Using the information contained in

mRNA, we design chemical structures, easily recognized by the body, which

resemble mRNA and DNA. These potent "antisense" oligonucleotides inhibit the

production of disease-causing proteins. This method of drug design is highly

productive, and in ten years we have created a substantial pipeline of drug

candidates, including 5 compounds currently in clinical trials.



Design of antisense compounds is less complex, more rapid and more

efficient than traditional drug design directed at protein targets. Traditional

drug design usually begins by characterizing the three-dimensional structure of

the protein target in order to design a prototype drug to interact with it.

Proteins are complex molecules with structures that are difficult to predict.

Antisense compounds, on the other hand, are designed to bind to mRNA structures,

which are more easily understood and predicted. Prototype antisense drugs can be

designed as soon as the sequence for the mRNA receptor is identified.



Our early research efforts focused on answering basic questions

regarding antisense-based therapeutics, including their stability, their ability

to be taken up by the target cells, their efficacy and the cost







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of manufacturing them. In the ten years since our founding, we have made

significant progress in understanding and using antisense technology to create

drugs, and have established a leadership position in this field.



THE MECHANISM OF ANTISENSE DRUGS



Genes carry the information that cells need to produce proteins.

Specific genes contain information to produce specific proteins at the genetic

level. The human genome, and its collection of more than 100,000 genes, contains

the information required for the human body to produce all proteins. Genes are

made up of DNA, a molecule that contains the information about when and how much

of which protein to produce, depending on what function is to be performed. The

DNA molecule is a "double helix"--a duplex of entwined strands. In each strand,

the building blocks of DNA, the nucleotides, are bound or "paired" with

complementary nucleotides on the other strand. The precise sequence of a

nucleotide chain, called the "sense" sequence, is a blueprint for the

information that is used during protein production. The sequence of a nucleotide

chain that is precisely complementary to a given sense sequence is called its

"antisense" sequence.



In the cell nucleus, the information in the gene necessary for the

production of a protein is copied from one strand of DNA into precursor mRNA

through a process called transcription. After processing into mature mRNA, the

mRNA moves from the nucleus of the cell into the cell cytoplasm, which contains

amino acids. The information encoded in a single mRNA is then translated into

many copies of the sequence of amino acids that builds the protein.



Antisense drugs are mirror or complementary images of small segments of

mRNA. To create antisense drugs, nucleotides are linked together in short chains

called oligonucleotides. Each antisense drug is designed to bind to a specific

sequence of nucleotides in its mRNA target to inhibit production of the protein

encoded by the target mRNA. By preventing the production of the disease-causing

protein and acting in the early stage of the disease-causing process, antisense

drugs have the potential to provide greater therapeutic benefit than traditional

drugs, which do not act until after the disease causing protein has been

produced.



Antisense drugs can be designed to be much more selective than

traditional drugs. Because antisense drugs interact by binding to mRNA and not,

as traditional drugs do, by binding to proteins, antisense drugs are able to

selectively inhibit one protein among a closely related group of proteins

without having an impact on the other members of the group. As a result, we are

able to design antisense drugs that selectively inhibit the disease-causing

member of the group without interfering with those members of the group

necessary for normal bodily functions. As a result of this unique selectivity,

antisense drugs have the potential to be far less toxic than traditional drugs

because they can be designed to minimize the impact on unintended targets.



ISIS' GENETROVE(TM) DIVISION



ANTISENSE TARGET VALIDATION AND GENE FUNCTIONALIZATION



Historically, the genomics industry has been focused on identifying and

cataloging all of the genes in the human genome. This stage of the process is

almost completed. The next steps in the process of making drugs and creating

value from genomics are to identify the functions of the 100,000 plus human

genes (gene functionalization) and to identify which genes are good targets for

drugs (target validation). While this is a challenging task, Isis has developed

its GeneTrove division, responsible for the company's antisense target

validation and gene functionalization program that can provide this genomic

information in an efficient and cost effective manner.



GeneTrove's antisense target validation and gene functionalization

program is based on Isis' expertise in producing highly specific antisense

inhibitors to genes and on a variety of specialized technology that the company

has created and/or integrated. Our antisense inhibitors can be used in cellular

assays and in animal models of disease to rapidly determine the pharmacological

impact of inhibiting the expression of a single gene target and to determine the

role of the targeted gene in human disease. Once we have shown that a target is

important in human disease, traditional drug discovery can be used to develop

drugs to inhibit the target, or the specific antisense inhibitor used to

validate the target can be rapidly developed as a drug.



Specialized technologies employed by our GeneTrove division include:







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-       A proprietary automated rapid throughput screening process that

streamlines the creation of optimized, target-specific antisense

inhibitors. We are using this system to build a large

proprietary database of inhibitors to more than 100 gene targets

per year. We are filing patent applications on these gene

targets as rapidly as they can be produced, thus expanding our

proprietary position in gene function and antisense.



-       Comparative genomics and covariance analysis, fields that Isis

has pioneered, provide key insights into biological function and

pathways. The process involves the comparison of molecules and

molecular systems of different organisms to find similarities

and differences across species. By determining how the molecules

of biological systems co-vary, we gain insights about how the

component parts of complex systems fit together. By assessing

the evolutionary position at which genes become expressed or

diverge, genes can be placed in likely pathways and we can

achieve a great deal of understanding about gene function.



-       Low-density DNA arrays developed by GeneTrove use proprietary

chemistry. When used in parallel with commercial arrays,

GeneTrove can acquire unique data, including insights regarding

gene function in normal and disease processes and can also

identify potential toxicological problems associated with

modulation of a particular gene.



-       A proprietary bioinformatics database, called MetaGraph, is

capable of assimilating vast quantities of genomics data and

finding relationships in complex data arrays.



GeneTrove has already achieved many significant accomplishments. With a

relatively small-scale effort, Isis has identified antisense inhibitors to more

than 500 genes, patented many of these findings and expects to create antisense

inhibitors to all important human genes over the next several years. As

inhibitors to these genes are created and tested, the data are being

incorporated into our pathway-oriented genomic database. To date, over 20

pathways have been characterized, including: MAP-kinases, apoptosis, NF-Kappa B,

cell adhesion, and TNF signaling and insulin signaling. We have established

Isis' first three target validation and gene functionalization partnerships with

Abbott Laboratories, Aventis and AstraZenca and we are pursuing additional

partnerships.



IBIS TECHNOLOGY PLATFORM



RNA-TARGETED SMALL MOLECULE DRUG DISCOVERY



Ibis Therapeutics is our program to discover low molecular weight,

potentially orally bioavailable drugs that work by binding to RNA. Ibis

leverages our success in pioneering RNA-targeted drug discovery and development

and expands our ability to convert genomics data into drug discovery

information.



In Ibis, we have developed proprietary technologies in four key areas:



-       Mining genomes for structured RNA in therapeutic targets;



-       Predicting the three-dimensional structure of RNA from genome

sequence data and designing RNA-targeted small molecules;



-       Synthesizing libraries of compounds designed to find RNA; and



-       Screening for RNA-binding molecules using novel massively

parallel screening technology and producing lead compounds for

further optimization and development.



With Ibis, we are developing and integrating genome mining software to

identify these RNA structural motifs in therapeutic targets of interest. We can

predict the three-dimensional shape of these motifs from biochemical probes of

RNA structure and molecular modeling methods. We have made a fundamental

breakthrough in the development of a parallel high-throughput screening strategy

to identify small molecules that bind RNA targets using high resolution mass

spectrometry. In a MASS (multitarget affinity/specificity screening) assay, each

compound and each target RNA is labeled by its exact molecular mass. Since every

small molecule is labeled uniquely, a large mixture can be screened in the

presence of several RNA targets simultaneously. The identity of the small

molecule, the RNA target that it binds, its binding affinity and the







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location of the binding site on the RNA can be determined in one rapid set of

experiments. Using this technology, we expect to be able to screen 10,000

compounds per day against 10 RNA targets.



Our initial area of focus in Ibis is discovering novel antibacterial

compounds. The technology has potential application in cancer, central nervous

system disease, inflammation, as well as degenerative diseases of aging. To

date, we have funded Ibis through government sponsored grants from the Defense

Advanced Research Projects Agency and the National Institute of Standards and

Technology. Our goal for Ibis is for it to be self-funding through corporate

partner support. We will move Ibis toward this goal by providing drug candidates

for development and providing optimized leads to pharmaceutical partners for

development and commercialization.



PRODUCTS APPROVED AND UNDER DEVELOPMENT



Our drug discovery programs use antisense and combinatorial drug

discovery technologies to identify compounds to treat infectious and

inflammatory diseases and cancer. The following table outlines each product

under development, its target, disease indication and development status, as

well as Isis' commercial rights.



ISIS PRODUCTS IN DEVELOPMENT



<TABLE>

<CAPTION>

DISEASE

COMPOUND        TARGET         INDICATION        DEVELOPMENT STATUS(1)   COMMERCIAL RIGHTS

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

<S>             <C>            <C>               <C>                     <C>

Vitravene       CMV            Cytomegalovirus   Approved for            Isis/CIBA Vision(2)

(fomivirsen)                   Retinitis         marketing in the

U.S., Europe and

Brazil.  Other market

applications under

review.



ISIS 3521       PKC-(alpha)    Cancer            Phase II                Isis



ISIS 5132       C-raf kinase   Cancer            Phase II                Isis



ISIS 2503       Ha-ras         Cancer             Phase II               Isis



ISIS 2302       ICAM-1         Psoriasis         Phase II                Isis

(topical)



Ulcerative        Phase II

colitis (enema)



ISIS 14803      HCV            Hepatitis C       Phase I/II              HepaSense, Ltd.(3)



ISIS 104838     TNF-(alpha)    Inflammation      IND Candidate           Isis/ Orasense, Ltd.(4)



ISIS 107248     CD49d          Inflammation      IND Candidate           Isis

</TABLE>



(1)     An "IND candidate" is a compound for which IND-enabling toxicology and

pharmacokinetic studies have been initiated and IND preparation has

begun.



(2)     CIBA Vision has the exclusive right to distribute fomivirsen.



(3)     HepaSense is a joint venture of Isis and Elan.



(4)     Orasense, a joint venture of Isis and Elan, owns the rights to an oral

formulation of ISIS 104838.



We also have a significant research program with the potential to yield

additional development candidates in the future. As described in the section of

this report entitled "Risk Factors - Uncertainties







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Associated with Clinical Trials," the product candidates listed in the preceding

table may not progress beyond their current status or yield a commercially

viable product.



INFECTIOUS DISEASES



CYTOMEGALOVIRUS (CMV) RETINITIS. Individuals with suppressed immune

systems, such as those with AIDS resulting from the HIV virus, are susceptible

to opportunistic infections caused by CMV. In the AIDS population, retinitis

caused by CMV is the primary cause of blindness. There are more than 270,000

active AIDS cases in the United States. The introduction of new anti-HIV drugs,

particularly protease inhibitors and combination treatment regimens, has

prolonged survival in HIV-infected individuals. Over the last three years, this

has resulted in a decline in mortality from AIDS, accompanied by a decline in

the incidence of many opportunistic infections including CMV. Currently approved

drugs for CMV retinitis are ganciclovir, foscarnet, cidofovir and fomivirsen.

Foscarnet and cidofovir are available in intravenous (IV) dosing forms only.

Ganciclovir is available in IV and oral doses, as well as in an intraocular

implant form.



VITRAVENE(TM) (FOMIVIRSEN). In August 1998, the FDA approved

Vitravene(TM) to treat CMV retinitis in AIDS patients. Vitravene(TM) is an

antisense compound discovered by Isis. CIBA Vision, our worldwide distribution

partner for this drug, launched Vitravene(TM) in November 1998. CIBA Vision is a

subsidiary of Novartis Pharma AG. See "Collaborative Agreements - CIBA Vision."

In 1999 Vitravene(TM) also received marketing approval in Europe and Brazil. We

delivered our first commercial shipment of Vitravene(TM) to our partner CIBA

Vision in 1998, earning product revenue of $560,000 in that year. No commercial

shipments of Vitravene(TM) were made in 1999, and no product revenue was earned.



HEPATITIS C (HCV). HCV continues to represent a major public health

challenge. This potentially deadly disease affects the liver and can eventually

cause liver cancer and death. It is estimated that almost four million people in

the United States are infected with HCV and 8,000 to 10,000 people are expected

to die from this disease each year. Interferon-a therapy, used alone or in

combination with ribovirin, is widely used in an attempt to eradicate this virus

from chronically infected individuals, but long-term remissions are achieved in

only about 20% of patients even after six months of therapy. Better, safer and

more effective treatments are urgently needed, as current therapies have limited

efficacy and potentially serious toxicities.



ISIS 14803. Our antisense inhibitor of HCV, ISIS 14803, may represent a

significant therapeutic advance in treating this serious viral epidemic. ISIS

14803 is designed to inhibit the replication of HCV. In preclinical studies,

ISIS 14803 demonstrated specific reduction of the HCV RNA expression in both

cell cultures and mouse model systems. Under a joint venture agreement signed in

January 2000, ISIS 14803 is being co-developed with Elan Corporation, a leader

in the area of drug delivery.



A Phase I/II clinical study of ISIS 14803 began in early 2000. This

study will evaluate safety and efficacy. Patients in this Phase I/II trial will

receive ISIS 14803 intravenously 3 times a week for 4 weeks. Studies of the

subcutaneous delivery of ISIS 14803 are also planned. Subsequently, studies of

ISIS 14803 using Elan's MEDIPAD, a minimally invasive microinfusion pump, will

be initiated.



CANCER



Much of our work in the area of cancer is focused on specific targets

within multigene families believed to be involved in both normal and abnormal

cell differentiation and cell growth. Members of multigene families, called

isotypes, are extremely similar to one another at the protein level but most

likely serve different biological functions. Since traditional drugs are not

specific enough to inhibit one isotype within a family without affecting the

function of the other related isotypes, it has been difficult to determine the

functional differences among them. There is growing evidence that certain

isotypes might be involved in abnormal cell differentiation or proliferation.

Antisense drug discovery technology exploits the differences among the isotypes

at the mRNA level to design drugs that can inhibit specific isotypes. Selective

inhibition of a single isotype may result in less toxicity. Much of our work has

focused on multigene families in the signal transduction pathway, the method by

which various cellular and extra cellular proteins communicate information

necessary for cell function and growth. Disruptions in the production or

behavior of signal transduction proteins are involved in numerous proliferative

disorders, including cancer.







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Clinical trials of our anticancer compounds have demonstrated that

antisense drugs can be effective cancer therapeutics. In these trials, our

compounds were well tolerated, with none of the serious side effects associated

with standard cancer chemotherapies such as bone marrow or immune system

suppression, gastrointestinal distress or hair loss.



ISIS 3521. ISIS 3521 is an antisense compound in Phase II clinical

development which inhibits the production of one particular isotype (the (alpha)

isotype) of protein kinase C. PKC is a key enzyme in signal transduction, and

PKC isotypes are associated with both normal and abnormal cell growth. We have

been able to specifically inhibit the production of the PKC-(alpha) isotype

without inhibiting the production of other isotypes, thus allowing the

inhibition of the isotype believed to be involved in abnormal cell growth

without inhibiting the isotypes required for healthy cells to grow.



ISIS 3521 is nearing the completion of Phase II clinical trials as an

anticancer agent, both alone and in combination with traditional cancer

chemotherapies. The Phase II trials are studying the effect of this drug in

treating a variety of cancer tumors. This compound inhibits protein kinase

C-(alpha), or PKC-(alpha), a protein associated with abnormal cell growth. Based

on promising data from a Phase I/II study, we plan to initiate Phase III

clinical trials of ISIS 3521 for patients with non-small cell lung cancer in

late 2000. Results from the Phase I/II trial show that of 17 patients with

non-small cell lung cancer, 15 have benefitted from the drug. Eleven of the 17

patients (65%) have experienced partial responses. One patient had a minor

response and 3 patients had stable disease lasting 4 to 8 months. Only 4 of 17

patients have died, with the longest survival being 23 months following study

entry. With a median of 10 months of follow-up, 77% of the patients are alive

and continuing to be evaluated.



In Phase I and Phase II studies, ISIS 3521 stabilized disease, reduced

tumor mass and reduced tumor markers in patients with lung cancer, ovarian

cancer and lymphoma. In those trials, ISIS 3521 caused no significant side

effects. In a Phase II study of ISIS 3521 as a single agent in the treatment of

patients with refractory non-Hodgkin's lymphoma, 1 of 7 patients treated so far

has had a partial response and one other is too early to evaluate.



The Phase I studies included 56 patients with various types of cancer

that had not responded to standard treatment. In these Phase I trials, the drug

was well-tolerated by patients with no significant side effects. We also saw

preliminary evidence of anticancer activity.



ISIS 2503. Substantial evidence exists supporting a direct role for ras

gene products in the development and maintenance of human cancer. Ras proteins

are involved in passing information between cells. Ras, in both normal and

mutated forms, is associated with abnormal cell growth and, as such, is

associated with cancer. ISIS 2503, a potent selective inhibitor of Harvey ras,

has been shown to inhibit abnormal cell growth by inhibiting expression of ras

genes in cell culture and animal models. ISIS 2503 has also inhibited the growth

of multiple different human cancers in nude mouse xenograft models.



In Phase I studies, ISIS 2503 was well-tolerated, with no clinically

significant toxicities observed among 22 patients with a variety of solid tumors

who received the drug by 14-day continuous infusion repeated every 21 days.

Prolonged stable disease was observed in 4 patients on this trial, including one

patient with pancreatic cancer who had disease stabilization for 8 treatment

courses administered over 6 months.



In Phase II trials of ISIS 2503, the compound is being evaluated both

alone and in combination with traditional cancer chemotherapies in patients with

colon, breast, pancreatic and lung cancers. The colon cancer trial is near

completion with no significant evidence of activity while early results in lung

cancer suggest improvement in cancer-related symptoms. ISIS 2503 has been

well-tolerated, with no clinically significant toxicities observed among

patients with a variety of solid tumors. A Phase I trial of ISIS 2503 plus

gemcitabine has been completed and will be followed by a Phase II study in

patients with cancer of the pancreas.



ISIS 5132. ISIS 5132 is an antisense compound which inhibits the

expression of C-raf kinase, another molecular target involved in cell signaling.

C-raf kinase is a member of the raf kinase multi-gene family and is associated

with abnormal cell growth. ISIS 5132 selectively inhibits C-raf kinase without

inhibiting the production of other members of that multigene family. Published

results from a human clinical trial show that ISIS 5132 reduced the levels of

its target RNA, c-raf-1 after intravenous administration.







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ISIS 5132 is in Phase II clinical trials as an anticancer agent. The

Phase II trials are studying the effect of this drug in treating a variety of

cancer tumors. In Phase I clinical trials, ISIS 5132 showed evidence of

antitumor activity in patients with ovarian, renal, pancreatic, and colon

cancers. In those trials, ISIS 5132 was well-tolerated and caused no clinically

significant side effects. A trial in ovarian cancer has not yet been completed.

There are no current plans to develop this drug further in the other tumor types

that have been studied (prostate cancer, colon cancer, non-small cell lung

cancer). Several patients in this trial experienced disease stabilization.



INFLAMMATORY DISEASES



Cell adhesion molecules make up a large family of related proteins and

represent targets for treating inflammatory diseases. Inflammation is a key

component of a large number of acute and chronic diseases. Although inflammation

is part of a normal localized protective response that the human body uses to

destroy infectious agents or repair injured tissue, disruptions of normal

inflammatory responses often lead to inflammatory diseases. These inflammatory

responses result in or contribute to a diverse set of diseases that can affect

many organs of the body ranging from the skin to the brain. Common inflammatory

diseases include rheumatoid arthritis, psoriasis, asthma and inflammatory bowel

disease. Inflammation also occurs as a result of burn, shock or organ

transplantation.



We have focused on a number of targets in our cell adhesion molecule

program. Our most advanced cell adhesion research and development effort has

been focused on the intercellular adhesion molecule ("ICAM") family and in

particular, ICAM-1. ICAM-1 facilitates the migration of immune cells involved in

both chronic and acute inflammation, allowing us to target both conditions.

Over-expression of ICAM-1 has been demonstrated in a wide variety of

inflammatory disorders, such as rheumatoid arthritis, asthma, psoriasis, organ

transplant rejection and inflammatory bowel diseases. While it is unlikely that

over-expression of ICAM-1 is a cause of these disorders, ICAM-1 is thought to

contribute to the pathology of these diseases and conditions. We have identified

lead compounds for other adhesion molecules including CD49d (VLA-4).



In addition to cell adhesion molecules, we have active research programs

targeting other steps in the inflammatory process. In particular, we have

identified antisense inhibitors which selectively inhibit the expression of

cytokines such as tumor necrosis factor-(alpha) (TNF-(alpha)), interleukin 5

(IL-5) and the IL-5 receptor. Lead antisense compounds targeting these proteins

are showing promising activity in multiple models of inflammatory diseases.



ISIS 2302. ISIS 2302, the most advanced compound in our cell adhesion

program, selectively inhibits ICAM-1 gene expression. In Phase I testing of ISIS

2302 in healthy volunteers, the compound was well tolerated at all doses. We

conducted Phase II trials in five disease indications: Crohn's disease,

psoriasis, ulcerative colitis, prevention of kidney transplant rejection and

rheumatoid arthritis. The Phase II studies involved 20 to 40 patients each and,

in general, were randomized and placebo-controlled.



-       CROHN'S DISEASE. Crohn's disease is a serious inflammatory

disease that affects the intestines and other parts of the

digestive tract. A patient with Crohn's disease suffers chronic

and often severe episodes of diarrhea, abdominal pain, rectal

bleeding and fever. Approximately 400,000 people in North

America and a similar number in Europe are afflicted with

Crohn's disease. Based on the positive results of a Phase II

study, we decided to initiate a pivotal quality trial of ISIS

2302 in Crohn's disease. That 300 patient trial was completed in

December 1999. The data from that clinical trial did not

demonstrate efficacy and the profile of the drug did not support

an NDA filing. The efficacy demonstrated, using the combined

primary end point of clinical remission plus complete steroid

withdrawal, was approximately 20% in all three arms of the

study. This negative outcome was unexpected. In late 1998, the

company conducted an interim analysis of the first 150 patients

enrolled in the study. Based on the positive data from the

interim analysis, the company believed that the 300 patient

study was likely to support an NDA filing.



In the trial, the effects of two weeks and four weeks of

treatment with ISIS 2302 were compared to placebo. The analysis

of the data from the study failed to demonstrate the same

efficacy profile of ISIS 2302 seen in the interim analysis. At

the interim analysis, ISIS 2302 induced steroid-free complete

clinical remissions in 29% of the drug-treated patients versus a

placebo response rate of 14%.







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This was statistically different (p=0.047). Both the 2- and

4-week dose groups had similar results. In the placebo group,

34% of the patients discontinued from the study prematurely

because of lack of response, while only 16% of the ISIS 2302

patients discontinued early. This also was statistically

significant (p=0.020). Other measures of efficacy also favored

ISIS 2302 in the interim analysis.



In the second half of the study, the results were significantly

different than the interim analysis. Only 12% of the ISIS 2302

treated patients enrolled in the second half of the study

achieved steroid-free remission. This differs from the results

in the initial 150 patients (p=0.0047). In the second half of

the study, only 6% of the placebo patients discontinued from the

study prematurely because of lack of response. This differed

significantly from the results in the first half of the study

(p=0.0004). In contrast, the early discontinuation rate for lack

of clinical response in the drug treated arms was 20%, not

significantly different from the results in the first 150

patients. The safety database has not yet been fully analyzed;

however, the drug was well tolerated. The second half of the

trial differs statistically from the first half in every

meaningful parameter. We are in the process of determining if we

can identify those factors that contributed to the differences

between the two halves of the study.



-       PSORIASIS. In early 2000, we initiated Phase II trials of ISIS

2302 for psoriasis as a topical cream formulation. Plaque

psoriasis is the most common form of psoriasis, and is an

uncomfortable, disfiguring and incurable skin disorder that

affects two to four percent of the nation's population.

Psoriasis produces recurrent skin lesions that may involve up to

80-90 percent of the body surface. A conveniently dosed topical

cream formulation that is shown to be safe and effective would

represent a significant improvement in treatment for patients

and a significant commercial opportunity.



-       KIDNEY TRANSPLANT REJECTION. The Phase II study in kidney

transplant rejection, which has been proceeding at a pace

mandated by the regulatory authorities as they carefully monitor

clinical studies in this patient population, is nearing

completion. However, due to the competitive picture and the cost

of development, we have put the development of ISIS 2302 for

organ transplants on hold. We will also limit our investment in

the development of ISIS 2302 as an enema formulation for

treatment of ulcerative colitis.



-       RHEUMATOID ARTHRITIS. We completed the Phase II study in

rheumatoid arthritis. We saw evidence of therapeutic activity.

ISIS 2302 was well tolerated, and the safety profile of the drug

continues to be attractive. Based on this outcome, we are

pursuing development of a second-generation, orally active

antisense inhibitor of ICAM-1 in lieu of continuing development

of ISIS 2302 in rheumatoid arthritis. We continue to believe

that inhibition of ICAM-1 is a promising anti-inflammatory

strategy in rheumatoid arthritis and will continue to test

second-generation inhibitors of this target for this disease.



ISIS 104838. ISIS 104838 is a second-generation antisense inhibitor of

TNF-(alpha). This compound has shown promising results in models of inflammatory

disease. In clinical trials it will be evaluated as a possible treatment for a

variety of inflammatory diseases including rheumatoid arthritis and Crohn's

disease. We are preparing to file an IND for ISIS 104838 and plan to initiate

Phase I clinical studies in the first half of 2001. An oral formulation of ISIS

104838 is being developed co-developed with Elan under our Orasense joint

venture.



ISIS 107248. ISIS 107248 is a second-generation antisense inhibitor of

CD49d (VLA-4). This compound, which will be evaluated as a possible treatment

for a variety of inflammatory diseases including multiple sclerosis, is

currently undergoing preclinical toxicology and pharmacokinetic studies. We are

preparing to file an IND for ISIS 107248 and plan to initiate Phase I clinical

studies in 2001.



RESEARCH PROGRAMS



We combine our core technology programs in medicinal chemistry, RNA

biochemistry, and molecular and cellular biology with molecular target-focused

drug discovery efforts to design drug candidates. The goal of our target-based

research programs is to identify antisense, Ibis and GeneTrove drug candidates

to treat diseases for which there are substantial markets and for which there is

a need for better drugs. In addition, our research programs focus on identifying

next-generation compounds to serve as backup compounds to our







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current products in development and development candidates. Our Ibis drug

discovery program is currently focused on identifying broad-spectrum

antibacterial agents with a focus on important drug-resistant infections.



Our core technology programs can support multiple target-based antisense

research programs without significantly increasing costs. Through these

programs, we can efficiently explore numerous disease targets and identify the

best lead compounds to advance into preclinical development. We are currently

pursuing antisense, Ibis and GeneTrove drug discovery programs focused on

various anti-viral and anti-bacterial targets, inflammatory disease targets, and

other key molecular targets that might play critical roles in cancer.



COLLABORATIVE AGREEMENTS



Our strategy is to use alliances with other companies and equity-based

financing to increase our financial resources, reduce risk, and retain an

appropriate level of ownership of products currently in development. Through

alliances with major pharmaceutical companies, we can obtain funding, expand

existing programs, learn of new technologies, and gain additional expertise in

developing and marketing products.



ELAN - HEPATITIS C



In January 2000, Isis and Elan Corporation agreed to form a new

subsidiary of Isis to develop an antisense drug, ISIS 14803, to treat patients

chronically infected with the Hepatitis C virus (HCV). The new subsidiary is

called HepaSense and will develop and commercialize this novel therapeutic for

HCV while investigating delivery of the therapeutic with Elan's proprietary

MEDIPAD(R) Drug Delivery System, a disposable subcutaneous infusion device. The

combination of a novel drug for HCV with a convenient delivery method could

result in a very attractive product for this international public health

problem. ISIS 14803 began Phase I clinical trials in early 2000.



Isis and Elan have each licensed significant technology to HepaSense. As

part of the transaction, Elan will purchase $7.5 million of Isis Common Stock in

April 2000 and may purchase an additional $7.5 million of common stock upon

completion of a mutually agreed milestone. Both investments will be at a premium

to Isis' market price. Elan also purchased Isis Series B Preferred Stock which

will be convertible in the future into either Isis stock or stock in HepaSense.

In addition, Elan will make available to Isis a $12.0 million line of credit for

Isis' funding commitment to HepaSense.



ISIS 14803 is an antisense drug that inhibits HCV replication. In

preclinical studies, ISIS 14803 demonstrated specific reduction of the HCV RNA

expression in both cell cultures and mouse model systems. A Phase I/II clinical

study of ISIS 14803 began in early 2000. This study will evaluate safety and

efficacy. Patients in this Phase I/II trial will receive ISIS 14803

intravenously 3 times a week for 4 weeks. Studies of the subcutaneous delivery

of ISIS 14803 are also planned. Subsequently, Isis will initiate studies of ISIS

14803 using Elan's MEDIPAD. Elan's proprietary subcutaneous MEDIPAD(R) Drug

Delivery System combines the convenience of a transdermal patch with the drug

delivery capabilities of an infusion pump. This system can be

self-administrated, is disposable and inexpensive. It can be used to infuse drug

over 24 and 48-hour timeframes. Elan and its collaborators presently have

multiple drugs in clinical trials being administered using the MEDIPAD(R)

System.



ELAN - ORAL FORMULATION



In April 1999, Isis and Elan formed a new subsidiary to develop a

platform technology for the oral delivery of antisense drugs. Isis is the

majority shareholder in this new subsidiary, named Orasense. The first oral drug

Orasense is working on is ISIS 104838, Isis' antisense inhibitor of tumor

necrosis factor - (alpha) (TNF-(alpha)). TNF-(alpha) is a gene that has been

implicated in a wide range of inflammatory diseases.



Elan made a $27 million equity investment in Isis, consisting of $15

million of common stock purchased at a premium to market and $12 million of

convertible exchangeable preferred stock. Elan also received warrants

exercisable in five years. Elan has the right to convert the preferred stock

into either an ownership interest in Isis or in Orasense.



Isis has made substantial progress in oral formulations of antisense

drugs, achieving significant oral bioavailability by combining novel chemistries

and formulation approaches. Elan, a world leader in oral drug







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delivery technology, has demonstrated the oral delivery and bioavailability of

large macromolecules with size and charge properties similar to many antisense

drugs. Both companies are combining existing technologies and expertise with new

research efforts towards the goal of building a proprietary, platform technology

for the oral delivery of antisense drugs.



ASTRAZENECA



In December 1998, we established an antisense collaboration with

AstraZeneca PLC to discover, develop and commercialize novel antisense drugs

targeting specific genes associated with cancer. In this collaboration, we are

creating antisense candidates and are working together with AstraZeneca to

optimize them. AstraZeneca will develop drugs arising out of the collaboration.

AstraZeneca will pay us technology access fees and provide research funding as

well as milestone payments and royalties for any drugs progressing into clinical

development and onto the market. The initial term of this collaboration is three

years. In 1998, AstraZeneca paid $2 million in technology access fees. In 1999,

AstraZeneca paid $2.9 million for research support and fees. While the initial

focus of this collaboration is on a limited number of cancer targets, we can,

with AstraZeneca, also pursue additional targets in cancer and expand the

collaboration to targets in other therapeutic areas. The agreement also provides

that the collaboration can also be extended beyond its initial term.



MERCK



In June 1998, we established a research collaboration with Merck & Co.

to discover small molecule drug candidates to treat patients infected with

Hepatitis C virus. Our chemists, working together with Merck scientists, will

design, synthesize and evaluate novel compounds that Merck will screen in its

proprietary enzymatic assays for identifying Hepatitis C virus replication

inhibitors. Merck will commercialize any drugs arising from the collaboration,

and we retain the right to use technology developed in the collaboration in our

antisense program. The three-year collaboration provides us with annual research

support plus a technology access fee and milestone payments and royalties upon

commercialization. In 1998 and 1999, we received $3.9 million and $2.5 million,

respectively, from Merck under the terms of this agreement.



CIBA VISION



In 1997, we entered into an agreement with CIBA Vision, granting it

exclusive worldwide distribution rights for Vitravene(TM). Under the terms of

the agreement, we will receive $20 million in pre-commercial fees and

milestones. As of December 31, 1999, we have received a total of $15 million of

these pre-commercial fees and milestones. While CIBA Vision will market and sell

Vitravene(TM) worldwide, we will manufacture and sell Vitravene(TM) to CIBA

Vision, at a price that will allow us to share the commercial value of the

product with CIBA Vision. The FDA approved Vitravene(TM) for commercial

marketing in August 1998. In 1999 Vitravene(TM) received marketing approval in

Europe and Brazil. We delivered our first commercial shipment of Vitravene(TM)

to our partner CIBA Vision in 1998, earning product revenue of $560,000. No

commercial shipments of Vitravene(TM) were made in 1999, and no product revenue

was earned. See "Products Under Development - Cytomegalovirus (CMV) Retinitis."



BOEHRINGER INGELHEIM



In 1995, we and Boehringer Ingelheim formed an alliance to combine the

clinical development and research programs of both companies in the field of

cell adhesion. The collaboration supported the clinical development of ISIS 2302

in a number of different diseases, and the discovery of both small molecule and

antisense inhibitors to various novel call adhesion targets. In 1999, we

reacquired ISIS 2302 from Boehringer Ingelheim. Under the terms of the

renegotiated agreement, Isis has sole responsibility for the development and

commercialization of ISIS 2302 and other antisense inhibitors of cell adhesion

molecules discovered during the collaboration. Boehringer Ingelheim will receive

a royalty on the commercial sales of these antisense drugs. Boehringer Ingelheim

now has sole responsibility for the development and commercialization of any

small molecule inhibitors of cell adhesion molecules discovered during the

collaboration, with Isis receiving a royalty on the commercial sales of these

small molecule drugs.







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In addition to funding one-half of the collaboration's research and

development, Boehringer Ingelheim made additional investments in ISIS and

provided us with a line of credit. As of December 31, 1999, outstanding

borrowings under this line of credit totaled $ 22.6 million. The line of credit

is no longer available for additional borrowing.



ISIS 2302 is in Phase II clinical trials for psoriasis, ulcerative

colitis and renal transplant rejection. We are also evaluating data from a Phase

III study of ISIS 2302 in Crohn's disease to determine if further development is

warranted. See "Products Under Development - Inflammatory Diseases."



As of February 25, 2000, Boehringer Ingelheim owned approximately 8% of

our outstanding Common Stock.



NOVARTIS



We began our research and development collaboration with Novartis (then

called Ciba-Geigy Limited) in 1990. The research portion of the collaboration

ended in September 1998, having produced two drugs currently in development,

ISIS 3521 and ISIS 5132. Novartis funded the clinical development of ISIS 3521

and ISIS 5132 through Phase II. In late 1999, Novartis chose to conclude its

participation in the development of ISIS 3521 and ISIS 5132 at the completion of

the current Phase II clinical trials. See "Products Under Development - Cancer -

ISIS 3521; -- ISIS 5132." As of February 25, 2000, Novartis owned approximately

7% of our outstanding Common Stock.



GENETROVE ANTISENSE TARGET VALIDATION AND GENE FUNCTIONALIZATION

COLLABORATIONS



With the entire human genome expected to be sequenced by the year 2003,

identification and understanding of those genes that play a key role in disease

will become increasingly important to pharmaceutical companies to develop of

novel drugs. Antisense technology can be used to provide functional data on the

importance of a specific gene in causing or maintaining a disease. Antisense

technology uses genetic sequence information to rapidly design inhibitors of any

gene target. Because of their exquisite specificity, antisense inhibitors can

inhibit the selected gene only, without an impact on other closely related

genes. As a result, antisense inhibitors allow the identification of function of

that single gene target more precisely than any other method.



GeneTrove, Isis' antisense target validation and gene functionalization

program, provides genomic information with unsurpassed productivity and

efficiency to pharmaceutical companies. Using the proprietary chemistries and

systems developed by Isis, we can move from in vitro analysis to animal model in

one step and provide solutions to our partner's queries within weeks.

GeneTrove's capabilities are validated by our accomplishments. GeneTrove has

identified antisense inhibitors to more than 500 genes and we have patented many

of these findings. In addition, we have characterized over 20 pathways,

including: MAP-kinases, apoptosis, NF-Kappa B, cell adhesion, and TNF signaling

and insulin signaling. We have also validated more than 20 gene targets in

animal models. Importantly, our technology has been embraced by three major

pharmaceutical partners, which are using our capabilities to help evaluate,

select and prioritize genes as potential drug targets.



ASTRAZENECA



In January 2000, we entered into a target validation collaboration with

AstraZeneca. The collaboration will use our target validation technology to

assess and prioritize genes identified within AstraZeneca's genomics programs.

This collaboration will enable AstraZeneca to determine the function and

therapeutic value of novel gene targets and to use this information about gene

function to develop pharmaceutical products. It also provides Isis with valuable

information on these targets to assist in the development of novel antisense

drugs. The initial term of this collaboration is three years.



AVENTIS



In September 1999, we entered into a target validation collaboration

with Aventis (formerly Rhone-Poulenc Rorer). The collaboration will use our

target validation technology to assess genes identified within Aventis' genomics

programs. This collaboration will enable RPR to determine the function and

therapeutic value of numerous novel gene targets and to use this information

about gene function to develop







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pharmaceutical products. It also provides Isis with valuable information on

these targets to assist in the development of novel antisense drugs. The initial

term of this collaboration is three years. RPR will pay Isis research fees and

milestone payments based on the success of the program. We received payments

totaling $613,000 in 1999.



ABBOTT LABORATORIES



In December 1998, we entered into a target validation collaboration with

Abbott Laboratories, Inc. The collaboration utilizes our target validation

technology to enable Abbott to validate numerous gene targets, identify the

function of these genes and prioritize the targets. Abbott will pay us an

upfront fee, research fees, and milestone payments and royalties on net sales of

any Abbott non-antisense product arising from the collaboration. We will also

receive rights to develop drugs targeting Abbott proprietary genes for Abbott.

The initial term of this collaboration is two years. We received payments

totaling $250,000 in 1998 and $1 million in 1999.



MANUFACTURING



In the past, production of chemically modified oligonucleotides, like

those used in our research and development programs, was generally expensive and

difficult, except in small quantities. As a result, we dedicated significant

resources to focus on ways to improve manufacturing capacity. Because all

oligonucleotide compounds are made of variants of the same nucleotide building

blocks and are produced using the same types of equipment, we found that the

same techniques used to efficiently manufacture one oligonucleotide drug product

proved helpful in improving the manufacturing processes for many other

oligonucleotide products. Through the development of several proprietary

chemical processes for scaling up manufacturing capabilities, we have been able

to greatly reduce the cost of producing oligonucleotide compounds. For example,

we have significantly reduced the cost of raw materials, while at the same time

greatly increasing our capacity to make the compounds. We have both internal

programs and outside collaborations with various industry vendors to allow for

even greater production.



We have sufficient manufacturing capacity to meet both current and

future research and clinical needs both for ourselves and for our partners. We

also believe that we have, or will be able to develop or acquire, sufficient

supply capacity to meet our anticipated commercial needs. We also believe that

with reasonably anticipated benefits from increases in scale, we will be able to

manufacture antisense compounds at commercially competitive prices.



In 1998, we established an antisense oligonucleotide manufacturing

collaboration with Avecia Life Science Molecules, a leading supplier of chemical

and biological compounds to the pharmaceutical and biotechnology industries.

Access to an alternate manufacturing source will provide greater flexibility in

production scheduling and will reduce our risk of dependence on a single

manufacturing site for all of our clinical needs. We are not required to make

any capital investment to create this manufacturing capability.



In 1999, we established a commercial-scale manufacturing collaboration

with Abbott Laboratories. This collaboration combines Abbott's process

development expertise and manufacturing capability with Isis' proprietary

oligonucleotide manufacturing technology.



PATENTS AND PROPRIETARY RIGHTS



Our success will depend, in part, on our ability to obtain patent

protection for our products in the United States and other countries. We file

applications, as appropriate, for patents covering our products and processes.

As of February 28, 2000, we have been issued or allowed more than 590 patents

worldwide and have filed more than 532 patent applications in the United States

and counterparts of many of these applications in other countries. Patents

issued or applied for cover the following types of inventions, processes and

products:



-       Composition of matter claims to core chemistries for

oligonucleotide structures, which cover our rights to the

building blocks of our compounds;



-       Composition of matter claims to messenger RNA target sequences,

which cover our rights to the genetic sequences that our

compounds target;







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-       Use claims for using oligonucleotides targeted to particular

disease targets, which cover our right to use oligonucleotide

based drugs to treat specific diseases;



-       Method claims for the manufacture of oligonucleotides, which

cover our new, improved or more cost effective ways to

manufacture oligonucleotides;



-       Composition of matter claims to RNA structural elements, which

cover our rights for discovery of small molecules that bind to

these RNA structural elements;



-       Method claims for analyzing the interaction of small molecules

with RNA, which cover our novel discovery methods using mass

spectrometry to analyze the interaction of small molecules with

RNA;



-       Method claims for optimizing the interaction of drug substances

with their target molecules, which cover our mass spectrometry

based structural activity relationship discovery methods, i.e.,

SAR by mass spectrometer; and



-       Methods claims for rapidly discovering antisense

oligonucleotides, which cover our rapid through-put method of

discovering antisense oligonucleotides.



In December 1999 Isis was issued U.S Patent 6,001,653, covering Human

RNase H1. RNase H1 is a cellular enzyme that degrades RNA when antisense drugs

bind to RNA. Most antisense inhibitors work through this mechanism of action and

it has proven to be the most potent and broadly useful mechanism of action for

antisense inhibitors used as drugs and as tools in target validation. Our patent

covers the DNA sequence for Human RNase H1, methods of making any antisense

inhibitor or drug using the RNase H1 mechanism, and methods of screening to

identify effective antisense inhibitors of genes that use RNase H1.



We believe the RNase H1 patent has the potential to benefit Isis in many

ways. It solidifies our dominance in antisense technology by further

strengthening our vast patent estate. It also enhances our attractiveness as a

partner for both therapeutic research collaborations and for genomic

collaborations. In addition, we anticipate that this patent will produce

significant revenues for the company in the form of licensing fees.



We have obtained licenses from various parties that we deem to be

necessary or desirable for the manufacture, use or sale of our products. These

licenses (both exclusive and non-exclusive) generally require us to pay

royalties to the parties on product sales. We may not be able to obtain licenses

to other required technology or, if obtainable, such technology may not be

available at reasonable cost. Our failure to obtain a license to any technology

required to commercialize our products may have a material adverse impact on our

business.



We consider that in the aggregate our issued patents, patent

applications and licenses under patents owned by third parties are important to

our success. The patent positions of pharmaceutical, biopharmaceutical and

biotechnology firms are generally uncertain and involve complex legal and

factual questions. Consequently, even though we are currently pursuing patent

applications with the U.S. and foreign patent offices, we do not know whether

any of the pending applications will result in the issuance of any additional

patents or whether any issued patents will provide significant proprietary

protection or will be circumvented or invalidated. Litigation, which could

result in substantial cost to us, may also be necessary to enforce any patents

issued to us or to determine the scope and validity of others' proprietary

rights in court or in administrative proceedings. In addition, to determine the

priority of inventions, we may find it necessary to participate in interference

proceedings declared by the U. S. Patent and Trademark Office or in opposition,

nullity or other proceedings before foreign agencies with respect to any of our

existing or future patents or patent applications, which could result in

substantial cost to us. We may find it necessary to participate, at substantial

cost, in International Trade Commission proceedings to abate importation of

goods that would compete unfairly with our products.







16

19



GOVERNMENT REGULATION



Our manufacture and potential sale of therapeutics are subject to

extensive regulation by United States and foreign governmental authorities. In

particular, pharmaceutical products are subject to rigorous preclinical and

clinical testing and other approval requirements by the FDA in the United States

under the Federal Food, Drug and Cosmetic Act and by comparable agencies in most

foreign countries. Various federal, state and foreign statutes also govern or

influence the manufacture, safety, labeling, storage, record keeping and

marketing of such products. Pharmaceutical manufacturing facilities are also

regulated by state, local and other authorities. Obtaining approval from the FDA

and other regulatory authorities for a new therapeutic may take several years

and involve substantial expenditures. Moreover, ongoing compliance with these

requirements can require the expenditure of substantial resources. Difficulties

or unanticipated costs may be encountered by us or our licensees or marketing

partners in their respective efforts to secure necessary governmental approvals,

which could delay or preclude us or our licensees or marketing partners from

marketing their products. In conjunction with obtaining approval of

Vitravene(TM), we successfully passed the manufacturing pre-approval inspection

by the FDA. Approval of each new therapeutic will require a rigorous

manufacturing pre-approval inspection by regulatory authorities.



In addition to regulations enforced by the FDA, we are also subject to

regulation under the Occupational Safety and Health Act, the Environmental

Protection Act, the Toxic Substances Control Act, the Resource Conservation and

Recovery Act and other present and potential future federal, state and local

regulations.



COMPETITION



For many of their applications antisense based drugs as well as Ibis

small molecules will be competing with existing therapies for market share. In

addition, a number of companies are pursuing the development of

oligonucleotide-based technology and the development of pharmaceuticals

utilizing such technology. These companies include specialized pharmaceutical

firms and large pharmaceutical companies acting either independently or together

with biopharmaceutical companies. Many of our existing or potential competitors

have substantially greater financial, technical and human resources than we do

and may be better equipped to develop, manufacture and market products. In

addition, many of these companies have extensive experience in preclinical

testing and human clinical trials. These companies may develop and introduce

products and processes competitive with or superior to ours. Furthermore,

academic institutions, government agencies and other public and private

organizations conducting research may seek patent protection and may establish

collaborative arrangements for product and clinical development.



Vitravene(TM) and our other products under development address numerous

markets. Our competition has been and will continue to be determined in part by

the diseases for which our compounds are developed and ultimately approved by

regulatory authorities. For certain of our products, an important factor in

competition may be the timing of market introduction of competitive products.

Accordingly, the relative speed with which we can develop products, complete the

clinical trials and approval processes and supply commercial quantities of the

products to the market is an important competitive factor. We expect that

competition among products approved for sale will be based, among other things,

on product efficacy, safety, reliability, availability, price and patent

position.



The development by others of new treatments for the diseases for which

we are developing compounds could render our compounds non-competitive or

obsolete. Furthermore, because of the fundamental differences between antisense

and other technologies, there may be applications for which the products of one

technology are superior to those of another. We are aware of several companies

with late-stage compounds in development for diseases we are pursuing.



Our competitive position also depends upon our ability to attract and

retain qualified personnel, obtain patent protection or otherwise develop

proprietary products or processes and secure sufficient capital resources for

the often substantial period between technological conception and commercial

sales.







17

20



EMPLOYEES



As of February 25, 2000, we employed 352 individuals. After the

restructuring is completed in the first four months of 2000, we expect to employ

approximately 276 individuals, of whom 87 hold advanced degrees. A significant

number of our management and professional employees have had prior experience

with pharmaceutical, biotechnology or medical product companies. We believe that

we have been highly successful in attracting skilled and experienced scientific

personnel; however, competition for such personnel is intensifying. None of our

employees is covered by collective bargaining agreements, and management

considers relations with its employees to be good.



EXECUTIVE OFFICERS



The executive officers of the Company and their ages as of February 29,

2000 are as follows:



STANLEY T. CROOKE, M.D., Ph.D....54

Chairman of the Board, President and Chief Executive Officer



Dr. Crooke was a founder of the Company and has been its Chief Executive

Officer and a director since January 1989 and has served as President since

February 1999. He was elected Chairman of the Board in February 1991. Dr. Crooke

previously served as President of the Company from January 1989 to May 1994.

From 1980 until January 1989, Dr. Crooke was employed by SmithKline Beckman

Corporation, a pharmaceutical company, most recently as President of Research

and Development of SmithKline & French Laboratories. Dr. Crooke is a director of

Valentis, Inc., Idun Pharmaceuticals, Inc., and SYNSORB Biotech, Inc., and EPIX

Medical, Inc. He is also an adjunct professor of pharmacology at the Baylor

College of Medicine and the University of California, San Diego.



B. LYNNE PARSHALL....44

Executive Vice President, Chief Financial Officer and Secretary



Ms. Parshall has served as Executive Vice President since December 1995,

Chief Financial Officer of the Company since June 1994, and Secretary since

November 1991. From February 1993 to December 1995, she was a Senior Vice

President of the Company, and from November 1991 to February 1993, she was a

Vice President of the Company. Prior to joining Isis, Ms. Parshall practiced law

at Cooley Godward LLP, counsel to the Company, where she was a partner from 1986

to 1991. Ms. Parshall served as Vice President of Business Development of

Biotrack, Inc., a medical device company, during 1988 and 1989.



DEBBY JO BLANK, M.D....48

Executive Vice President



Dr. Blank joined Isis in March 1999 as Executive Vice President. Prior

to joining the Company, she was the President and Chief Operating Officer of

Cypress Bioscience, Inc. from 1996 to 1999. She also held various senior

management positions at Advanced Technology Laboratories, Syntex Laboratories,

Inc., The DuPont Merck Pharmaceutical Company, and E.I. DuPont & Company.



C. FRANK BENNETT, Ph.D.....43

Vice President, Biology



Dr. Bennett has served as Vice President, Biology since June 1995. From

March 1993 to June 1995, he was Director, Molecular Pharmacology, and from May

1992 to March 1993, he was an Associate Director in the Molecular and Cellular

Biology department. Prior to joining Isis in 1989, Dr. Bennett was employed by

SmithKline and French Laboratories in various research positions.



DAVID J. ECKER, Ph.D.....45

Vice President & Managing Director, Ibis Therapeutics



Dr. Ecker was a founder of the Company and has served as Vice President

& Managing Director of Ibis Therapeutics, a division of Isis Pharmaceuticals,

since June 1995. He served as Vice President, Biology from July 1993 to June

1995, as Executive Director, Molecular and Cellular Biology from February 1993

to July 1993,







18

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and as Director, Molecular and Cellular Biology from February 1989 to February

1993. From 1984 until February 1989, he was employed by SmithKline and French

Laboratories in a variety of research positions.



PATRICIA LOWENSTAM....53

Vice President, Human Resources



Ms. Lowenstam has served as Vice President, Human Resources since

January 1995. She joined Isis in August 1992 as Director, Human Resources and

served in that capacity until January 1995. Prior to joining Isis, she held

senior management positions in Human Resources with Quotron systems, Inc.,

Citicorp, Zales Jewelers, and the May Company.



RISK FACTORS



Please consider the following risk factors carefully in addition to the

other information contained in this report.



OUR BUSINESS WILL SUFFER IF WE FAIL TO OBTAIN REGULATORY APPROVAL FOR OUR

PRODUCTS.



We must conduct time-consuming, extensive and costly clinical trials, in

compliance with U.S. Food and Drug Administration regulations, to show the

safety and efficacy of each of our drug candidates, as well as the optimum

dosage for each, before the FDA can approve a drug candidate for sale. We cannot

guarantee that we will be able to obtain necessary regulatory approvals on a

timely basis, if at all, for any of our products under development. Delays in

receiving these approvals, failure by us or our partners to receive these

approvals at all or failure to comply with existing or future regulatory

requirements could have a material adverse effect on our business, financial

condition and results of operations.



Significant additional trials may be required, and we may not be able to

demonstrate that our drug candidates are safe or effective. We have only

introduced one commercial product, Vitravene(TM). We cannot guarantee that any

of our other product candidates will obtain required government approvals or

that we can successfully commercialize any products. We expect to have ongoing

discussions with the FDA and foreign regulatory agencies with respect to all of

our drugs in clinical development.



OUR BUSINESS WILL SUFFER IF OUR PRODUCTS ARE NOT USED BY DOCTORS TO TREAT

PATIENTS.



We cannot guarantee that any of our products in development, if approved

for marketing, will be used by doctors to treat patients. We currently have one

product, Vitravene(TM), a treatment for CMV retinitis in AIDS patients, which

addresses a small commercial market with significant competition. We delivered

our first commercial shipment of Vitravene(TM) to our partner CIBA Vision in

1998, earning product revenue of $560,000. No commercial shipments of

Vitravene(TM) were made in 1999, and no product revenue was earned.



The degree of market acceptance for any of our products depends upon a

number of factors, including:



-       the receipt and scope of regulatory approvals,



-       the establishment and demonstration in the medical and patient

community of the clinical efficacy and safety of our product

candidates and their potential advantages over competitive

products, and



-       reimbursement policies of government and third-party payors.



In addition, we cannot guarantee that physicians, patients, patient advocates,

payors or the medical community in general will accept and use any products that

we may develop.



OUR BUSINESS WILL SUFFER IF ANY OF OUR COLLABORATIVE PARTNERS FAIL TO DEVELOP,

FUND OR SELL ANY OF OUR PRODUCTS UNDER DEVELOPMENT.



If any collaborative partner fails to develop or sell any product in

which we have rights, our business may be negatively affected. While we believe

that our collaborative partners will have sufficient motivation to continue

their funding, development and commercialization activities, we cannot be sure

that any of these







19

22



collaborations will be continued or result in commercialized products. The

failure of a corporate partner to continue funding any particular program could

delay or stop the development or commercialization of any products resulting

from such program.



Collaborative partners may be pursuing other technologies or developing

other drug candidates either on their own or in collaboration with others,

including our competitors, to develop treatments for the same diseases targeted

by our own collaborative programs.



We also may wish to rely on additional collaborative arrangements to

develop and commercialize our products in the future. However, we may not be

able to negotiate acceptable collaborative arrangements in the future, and, even

if successfully negotiated, the collaborative arrangements themselves may not be

successful.



OUR BUSINESS COULD SUFFER IF THE RESULTS OF FURTHER CLINICAL TESTING INDICATE

THAT ANY OF OUR PRODUCTS UNDER DEVELOPMENT ARE NOT SUITABLE FOR COMMERCIAL USE.



Drug discovery and development involves inherent risks, including the

risk that molecular targets prove unsuccessful and the risk that compounds that

demonstrate attractive activity in preclinical studies do not demonstrate

similar activity in human beings or have undesirable side effects. Most of our

resources are dedicated to applying molecular biology and medicinal chemistry to

the discovery and development of drug candidates based upon antisense

technology, a novel drug discovery tool in designing drugs that work at the

genetic level to block the production of disease-causing proteins.



In late 1999, we completed a Phase III trial of ISIS 2302 in Crohn's

disease. The data from that study did not demonstrate efficacy and did not

support an NDA filing. This negative outcome was unexpected. In late 1998, the

company conducted an interim analysis of the first 150 patients enrolled in the

study. Based on the positive data from the interim analysis, the company

believed that the 300 patient study was likely to support an NDA filing. This

same result could occur with other products under development.



WE HAVE INCURRED LOSSES AND OUR BUSINESS WILL SUFFER IF WE FAIL TO ACHIEVE

PROFITABILITY IN THE FUTURE.



Because of the nature of the business of drug discovery and development,

our expenses have exceeded our revenues since Isis was founded in January 1989.

As of December 31, 1999, our accumulated losses were approximately $257 million.

Most of the losses have resulted from costs incurred in connection with our

research and development programs and from general and administrative costs

associated with our growth and operations. These costs have exceeded our

revenues, most of which have come from collaborative arrangements, interest

income and research grants. Our current product revenues are derived solely from

sales of Vitravene(TM). This product has limited sales potential relative to

most pharmaceutical products. We expect to incur additional operating losses

over the next several years, and we expect losses to increase as our preclinical

testing and clinical trial efforts continue to expand. We cannot guarantee that

we will successfully develop, receive regulatory approval for, commercialize,

manufacture, market or sell any additional products, or achieve or sustain

future profitability.



OUR BUSINESS WILL SUFFER IF WE FAIL TO OBTAIN TIMELY FUNDING.



Based on our current operating plan, we believe that our available cash

and existing sources of revenue and credit, together with the interest earned on

those funds, will be adequate to satisfy our capital needs for at least three

years. We expect that we will need substantial additional funding in the future.

Our future capital requirements will depend on many factors, such as the

following:



-       continued scientific progress in our research, drug discovery

and development programs;



-       the size of these programs and progress with preclinical and

clinical trials;



-       the time and costs involved in obtaining regulatory approvals;



-       the market acceptance of Vitravene(TM);



-       the costs involved in filing, prosecuting and enforcing patent

claims;







20

23



-       competing technological and market developments, including the

introduction of new therapies that address our markets; and



-       changes in existing collaborative relationships and our ability

to establish and maintain additional collaborative arrangements.



If we find that we do not have enough money, additional funds will need

to be raised, including through public or private financing. Additional

financing may not be available, or, if available, may not be on acceptable

terms. If additional funds are raised by issuing equity securities, the shares

of existing stockholders will be subject to further dilution and share prices

may decline. If adequate funds are not available, we may be required to cut back

on one or more of our research, drug discovery or development programs or obtain

funds through arrangements with collaborative partners or others. These

arrangements may require us to give up rights to certain of our technologies,

product candidates or products.



OUR BUSINESS WILL SUFFER IF WE CANNOT MANUFACTURE OUR PRODUCTS OR HAVE A THIRD

PARTY MANUFACTURE OUR PRODUCTS AT LOW COSTS SO AS TO ENABLE US TO CHARGE

COMPETITIVE PRICES TO BUYERS.



To establish additional commercial manufacturing capability on a large

scale, we must improve our manufacturing processes and reduce our product costs.

The manufacture of sufficient quantities of new drugs is typically a

time-consuming and complex process. Pharmaceutical products based on chemically

modified oligonucleotides have never been manufactured on a large commercial

scale. There are a limited number of suppliers for certain capital equipment and

raw materials that we use to manufacture our drugs, and some of these suppliers

will need to increase their scale of production to meet our projected needs for

commercial manufacturing. We may not be able to manufacture at a cost or in

quantities necessary to make commercially successful products.



In 1998, we entered into an antisense oligonucleotide manufacturing

collaboration with Avecia Life Science Molecules of Manchester, England pursuant

to which Avecia LSM will supply a portion of our requirements of drugs for

clinical trials. As of the date of this report, we have not yet received any

supply of drugs under this arrangement, and we cannot guarantee that Avecia LSM

will prove to be an acceptable alternative supplier.



OUR BUSINESS WILL SUFFER IF WE FAIL TO COMPETE EFFECTIVELY WITH OUR COMPETITORS.



Our competitors are engaged in all areas of drug discovery in the United

States and other countries, are numerous, and include, among others, major

pharmaceutical and chemical companies, specialized biopharmaceutical firms,

universities and other research institutions. Our competitors may succeed in

developing other new therapeutic drug candidates that are more effective than

any drug candidates that we have been developing. These competitive developments

could make our technology and products obsolete or non-competitive before we

have had enough time to recover our research, development or commercialization

expenses.



Many of our competitors have substantially greater financial, technical

and human resources than we do. In addition, many of these competitors have

significantly greater experience than we do in conducting preclinical testing

and human clinical trials of new pharmaceutical products and in obtaining FDA

and other regulatory approvals of products for use in health care. Accordingly,

our competitors may succeed in obtaining regulatory approval for products

earlier than we do. We will also compete with respect to manufacturing

efficiency and marketing capabilities, areas in which we have limited or no

experience.



OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO PROTECT OUR PATENTS OR OUR

PROPRIETARY RIGHTS.



Our success depends to a significant degree upon our ability to develop

proprietary products. However, we cannot assure you that patents will be granted

on any of our patent applications in the United States or in other countries. We

also cannot assure you that the scope of any of our issued patents will be

sufficiently broad to offer meaningful protection. In addition, our issued

patents or patents licensed to us could potentially be successfully challenged,

invalidated or circumvented so that our patent rights would not create an

effective competitive barrier.







21

24



INTELLECTUAL PROPERTY LITIGATION COULD HARM OUR BUSINESS.



To date, we have not experienced any patent or other intellectual

property litigation. However, we cannot guarantee that we will not have to

defend our intellectual property rights in the future. In the event of an

intellectual property dispute, we may be forced to litigate or otherwise defend

our intellectual property assets. Disputes could involve litigation or

proceedings declared by the United States Patent and Trademark Office or the

International Trade Commission. Intellectual property litigation can be

extremely expensive, and such expense, as well as the consequences should we not

prevail, could seriously harm our business.



If a third party claimed an intellectual property right to technology we

use, we might be forced to discontinue an important product or product line,

alter our products and processes, pay license fees or cease certain activities.

We may not be able to obtain a license to such intellectual property on

favorable terms, if at all.



THE LOSS OF KEY PERSONNEL, OR THE INABILITY TO ATTRACT AND RETAIN HIGHLY SKILLED

PERSONNEL, COULD ADVERSELY AFFECT OUR BUSINESS.



We are dependent on the principal members of our management and

scientific staff. We do not have employment agreements with any of our

management. The loss of our management and key scientific employees might slow

the achievement of important research and development goals. It is also critical

to our success to 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 stiff

competition for experienced scientists among many pharmaceutical and health care

companies, universities and non-profit research institutions.



OUR STOCK PRICE MAY CONTINUE TO BE HIGHLY VOLATILE.



The market price of our common stock, like that of the securities of

many other biopharmaceutical companies, has been and is likely to continue to be

highly volatile. During the last twelve months, the market price of our common

stock has ranged from $4 per share to $39 per share. The market price can be

affected by many factors, including, for example, fluctuation in our operating

results, announcements of technological innovations or new drug products being

developed by us or our competitors, governmental regulation, regulatory

approval, developments in patent or other proprietary rights, public concern

regarding the safety of our drugs and general market conditions.



PROVISIONS IN OUR CERTIFICATE OF INCORPORATION 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 the Board of Directors. Our certificate also includes a provision

that requires at least 66-2/3% of our voting stockholders to approve a merger or

certain other business transactions with, or proposed by, 15% or more of our

voting stockholders, except in cases where certain directors approve the

transaction or certain minimum price criteria and other procedural requirements

are met.



Our certificate of incorporation also requires that any action

required or permitted to be taken by our stockholders must be taken at a duly

called annual or special meeting of stockholders and may not be taken by written

consent. In addition, special meetings of our stockholders may be called only by

the board of directors, the chairman of the board or the president, or by any

holder of 10% or more of the outstanding common stock. These provisions may

discourage certain types of transactions in which the stockholders might

otherwise receive a premium for their shares over then current market prices,

and may limit the ability of the stockholders to approve transactions that they

think may be in their best interests. In addition, the board of directors has

the authority to fix the rights and preferences of and issue shares of Preferred

Stock, which may have the effect of delaying or preventing a change in control

of Isis without action by the stockholders.









22

25



ITEM 2. PROPERTIES



We occupy approximately 170,000 square feet of laboratory and office

space (including a 12,000 square foot GMP manufacturing suite) in five buildings

located on our "campus" in Carlsbad, California. Three of these buildings are

owned by Isis and, as of December 31, 1999, secure approximately $7.8 million in

indebtedness of the Company. Two of the buildings are leased under lease

agreements expiring in 2007 and 2010. We have also leased 1,600 sq. ft. of

office space in the United Kingdom to accommodate employees supervising European

clinical trials. We believe that our facilities will be adequate to meet our

needs through 2000.



ITEM 3. LEGAL PROCEEDINGS



The Company is not party to any material legal proceedings.





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



Not applicable.



PART II



ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



Our common stock is traded publicly through the Nasdaq National Market

under the symbol "ISIP." The following table presents quarterly information on

the price range of the common stock. This information indicates the high and low

sale prices reported by the Nasdaq National Market. These prices do not include

retail markups, markdowns or commissions.



<TABLE>

<CAPTION>

HIGH          LOW

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

<S>                                                             <C>             <C>

1998

First Quarter                                               $  16.06        $12.00

Second Quarter                                              $  16.25        $11.63

Third Quarter                                               $  16.00        $ 7.00

Fourth Quarter                                              $  13.31        $ 8.88



1999

First Quarter                                               $  15.25        $ 8.94

Second Quarter                                              $  12.19        $ 9.25

Third Quarter                                               $  13.81        $ 9.16

Fourth Quarter                                              $  17.38        $ 3.88

</TABLE>



As of January 31, 2000, there were approximately 1,278 stockholders of

record of our common stock. We have never paid dividends and do not anticipate

paying any dividends in the foreseeable future. Under the terms of certain term

loans, we are restricted from paying cash dividends until the loans are fully

repaid. See Item 7, "Management's Discussion and Analysis of Financial Condition

and Results of Operations -- Liquidity and Capital Resources."



RECENT SALES OF UNREGISTERED SECURITIES



On April 20, 1999, in conjunction with the formation of the Orasense

joint venture, Isis sold 120,150 shares of Isis' Series A Convertible Preferred

Stock to Elan International Services for $12,015,000. In conjunction with this

transaction, Isis also sold 910,844 shares of Isis' Common Stock to EIS for

$15,000,000, and issued to EIS a warrant to purchase up to 215,000 shares of

Isis' Common Stock at $24 per share. The term of the warrant is 5 years. We

expect that the proceeds from the sale of these securities will be used for

general







23

26



corporate purposes, including, but not limited to, funding the research and

development activities of the Orasense joint venture.



At any time after March 31, 2002, the Preferred Stock (including accrued

dividends) will be convertible at EIS' option into shares of Isis' Common Stock

at 125% of the 60-trading day average closing price of Isis' common Stock ending

two business days prior to March 31, 2002 (as adjusted for stock splits, stock

dividends and the like). In the event of a liquidation of Isis or certain

transactions involving a change of control of Isis, the agreement provides for

automatic conversion of the Preferred Stock on terms similar to those set forth

above.



At any time until June 30, 2002, the holders of Preferred Stock may

exchange their Preferred Stock with Isis for common shares of Orasense held by

Isis that represent 30.1% of the total outstanding capital stock of Orasense.

The exchange right will terminate if the Preferred Stock is converted into Isis'

Common Stock, unless such conversion occurs as a result of a liquidation or

certain transactions involving a change of control of Isis.



Until March 31, 2002, EIS will, at Isis' request, purchase convertible

debt of Isis in an amount equal to Isis' share of budgeted funding for Orasense.

The convertible debt will have a term of six years, bear interest at the rate of

12% and be convertible into Isis' Common Stock at a premium. Isis may prepay the

convertible debt in cash or in Isis' Common Stock. Isis will use the proceeds of

the sale of the convertible debt to provide additional development funding to

Orasense.



The issuance and sale of these securities was intended to be exempt from

registration and prospectus delivery requirements under the Securities Act of

1933, as amended, by virtue of Section 4(2) thereof due to, among other things,

(i) the limited number of persons to whom the shares were issued, (ii) the

distribution of disclosure documents to the investor, (iii) the fact that such

person represented and warranted to Isis, among other things, that such person

was acquiring the shares for investment only and not with a view to the resale

or distribution thereof, and (iv) the fact that certificates representing the

shares were issued with a legend to the effect that such shares had not been

registered under the Securities Act or any state securities laws and could not

be sold or transferred in the absence of such registration or an exemption

therefrom.



ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



<TABLE>

<CAPTION>

YEARS ENDED DECEMBER 31,

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

1999             1998             1997             1996             1995

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

<S>                                         <C>              <C>              <C>              <C>              <C>

STATEMENT OF OPERATIONS DATA:

Research and development revenues           $ 33,925         $ 38,611         $ 32,722         $ 22,663         $ 12,966

Research and development expenses             66,413           62,200           55,940           45,653           33,175

Net loss applicable to common stock          (59,645)         (42,983)         (31,066)         (26,521)         (23,712)

Basic and diluted net loss per share           (2.08)           (1.60)           (1.17)           (1.04)           (1.10)

Shares used in computing basic and

diluted net loss per share                28,703           26,873           26,456           25,585           21,514

</TABLE>



<TABLE>

<CAPTION>

DECEMBER 31,

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

1999              1998              1997              1996              1995

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

<S>                                          <C>               <C>               <C>               <C>               <C>

BALANCE SHEET DATA:

Cash, cash equivalents and short-term

investments                                $  52,839         $  58,848         $  86,786         $  77,624         $  77,407

Working capital                                 44,213            40,651            62,573            56,300            60,040

Total assets                                   103,107            96,074           117,881           101,305            99,569

Long-term debt and capital lease

obligations, less current portion             87,254            77,724            56,452            19,864             4,714

Accumulated deficit                           (256,761)         (197,116)         (154,133)         (123,067)          (96,546)

Stockholders' equity (deficit)                     869            (4,186)           34,852            58,385            75,850

</TABLE>







24

27



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS



Since its inception in January 1989, almost all of Isis' resources have

been devoted to our research, drug discovery and drug development programs. We

are not yet profitable and expect to continue to have operating losses for the

next several years. Our revenue comes from collaborative research and

development agreements with pharmaceutical companies, research grants and

interest income. The revenue from the collaboration agreements increases the

amount of research and development activity that we are able to fund and offsets

a portion of our research and development costs. See Item 1,

"Business--Collaborative Agreements." In 1998, we received approval from the

U.S. Food and Drug Administration ("FDA") to begin marketing our first product,

Vitravene(TM), a drug used to treat CMV retinitis.



RESULTS OF OPERATIONS



Years Ended December 31, 1999 and December 31, 1998



Our revenue from collaborative research and development agreements was

$33.9 million for the year ended December 31, 1999, compared with $38.6 million

in 1998, a decrease of 12%. The decrease was principally due to $5.0 million of

revenue recognized in 1998 from licensing certain patents. Revenue earned in

1999 from licensing patents was not significant. We delivered our first

commercial shipment of Vitravene(TM) to our partner CIBA Vision in 1998, earning

product revenue of $560,000. No commercial shipments of Vitravene(TM) were made

in 1999, and no product revenue was earned.



In April 1999, Isis and Elan Corporation formed a joint venture to

develop a platform technology for the oral delivery of antisense drugs. The

joint venture, Orasense Ltd. is a Bermuda limited company. While Isis owns 80.1%

of the outstanding common stock of Orasense, Elan and its subsidiaries have

retained significant minority investor rights that are considered "participating

rights" as defined in EITF 96-16. Therefore, Isis does not consolidate the

financial statements of Orasense, but instead accounts for its investment in

Orasense under the equity method of accounting. During 1999, Isis recognized

$4.4 million in contract revenue for research and development activities

performed for Orasense.



Research and development expenses rose 7% to $66.4 million in 1999 from

$62.2 million in 1998. The increase in research and development expenses

occurred because compounds in preclinical and clinical development continued to

advance into more expensive stages of development. We expect that research and

development expenses will decrease from the 1999 levels as the company

implements the restructuring plan announced in January 2000. Operating expenses

in 1998 included a $5.2 million write-off of acquired patents. No similar

expenses were incurred in 1999.



General and administrative expenses were $10.6 million for 1999,

compared with $9.5 million in 1998. This increase was primarily due to expanded

business development and investor relations activities and support of our

increasing research and development efforts. We expect that general and

administrative expenses will decrease from the 1999 levels as the company

implements its restructuring plan.



Interest income declined to $2.5 million in 1999 from $4.2 million in

1998. This decrease was primarily due to lower levels of cash and short-term

investments during 1999.



Interest expense increased to $11.4 million in 1999, compared with $9.4

million in 1998. This increase in interest expense was due primarily to

borrowing a total of $40 million in 1997 and 1998 under the terms of ten-year

private debt financings. Under the terms of the private debt financing

arrangements, payment of both principal and interest is deferred for the first

five years. During the third and fourth quarters of 1999, the company also

borrowed $2.3 million from Elan related to the Orasense joint venture. The terms

of the Elan debt also provide that the payment of principal and interest is

deferred for five years. Therefore, of the $11.4 million interest expense in

1999, $8.1 million was accrued under the long-term debt agreements and will not

require current cash payment.



Our net loss for 1999 was $59.6 million, or $2.08 per share, compared to

$43.0 million, or $1.60 per share, for 1998. The 1999 loss included $7.2 million

for Isis' equity in the loss of Orasense. Isis' loss from operations was $43.1

million in 1999, compared to $37.8 million in 1998. We expect that operating

losses will be







25

28



reduced from the 1999 level, as we implement our restructuring plan. Operating

losses may fluctuate from quarter to quarter because of differences in the

timing of revenue and expense recognition.



At December 31, 1999, our net operating loss carryforward for

federal income tax purposes was approximately $246 million. The net operating

loss and research credit carryforwards make up the majority of our deferred tax

assets. We will only be able to use the net operating loss and research credits,

and realize the benefit of these deferred tax assets, if we become profitable.

We have fully reserved all of our deferred tax assets, as their realization is

uncertain. Our research credit carryforward for federal income tax purposes was

approximately $11 million. Our federal net operating loss and research credit

carryforwards will begin expiring in 2004 unless previously utilized. Our net

operating loss and tax credit carryforwards will be subject to an annual

limitation regarding utilization against taxable income in future periods, due

to "change of ownership" provisions of the Tax Reform Act of 1986. We believe

that such limitation will not have a material adverse impact on the benefits

that may arise from our net operating loss and tax credit carryforwards.

However, there may or may not be additional limitations arising from any future

changes in ownership that may have a material adverse impact on Isis.



We believe that inflation and changing prices have not had a material

effect on our operations to date.



Years Ended December 31, 1998 and December 31, 1997



Our revenue from collaborative research and development agreements was

$38.6 million in 1998 and $32.7 million in 1997, an increase of 18%. The receipt

of $5 million from CpG ImmunoPharmaceuticals, Inc. for a license to certain

issued patents together with $1.8 million in from a research collaboration with

Merck contributed to this revenue increase. We delivered our first commercial

shipment of Vitravene(TM) in 1998, earning product revenue of $0.6 million.



Research and development expenses amounted to $62.2 million in 1998 and

$55.9 million in 1997. This increase in research and development expenses

resulted from Isis' growing preclinical and clinical development activities.



Operating expenses also included $5.2 million related to the write-off

of acquired patents.



General and administrative expenses were $9.5 million in 1998, compared

with $8.1 million in 1997. This increase was due to expanded business

development and investor relations activities and support of our increasing

research and development efforts.



Interest expense increased to $9.4 million in 1998 from $3.6 million in

1997. This increase was due to borrowing a total of $40 million in the fourth

quarter of 1997 and the second quarter of 1998. This borrowing was under the

terms of ten-year private debt financings.



Our net loss was $43.0 million, or $1.60 per share, in 1998 and $31.1

million, or $1.17 per share, in 1997.



LIQUIDITY AND CAPITAL RESOURCES



We have financed our operations with revenue from contract research and

development, by selling equity securities and by issuing long-term debt. From

our inception through December 31, 1999, we have earned approximately $180

million in revenue from contract research and development. We have also raised

net proceeds of approximately $250 million from the sale of equity securities

since Isis was founded. We have borrowed approximately $72 million under

long-term debt arrangements to finance a portion of our operations.



As of December 31, 1999, we had cash, cash equivalents and short-term

investments of $52.8 million and working capital of $44.2 million. In

comparison, we had cash, cash equivalents and short-term investments of $58.8

million and working capital of $40.7 million as of December 31, 1998. This

decrease in cash and short-term investments resulted from the funding of

operating losses, investments in capital equipment and building improvements,

investment in the Orasense Ltd. joint venture and principal payments on debt and

capital lease obligations. This decrease was offset in part by the sale of $15

million of common stock and $12 million of convertible preferred stock to Elan

Corporation in conjunction with the Orasense joint venture. Other sources







26

29



of funding in 1999 included $37.3 million from our issuance of common stock and

$3.2 million from long term debt financing.



The agreement with Elan International Services Ltd. provides us with

access to up to $18.4 million in convertible debt. This debt is to be used to

support the Orasense joint venture collaboration. Restrictions on the

availability of the debt facility are based on the anticipated collaboration

costs and the amount of funds available to us. As of December 31, 1999, the

outstanding balance under this line of credit was $2.3 million. See Note 3 to

the Financial Statements, "Long-term obligations and commitments."



In 1997 and 1998, we borrowed a total of $40 million in private

transactions. The loans must be repaid on November 1, 2007, and bear interest at

14% per annum. No payments of either principal or interest are required during

the first 5 years of the loans. After the first 5 years, interest must be paid

quarterly until the end of the loans. No principal payments are required until

November 1, 2007. In conjunction with this transaction, we issued warrants to

purchase 800,000 shares of common stock at a price of $25 per share. The

warrants issued in connection with these financings expire on November 1, 2004.

The warrants have been valued at a combined total of $5.4 million. This amount

has been credited to stockholders' equity. Because interest is deferred during

the first 5 years, the combined principal balance of both borrowings will accrue

to a total of $78 million on November 1, 2002. The debt under these arrangements

is carried on the balance sheet net of the unamortized amount allocated to the

warrants and including accrued interest. The combined carrying amount of these

notes at December 31, 1999 was $49,086,000. See Note 3 to the Financial

Statements, "Long-term obligations and commitments".



As of December 31, 1999, our long-term obligations (including current

portion) totaled $91.1 million, compared to $81.3 million at December 31, 1998.

This increase was due to the accrual of interest on the private debt financing

together with the additional debt acquired during the year as described above.

Additional capital lease financing to fund equipment acquisitions also

contributed to the increase. We expect that capital lease obligations will

increase over time to fund capital equipment acquisitions required for our

business. We will continue to use lease lines as long as the terms continue to

remain commercially attractive. We believe that our existing cash, cash

equivalents and short-term investments, combined with interest income, committed

contract revenue and committed equity funding will be sufficient to meet our

anticipated requirements for at least three years.



IMPACT OF YEAR 2000 COMPUTER ISSUES



In 1998 and 1999 SEC filings, the Company discussed the nature and

progress of its plans to become Year 2000 ready. In late 1999, the Company

completed its remediation and testing of systems. As a result of those planning

and implementation efforts, the Company experienced no significant disruptions

in mission critical information technology and non-information technology

systems and believes those systems successfully responded to the Year 2000 date

change. The Company expensed approximately $150,000 during 1999 in connection

with remediating its systems. The Company is not aware of any material problems

resulting from Year 2000 issues, either with its products, its internal systems,

or the products and services of third parties. The Company will continue to

monitor its mission critical computer applications and those of its suppliers

and vendors throughout the year 2000 to ensure that any latent Year 2000 matters

that may arise are addressed promptly.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company is exposed to changes in interest rates primarily from its

long-term debt arrangements and, secondarily, its investments in certain

short-term investments. The Company invests its excess cash in highly liquid

short-term investments that are typically held for the duration of the term of

the respective instrument. The Company does 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, the Company believes that, while the securities the

Company holds are subject to changes in the financial standing of the issuer of

such securities, the Company is 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







27

30



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Our financial statements and supplementary data required by this item

are filed as exhibits hereto, are listed under Item 14(a)(1) and (2), and are

incorporated herein by reference.



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE



Not applicable.



PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS



The information required by this item (with respect to Directors) is

incorporated by reference from the information under the caption "Election of

Directors" contained in our definitive Proxy Statement (the "Proxy Statement")

which will be filed on or before April 24, 2000 with the Securities and Exchange

Commission in connection with the solicitation of proxies for our 2000 Annual

Meeting of stockholders to be held on June 8, 2000.



The required information concerning our Executive Officers is contained

in Item 1, Part I of this Report.



ITEM 11. EXECUTIVE COMPENSATION



The information required by this item is incorporated by reference to

the information under the caption "Executive Compensation" contained in the

Proxy Statement.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The information required by this item is incorporated by reference to

the information under the captions "Security Ownership of Certain Beneficial

Owners and Management" contained in the Proxy Statement.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by this item is incorporated by reference to

the information under the caption "Compensation Committee Interlocks and Insider

Participation" and "Certain Transactions" contained in the Proxy Statement.







28

31



PART IV



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



(a)(1) Index to Financial Statements



The financial statements required by this item are submitted in a

separate section beginning on page 36 of this Report.

<TABLE>

<CAPTION>

PAGE

----

<S>                                                                                      <C>

Report of Ernst & Young LLP, Independent Auditors                                          36



Balance Sheets at December 31, 1999 and 1998                                               37



Statements of Operations for the years ended December 31, 1999, 1998 and 1997              38



Statements of Stockholders' Equity (deficit) for the years ended December 31,

1999, 1998 and 1997                                                                      39



Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997              40



Notes to Financial Statements                                                              41

</TABLE>



(A)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES



None required.



(A)(3) INDEX TO EXHIBITS



See Index to Exhibits on pages 33 through 35.



The following management compensatory plans and arrangements are required to be

filed as exhibits to this Report pursuant to Item 14(c):



<TABLE>

<CAPTION>

EXHIBIT

NUMBER          DESCRIPTION

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

<S>             <C>

10.2    --      Registrant's 1989 Stock Option Plan, as amended.(5)



10.3    --      Revised form of Incentive Stock Option Agreement under the 1989

Stock Option Plan.(2)



10.4    --      Revised form of Supplemental Stock Option Agreement under

the 1989 Stock Option Plan.(2)



10.5    --      Form of Incentive Stock Option Agreement dated January 1, 1995

under the 1989 Stock Option Plan entered into between Registrant

and certain of its officers together with related schedule.(3)



10.6    --      Form of Supplemental Stock Option Agreement dated January 1,

1995 under the 1989 Stock Option Plan entered into between

Registrant and certain of its officers together with related

schedule.(3)



10.7    --      Registrant's 1992 Non-Employee Directors Stock Option Plan, as

amended.(2)



10.8    --      Revised form of Supplemental Stock Option Agreement under

Registrant's 1992 Non-Employee Directors' Stock Option Plan.(4)



10.9    --      Form of Supplemental Stock Option Agreement dated January 6,

2000 under the 1989 Stock Option Plan.



10.10   --      Form of Performance-Based Supplemental Stock Option Agreement

dated January 6, 2000 under the 1989 Stock Option Plan entered

into between Registrant and certain of its officers together

with related schedule.



10.11   --      Registrant's 2000 Employee Stock Purchase Plan.



10.12   --      Form of Employee Assignment of Patent Rights.(1)



10.13   --      Registrant's 2000 Broad-Based Equity Incentive Stock Option

Plan.

</TABLE>







29

32



<TABLE>

<S>             <C>

10.14   --      Form of Supplemental Stock Option Agreement dated January 6,

2000 under the 2000 Broad-Based Equity Incentive Stock Option

Plan.



10.15   --      Form of Supplemental Stock Option Agreement dated January 6,

2000 under the 2000 Broad-Based Equity Incentive Stock Option

Plan entered into between the Registrant and its directors.



10.16   --      Severance Agreement dated January 11, 2000 entered into between

Registrant and its executive officers, together with related

schedule.

</TABLE>



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



(1)     Filed as an exhibit to the Registrant's Registration Statement on

Form S-1 (No. 33-39640) or amendments thereto and incorporated herein by

reference.



(2)     Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for

the quarter ended September 30, 1996 and incorporated herein by

reference.



(3)     Filed as an exhibit to Registrant's Annual Report on Form 10-K for the

year ended December 31, 1994 and incorporated herein by reference.



(4)     Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for

the quarter ended June 30, 1997 and incorporated herein by reference.



(5)     Filed as an exhibit to the Registrant's Annual Report on Form 10-K for

the year ended December 31, 1997 and incorporated herein by reference.



(b)     REPORTS ON FORM 8-K



On January 28, 2000, the Registrant filed the following report on

Form 8-K:



Report dated January 14, 2000 which described the joint venture the

Registrant entered into with Elan Corporation, plc. No financial

statements were filed with this report on Form 8-K. Eight documents,

including the Subscription, Joint Development and Operating Agreement,

security and warrant purchase agreements and related license agreements

(with certain confidential information deleted) were filed as exhibits

to the report.



(c)     EXHIBITS



The exhibits required by this Item are listed under Item 14(a)(3).



(d)     FINANCIAL STATEMENT SCHEDULES



The financial statement schedules required by this Item are listed under

Item 14(a)(2).







30

33



SIGNATURES



Pursuant to the requirements of Section 14 or 15(d) of the Securities

Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to

be signed on its behalf by the undersigned, thereunto duly authorized on the

27th day of March, 2000.



ISIS PHARMACEUTICALS, INC.



By:  /s/ STANLEY T. CROOKE, M.D., Ph.D.

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

Stanley T. Crooke, M.D., Ph.D.

Chairman of the Board, President and

Chief Executive Officer

(Principal executive officer)



POWER OF ATTORNEY



KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears

below constitutes and appoint Stanley T. Crooke and B. Lynne Parshall, or any of

them, his or her attorney-in-fact, each with the power of substitution, for him

or her in any and all capacities, to sign any amendments to this Report, and to

file the same, with exhibits thereto and other documents in connection

therewith, with the Securities and Exchange Commission, hereby ratifying and

confirming all that each of said attorneys-in-fact, or his or her substitute or

substitutes, may do or cause to be done by virtue hereof.



Pursuant to the requirements of the Securities Exchange Act of 1934,

this report has been signed below by the following persons on behalf of the

Registrant and in the capacities and on the dates indicated.



<TABLE>

<CAPTION>

SIGNATURES                      TITLE                                 DATE

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

<S>                                       <C>                                   <C>

/s/ STANLEY T. CROOKE, M.D., Ph.D.        Chairman of the Board,                March 27, 2000

- ----------------------------------        Chief Executive Officer and

Stanley T. Crooke, M.D., Ph.D.        Director (Principal

executive officer)





/s/  B. LYNNE PARSHALL                    Executive Vice President and          March 27, 2000

- ----------------------------------        Chief Financial Officer

B. Lynne Parshall                    (Principal financial and

accounting officer)





/s/ CHRISTOPHER F. O. GABRIELI            Director                              March 27, 2000

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

Christopher F. O. Gabrieli







/s/ ALAN C. MENDELSON                     Director                              March 27, 2000

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

Alan C. Mendelson

</TABLE>







31

34



<TABLE>

<CAPTION>

SIGNATURES                      TITLE                                 DATE

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

<S>                                       <C>                                   <C>

/s/  WILLIAM R. MILLER                    Director                              March 27, 2000

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

William R. Miller





/s/  MARK B. SKALETSKY                    Director                              March 27, 2000

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

Mark B. Skaletsky





/s/  LARRY SOLL                           Director                              March 27, 2000

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

Larry Soll





/s/  JOSEPH H. WENDER                     Director                              March 27, 2000

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

Joseph H. Wender

</TABLE>







32

35



INDEX TO EXHIBITS



<TABLE>

<CAPTION>

EXHIBIT

NUMBER                       DESCRIPTION OF DOCUMENT

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

<S>             <C>

3.1     --      Amended and Restated Certificate of Incorporation.(1)



3.2     --      Bylaws.(1)



4.1     --      Reference is made to Exhibits 3.1, 3.2 and 10.19.



4.2     --      Ciba-Geigy Investor Rights Agreement between the Registrant and

Novartis AG, formerly Ciba-Geigy Limited("Novartis"), dated

November 9, 1990.(1)



4.3     --      Voting Rights Agreement among the Registrant, Novartis and Dr.

Crooke, dated November 9, 1990.(1)



4.4     --      Specimen stock certificate.(1)



9.1     --      Reference is made to Exhibit 4.4.



10.1    --      Form of Indemnification Agreement entered into between the

Registrant and its Directors and officers with related

schedule.(1)



10.2    --      Registrant's 1989 Stock Option Plan, as amended.(10)



10.3    --      Revised form of Incentive Stock Option Agreement under the 1989

Stock Option Plan.(8)



10.4    --      Revised form of Supplemental Stock Option Agreement under

the 1989 Stock Option Plan.(8)



10.5    --      Form of Incentive Stock Option Agreement dated January 1, 1995

under the 1989 Stock Option Plan entered into between Registrant

and certain of its officers together with related schedule.(4)



10.6    --      Form of Supplemental Stock Option Agreement dated January 1,

1995 under the 1989 Stock Option Plan entered into between

Registrant and certain of its officers together with related

schedule.(4)



10.7    --      Registrant's 1992 Non-Employee Directors Stock Option Plan, as

amended.(8)



10.8    --      Revised form of Supplemental Stock Option Agreement under

Registrant's 1992 Non-Employee Directors' Stock Option Plan.(9)



10.9    --      Form of Supplemental Stock Option Agreement dated January 6,

2000 under the 1989 Stock Option Plan.



10.10   --      Form of Performance-Based Supplemental Stock Option Agreement

dated January 6, 2000 under the 1989 Stock Option Plan entered

into between Registrant and certain of its officers together

with related schedule.



10.11   --      Registrant's 2000 Employee Stock Purchase Plan.



10.12   --      Form of Employee Assignment of Patent Rights.(1)



10.13   --      Registrant's 2000 Broad-Based Equity Incentive Stock Option

Plan.



10.14   --      Form of Supplemental Stock Option Agreement dated January 6,

2000 under the 2000 Broad-Based Equity Incentive Stock Option

Plan.



10.15   --      Form of Supplemental Stock Option Agreement dated January 6,

2000 under the 2000 Broad-Based Equity Incentive Stock Option

Plan entered into between the Registrant and its directors.



10.16   --      Severance Agreement dated January 11, 2000 entered into between

Registrant and its executive officers, together with related

schedule.



10.17   --      Amended and Restated Research, Development and Licensing

Agreement by and between Isis Pharmaceuticals, Inc. and Novartis

AG dated February 13, 1996(with certain confidential information

deleted).(7)



10.18   --      Stock Purchase Agreement between the Registrant and Boehringer

Ingelheim International GmbH, dated as of July 18, 1995 (with

certain confidential information deleted).(5)



10.19   --      Collaborative Agreement between the Registrant and Boehringer

Ingelheim International GmbH, dated as of July 18, 1995 (with

certain confidential information deleted).(6)



10.20   --      Agreement between Registrant and CIBA Vision Corporation dated

July 10, 1997 (with certain confidential information

deleted).(9)

</TABLE>







33

36



<TABLE>

<CAPTION>

EXHIBIT

NUMBER                       DESCRIPTION OF DOCUMENT

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

<S>             <C>

10.21   --      Amendment No. 2 to the Agreement between the Company and CIBA

Vision Corporation, dated September 14, 1998 (with certain

confidential information deleted).(12)



10.22   --      Imperial Bank Note Secured by Deed of Trust dated March 24, 1997

in the amount of $6,000,000, together with the related Deed of

Trust and Assignment of Rents dated March 24, 1997.(9)



10.23   --      Imperial Bank Note Secured by Deed of Trust dated March 24, 1997

in the amount of $3,706,620, together with the related Deed of

Trust and Assignment of Rents dated March 24, 1997.(9)



10.24   --      Purchase Agreement for 14% Senior Subordinated Discount Notes

due November 1, 2007 and Warrants for Common Stock dated October

24, 1997 (with certain confidential information deleted).(10)



10.25   --      First Supplement to Purchase Agreement for 14% Senior

Subordinated Discount Notes due November 1, 2007 and Warrants

for Common Stock dated May 1, 1998 (with certain confidential

information deleted).(11)



10.26   --      Asset Purchase Agreement between Registrant and Gen-Probe

Incorporated dated December 19, 1997 (with certain confidential

information deleted).(10)



10.27   --      Research Collaboration and License Agreement between Merck &

Co., Inc. and the Registrant dated June 1, 1998 (with certain

confidential information deleted).(11)



10.28   --      Research and Development Agreement between the Registrant and

Zeneca Limited, dated December 18, 1998 (with certain

confidential information deleted).(14)



10.29   --      Patent Rights Purchase Agreement between the Registrant and

Gilead Sciences, Inc., dated December 18, 1998 (with certain

confidential information deleted).(13)



10.30   --      Subscription, Joint Development and Operating Agreement, dated

April 20, 1999 by and among Registrant, Elan Corporation, plc,

Elan International Services, Ltd. and Orasense, Ltd. (with

certain confidential information deleted); together with the

related Securities Purchase Agreement, Convertible Promissory

Note, Warrant to Purchase Shares of Common Stock, Registration

Rights Agreements and License Agreements.(16)



10.31   --      Agreement dated August 31, 1999 between Boehringer Ingelheim

International GmbH and Isis Pharmaceuticals, Inc.; together with

related Amendment to the Stock Purchase Agreement.(17)



10.32   --      Subscription, Joint Development and Operating Agreement, dated

January 14, 2000 by and among Registrant, Elan Corporation, plc,

Elan International Services, Ltd. and HepaSense, Ltd. (with

certain confidential information deleted); together with the

related Securities Purchase Agreement, Convertible Promissory

Note, Warrant to Purchase Shares of Common Stock, Registration

Rights Agreements and License Agreements.(18)



23.1    --      Consent of Ernst & Young LLP, Independent Auditors.



24.1    --      Power of Attorney.  Reference is made to page 31.



27.1    --      Financial Data Schedule.



99.1    --      Form of Confidentiality Agreement.(15)

</TABLE>



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



(1)     Filed as an exhibit to the Registrant's Registration Statement on Form

S-1 (No. 33-39640) or amendments thereto and incorporated herein by

reference.



(2)     Filed as an exhibit to the Registrant's Registration Statement on Form

S-8 (No. 33-42970) and incorporated herein by reference.



(3)     Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q

for the quarter ended March 31, 1992 and incorporated herein by

reference.



(4)     Filed as an exhibit to the Registrant's Annual Report on Form 10-K for

the year ended December 31, 1994 and incorporated herein by reference.



(5)     Filed as an exhibit to the Registrant's Report on Form 8-K dated July

18, 1995 and incorporated herein by reference.







34

37



(6)     Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q

for the quarter ended September 30, 1995 and incorporated herein by

reference.



(7)     Filed as an exhibit to the Registrant's Annual Report on Form 10-K for

the year ended December 31, 1995 and incorporated herein by reference.



(8)     Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q

for the quarter ended September 30, 1996 and incorporated herein by

reference.



(9)     Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q

for the quarter ended June 30, 1997 and incorporated herein by

reference.



(10)    Filed as an exhibit to the Registrant's Annual Report on Form 10-K for

the year ended December 31, 1997 and incorporated herein by reference.



(11)    Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q

for the quarter ended June 30, 1998 and incorporated herein by

reference.



(12)    Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q

for the quarter ended September 30, 1998 and incorporated herein by

reference.



(13)    Filed as an exhibit to the Registrant's Annual Report on Form 10-K for

the year ended December 31, 1998 and incorporated herein by reference.



(14)    Filed as an exhibit to the Registrant's Annual Report on Form 10-K

(Amendment No. 2) for the year ended December 31, 1998 and incorporated

herein by reference.



(15)    Filed as an exhibit to the Registrant's Registration Statement on Form

S-3 (No. 333-71911) or amendments thereto for the year ended December

31, 1998 and incorporated herein by reference.



(16)    Filed as an exhibit to the Registrant's Report on Form 8-K dated April

20, 1999 and incorporated herein by reference.



(17)    Filed as an exhibit to the Registrant's Report on Form 8-K dated August

31, 1999 and incorporated herein by reference.



(18)    Filed as an exhibit to the Registrant's Report on Form 8-K dated January

28, 2000 and incorporated herein by reference.







35

38



REPORT OF ERNST & YOUNG  LLP, INDEPENDENT AUDITORS



The Board of Directors

Isis Pharmaceuticals, Inc.



We have audited the accompanying balance sheets of Isis Pharmaceuticals,

Inc. as of December 31, 1999 and 1998, and the related statements of operations,

stockholders' equity (deficit), and cash flows for each of the three years in

the period ended December 31, 1999. These financial statements are the

responsibility of the Company's management. Our responsibility is to express an

opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally

accepted in the United States. Those standards require that we plan and perform

the audit to obtain reasonable assurance about whether the financial statements

are free of material misstatement. An audit includes examining, on a test basis,

evidence supporting the amounts and disclosures in the financial statements. An

audit also includes assessing the accounting principles used and significant

estimates made by management, as well as evaluating the overall financial

statement presentation. We believe that our audits provide a reasonable basis

for our opinion.



In our opinion, the financial statements referred to above present

fairly, in all material respects, the financial position of Isis

Pharmaceuticals, Inc. at December 31, 1999 and 1998, and the results of its

operations and its cash flows for each of the three years in the period ended

December 31, 1999, in conformity with accounting principles generally accepted

in the United States.





ERNST & YOUNG LLP





San Diego, California

January 28, 2000,

except for paragraph 3

of Note 8, as to which

the date is March 8, 2000







36

39



ISIS PHARMACEUTICALS, INC.



BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)



ASSETS



<TABLE>

<CAPTION>

DECEMBER 31,

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

1999              1998

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

<S>                                                                   <C>               <C>

Current assets:

Cash and cash equivalents                                            $  35,296         $  27,618

Short-term investments                                                  17,543            31,230

Contracts receivable                                                     5,429             3,466

Prepaids and other current assets                                          929               873

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

Total current assets                                             59,197            63,187



Property, plant and equipment, net                                       23,945            21,542

Patent costs, net                                                        11,250             9,113

Investment in joint venture                                               6,991                --

Deposits and other assets                                                 1,724             2,232

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

$ 103,107         $  96,074

=========         =========



LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)



Current liabilities:

Accounts payable                                                     $   3,148         $   2,977

Accrued payroll and related expenses                                     1,215             3,088

Accrued liabilities                                                      2,563             2,714

Deferred contract revenues                                               4,166            10,176

Current portion of long-term obligations                                 3,892             3,581

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

Total current liabilities                                              14,984            22,536



Long-term obligations, less current portion                              87,254            77,724



Commitments (See Note 3)



Stockholders' equity (deficit):

Series A Convertible Exchangeable 5% Preferred stock,

$.001 par value, 15,000,000 shares authorized,

120,150 shares and no shares issued and

outstanding at December 31, 1999 and 1998, respectively            12,315                --

Accretion of Preferred stock dividend                                     120                --

Common stock, $.001 par value; 50,000,000 shares authorized,

31,613,000 shares and 27,053,000 shares issued and

outstanding at December 31, 1999 and 1998, respectively                32                27

Additional paid-in capital                                             245,192           192,737

Accumulated other comprehensive income (loss)                              (29)              166

Accumulated deficit                                                   (256,761)         (197,116)

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

Total stockholders' equity (deficit)                                869            (4,186)

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

$ 103,107         $  96,074

=========         =========

</TABLE>





See accompanying notes.







37

40



ISIS PHARMACEUTICALS, INC.



STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)



<TABLE>

<CAPTION>

YEAR ENDED DECEMBER 31,

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

1999             1998             1997

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

<S>                                              <C>              <C>              <C>

Revenues:

Research and development revenues

under collaborative agreements                 $ 29,523         $ 38,611         $ 32,722

Research and development revenues

from joint venture                               4,402               --               --

Product revenues                                      --              560               --

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

33,925           39,171           32,722

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

Expenses:

Research and development                          66,413           62,200           55,940

Write-off of acquired patents                         --            5,238               --

General and administrative                        10,571            9,511            8,078

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

Total operating expenses                     76,984           76,949           64,018

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



Loss from operations                              (43,059)         (37,778)         (31,296)

Equity in loss of joint venture                   (7,242)              --               --

Interest income                                    2,500            4,150            3,815

Interest expense                                 (11,424)          (9,355)          (3,585)

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

Net loss                                          (59,225)         (42,983)         (31,066)

Accretion of dividend on preferred stock            (420)              --               --

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

Net loss applicable to common stock              $(59,645)        $(42,983)        $(31,066)

========         ========         ========



Basic and diluted net loss per share             $  (2.08)        $  (1.60)        $  (1.17)

========         ========         ========



Shares used in computing basic and

diluted net loss per share                       28,703           26,873           26,456

========         ========         ========

</TABLE>







See accompanying notes.







38

41



ISIS PHARMACEUTICALS, INC.



STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS)





<TABLE>

<CAPTION>

PREFERRED STOCK

----------------------------------------             COMMON STOCK

ACCRUED                       ------------------------

DESCRIPTION                             SHARES           AMOUNT        DIVIDEND        SHARES          AMOUNT

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

<S>                                       <C>             <C>            <C>             <C>            <C>

Balance at December 31, 1996                     --       $      --      $      --          26,201      $      26



Comprehensive Income

Net loss                                      --              --             --              --             --

Changes in unrealized gains and

(losses), net of income taxes             --              --             --              --             --

Comprehensive income (loss)



Options exercised and employee

Stock purchase plan                           --              --             --             454              1

Issuances of warrants to purchase

Common stock                                                                                 --             --

Compensation relating to the

Granting of options                           --              --             --              --             --

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

Balance at December 31, 1997                     --              --             --          26,655             27

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



Comprehensive Income

Net loss                                      --              --             --              --             --

Change in unrealized gains and

(losses), net of income taxes               --              --             --              --             --

Comprehensive income (loss)



Options exercised and employee

Stock purchase plan                          --              --             --             398             --

Issuances of warrants to purchase

Common stock                                     --              --             --              --             --

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

Balance at December 31, 1998                     --              --             --          27,053             27

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

Comprehensive Income

Net loss                                      --              --             --              --             --

Change in unrealized gains and

(losses), net of income taxes             --              --             --              --             --

Comprehensive income (loss)



Issuance of preferred stock                     120          12,015             --              --             --

Dividends accrued                                --              --            420              --             --

Conversion of preferred stock

dividends                                    --             300           (300)             --             --

Issuances of common stock, net of

repurchases and offering costs               --              --             --           3,974              4

Warrants exercised                               --              --             --             157             --

Options exercised and employee

stock purchase plan                          --              --             --             429              1

Compensation relating to the

granting of options                          --              --             --              --             --

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

Balance at December 31, 1999                    120       $  12,315      $     120          31,613      $      32

=========       =========      =========       =========      =========

</TABLE>







<TABLE>

<CAPTION>

ACCUMULATED

OTHER                          TOTAL

PAID IN      COMPREHENSIVE    ACCUMULATED    STOCKHOLDERS'

CAPITAL      INCOME/(LOSS)      DEFICIT        EQUITY

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

<S>                                       <C>           <C>              <C>            <C>

Balance at December 31, 1996              $ 181,248      $     178       $(123,067)      $  58,385



Comprehensive Income

Net loss                                      --             --         (31,066)        (31,066)

Changes in unrealized gains and

(losses), net of income taxes             --            (13)             --             (13)

---------

Comprehensive income (loss)                                                                (31,079)

---------

Options exercised and employee

Stock purchase plan                        3,306             --              --           3,307

Issuances of warrants to purchase

Common stock                               3,780             --              --           3,780

Compensation relating to the

Granting of options                          459             --              --             459

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

Balance at December 31, 1997                188,793            165        (154,133)         34,852

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



Comprehensive Income

Net loss                                      --             --         (42,983)        (42,983)

Change in unrealized gains and

(losses), net of income taxes               --              1              --               1

---------

Comprehensive income (loss)                                                                (42,982)

---------

Options exercised and employee

Stock purchase plan                       2,298             --              --           2,298

Issuances of warrants to purchase

Common stock                                  1,646             --              --           1,646

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

Balance at December 31, 1998                192,737            166        (197,116)         (4,186)

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



Comprehensive Income

Net loss                                      --             --         (59,645)        (59,645)

Change in unrealized gains and

(losses), net of income taxes             --           (195)             --            (195)

---------

Comprehensive income (loss)                                                                (59,840)

---------

Issuance of preferred stock                      --             --              --          12,015

Dividends accrued                                --             --              --             420

Conversion of preferred stock

dividends                                    --             --              --              --

Issuances of common stock, net of

repurchases and offering costs           49,051             --              --          49,055

Warrants exercised                               17             --              --              17

Options exercised and employee

stock purchase plan                       3,250             --              --           3,251

Compensation relating to the

granting of options                         137             --              --             137

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

Balance at December 31, 1999              $ 245,192      $     (29)      $(256,761)      $     869

=========      =========       =========       =========

</TABLE>





See accompanying notes.







39

42



ISIS PHARMACEUTICALS, INC.



STATEMENTS OF CASH FLOWS

(IN THOUSANDS)





<TABLE>

<CAPTION>

YEAR ENDED DECEMBER 31,

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

1999           1998           1997

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

<S>                                                                         <C>            <C>            <C>

Operating activities:

Net loss                                                                   $(59,225)      $(42,983)      $(31,066)

Adjustments to reconcile net loss to net cash used

in operating activities:

Depreciation and amortization                                               5,196          4,258          3,178

Deferred interest on long term debt                                         8,077          6,112            654

Equity in losses of joint venture                                           7,242             --             --

Write-off of acquired patents                                                  --          5,238             --

Compensation expense related to grant of options                              137             --            459

Changes in operating assets and liabilities:

Contracts receivable                                                    (1,963)        (3,177)          (289)

Prepaids and other current assets                                          (56)         1,202           (343)

Accounts payable                                                            171            134            481

Accrued payroll and related expenses                                     (1,873)           846            753

Accrued liabilities                                                         (60)        (1,633)         1,584

Deferred contract revenues                                               (6,010)        (4,717)         4,689

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

Net cash used in operating activities                                    (48,364)       (34,720)       (19,900)

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

Investing activities:

Short-term investments                                                       13,492         17,455         (8,155)

Property, plant and equipment                                                (4,791)        (4,434)        (3,454)

Patent costs                                                                 (2,642)        (3,882)        (1,455)

Investment in joint venture                                                 (14,233)            --             --

Deposits and other assets                                                       276            (30)        (2,098)

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

Net cash provided by (used in) investing activities                       (7,898)         9,109        (15,162)

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

Financing activities:

Net proceeds from issuance of equity                                         64,338          3,944          7,087

Proceeds from long-term borrowing                                             3,233         13,354         32,666

Principal payments on debt and capital lease obligations                     (3,631)        (2,171)        (3,671)

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

Net cash provided by financing activities                                 63,940         15,127         36,082

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

Net increase (decrease) in cash and cash equivalents                           7,678        (10,484)         1,020

Cash and cash equivalents at beginning of year                                27,618         38,102         37,082

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

Cash and cash equivalents at end of year                                    $ 35,296       $ 27,618       $ 38,102

========       ========       ========



Supplemental disclosures of cash flow information:

Interest paid                                                              $  2,402       $  3,191       $  2,644

Supplemental disclosures of non-cash investing and

financing activities:

Additions to debt and capital lease obligations for

acquisitions of property, plant and equipment                          $  2,071       $  2,068       $  2,953

Additions to debt for patent acquisitions                                  $     --       $  3,238       $     --

Conversion of preferred stock dividends into

preferred stock                                                        $    300       $     --       $     --

</TABLE>







See accompanying notes.







40

43



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1999





1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES



Organization and business activity--Isis Pharmaceuticals was

incorporated in California on January 10, 1989. In conjunction with its initial

public offering, Isis was reorganized as a Delaware corporation, as Isis

Pharmaceuticals, Inc., in April 1991. Isis was organized principally to develop

human therapeutic drugs using antisense and combinatorial technology.



Basic net loss per share--Basic earnings per share is based on weighted

average common shares outstanding and excludes any dilutive effects of options,

warrants and convertible securities. Dilutive earnings per share includes the

dilutive effects of options, warrants and convertible securities. Options and

warrants to purchase common stock were not included in the computation of

diluted net loss per share because the effect would be antidilutive.



Contract revenues and expenses--Contract revenues consist of

non-refundable research and development funding and are recorded as earned based

on the performance requirements of the collaborative research and development

contracts. Contract fees for which no further performance obligations exist are

recognized when the payments are received or when the collection is assured.

Payments received in excess of amounts earned are recorded as deferred contract

revenues. Research and development costs are expensed as incurred. For the years

ended December 31, 1999, 1998 and 1997, costs and expenses of approximately

$26,000,000, $35,000,000 and $31,000,000, respectively, were related to

collaborative research and development arrangements.



Revenue recognition--Isis recognizes revenue from product sales at the

time of shipment. An estimate is made of the amount of the product that may be

returned and current period sales are reduced accordingly. License fees consist

of non-refundable fees from the sale of license rights to our proprietary

technologies. Revenue from these fees is recorded when no further performance

obligations exist in accordance with Staff Accounting Bulletin No. 101.



Cash equivalents and short-term investments--Cash equivalents and

short-term investments consist of highly liquid debt instruments. Isis considers

instruments with original maturities of less than 90 days to be cash

equivalents. Isis has recorded its cash equivalents and short-term investments

at fair market value as of December 31, 1999, and has classified all of its

investments as available-for-sale. Unrealized gains and losses, net of the

related tax effect, are included in accumulated other comprehensive income

(loss), a separate component of stockholders' equity (deficit). See Note 2 -

Investments.







41

44



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999





Property, plant and equipment--Property, plant and equipment is stated

at cost and consists of the following (in thousands):



<TABLE>

<CAPTION>

DECEMBER 31,

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

1999           1998

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

<S>                                          <C>            <C>

Land                                         $  1,163       $  1,163

Buildings and improvements                     16,911         16,084

Equipment                                      31,075         25,324

Furniture and fixtures                          1,510          1,227

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

50,659         43,798

Less accumulated depreciation                 (26,714)       (22,256)

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

$ 23,945       $ 21,542

========       ========

</TABLE>



Depreciation of property, plant and equipment is provided on the straight-line

method over estimated useful lives as follows:



<TABLE>

<S>                                             <C>

Building                                        31.5 years

Improvements                                    15 years

Equipment                                       2.5-5 years

Furniture and fixtures                          5 years

</TABLE>



Patent costs--Isis capitalizes certain costs related to patent

applications, principally consisting of legal and filing fees. These costs are

regularly reviewed to determine that they include costs for patent applications

Isis is pursuing. Costs related to applications that are not being actively

pursued are evaluated under Accounting Principles Board Statement 17: Intangible

Assets and are adjusted to an appropriate amortization period, which results in

an immediate write-off. Accumulated patent costs are amortized on a

straight-line basis over their estimated economic lives of approximately 10

years, beginning with the date the patents are issued. The weighted average

remaining life of issued patents was 7.6 years at December 31, 1999 and 8.2

years for December 31, 1998. Accumulated amortization was $999,000 at December

31, 1999 and $493,000 at December 31, 1998.



Investment in joint venture--On April 20, 1999, Isis and Elan

Corporation, plc formed a joint venture to develop technology for the

formulation of oral oligonucleotide drugs. The joint venture, Orasense, Ltd., a

Bermuda limited company, is initially owned 80.1% by Isis and 19.9% by Elan.

While Isis owns 80.1% of the outstanding common stock of Orasense, Elan and its

subsidiaries have retained significant minority investor rights that are

considered "participating rights" as defined in EITF 96-16. Therefore, Isis

accounts for its investment in Orasense under the equity method of accounting.



Long-lived assets-- Long-lived assets are reviewed for potential

impairment annually or when events and circumstances warrant an earlier review.

When an evaluation is required, we compare the estimated future undiscounted

cash flows associated with the asset to the asset's carrying amount to determine

if a write-down to fair market value is required.



Use of estimates--The preparation of financial statements in conformity

with generally accepted accounting principles requires management to make

estimates and assumptions that affect the amounts









42

45



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999



reported in the financial statements and accompanying notes. Actual results

could differ from those estimates.



Comprehensive income (loss)--Statement of Financial Accounting Standards

(FAS) 130, "Reporting Comprehensive Income" requires Isis to display

comprehensive income (loss) and its components as part of Isis' full set of

financial statements. The measurement and presentation of net income (loss) did

not change. Comprehensive income (loss) is comprised of net income (loss) and

certain changes in equity that are excluded from net income (loss).

Specifically, FAS 130 requires unrealized holding gains and losses on Isis'

available-for-sale securities, which were reported separately in stockholders'

equity, to be included in accumulated other comprehensive income (loss).

Comprehensive income (loss) for the years ended December 31, 1999, 1998 and 1997

have been reflected in the Consolidated Statement of Stockholders' Equity

(Deficit).



Reclassification--Certain prior period amounts have been reclassified to

conform to current presentation.



2. INVESTMENTS



Isis invests its excess cash in U.S. Government securities and debt

instruments of financial institutions and corporations with strong credit

ratings. Isis has established guidelines relative to diversification and

maturities that maintain safety and liquidity. These guidelines are periodically

reviewed and modified to take advantage of trends in yields and interest rates.

Isis has not experienced any losses on its short-term investments. As of

December 31, 1999, 75% of the debt securities held by Isis had a contractual

maturity of one year or less, and the remaining 25% of the portfolio was due

within 2.5 years.



The following is a summary of Isis' short-term investments, accounted

for as available-for-sale securities:



<TABLE>

<CAPTION>

AVAILABLE-FOR-SALE SECURITIES

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

GROSS

UNREALIZED           ESTIMATED

COST         GAINS (LOSSES)        FAIR VALUE

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

DECEMBER 31, 1999                                           (in thousands)

<S>                                          <C>                <C>                 <C>

U.S. Treasury securities and

obligations of U.S. Government

agencies                                  $ 7,311            ($   29)            $ 7,282

U.S. corporate debt securities                10,261                 (0)             10,261

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

Total debt securities                     $17,572            ($   29)            $17,543

=======            =======             =======



DECEMBER 31, 1998

U.S. Treasury securities and

obligations of U.S. Government

agencies                                  $20,700            $    86             $20,786

U.S. corporate debt securities                10,364                 80              10,444

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

Total debt securities                     $31,064            $   166             $31,230

=======            =======             =======

</TABLE>







43

46



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999





3. LONG-TERM OBLIGATIONS AND COMMITMENTS



Between 1997 and 1998, Isis obtained a total of $40,060,000 in private

debt financing. The terms of the financing provide for a 10 year maturity on the

debt, interest of 14% per annum and deferred interest payments for the first 5

years of the loan. After the first 5 years, interest must be paid quarterly

until the end of the loan, November 1, 2007. No principal repayments are

required until the end of the loan. Because interest is deferred during the

first 5 years, the principal balance will be $78 million on November 1, 2002. In

conjunction with the debt financing, Isis issued warrants to the lender to

purchase shares of common stock, exercisable at $25 per share. Isis issued

warrants for a total of 800,000 common shares. The fair value of the warrants

was estimated using the Black-Scholes option pricing model, with the following

assumptions: expected life of 4.5 years, expected dividend yield of zero percent

and expected volatility of 60 percent. The assumed risk free interest rate was

5.9%. A total fair value of $5,426,000 was calculated for the warrants and was

credited to equity. The allocation of value to the warrants creates an effective

debt discount which is amortized using the effective interest method. The

effective interest rate of this debt is approximately 16%, including the effect

of the discount amortization. The debt is carried on the balance sheet net of

the unamortized amount allocated to the warrants, and including accrued

interest. The carrying amount at December 31, 1999 was $49,086,000. The fair

value of this debt at December 31, 1999 approximated $52,000,000. The fair value

of the long-term debt is estimated using discounted cash flow analyses, based on

current borrowing rates for similar types of borrowing arrangements.



In 1997, Isis obtained 2 new term loans from a bank to refinance

existing notes secured by real property and to fund facilities expansion. Both

notes are secured by Isis' real property and bear interest at the prime interest

rate plus 0.5%. The first note in the amount of $3,707,000 requires monthly

principal repayments of $12,433 plus interest with the remaining principal

balance due in April 2002. The balance of the note at December 31, 1999 was

$3,290,000. The second note in the amount of $6,000,000 requires monthly

principal repayments of $50,000 plus related interest with the remaining

principal balance due in July 2002. The balance at December 31, 1999 was

$4,500,000. As of December 31, 1999, the carrying value of these variable rate

long-term notes approximated fair value.



In 1996 and 1997, Isis borrowed a total of $22,576,000 under a

$40,000,000 line of credit made available under the terms of its collaborative

agreement with Boehringer Ingelheim International GmbH. The borrowed funds were

used to fund research and development costs associated with the collaboration.

Borrowings under the line of credit bear interest at the 7 year U.S.

interbanking rate plus 2.0%, determined at the time each advance was made.

Interest payments are due twice each year with principal repayment due 7 years

after the advance date. The principal may be repaid in cash or stock, at Isis'

option. If Isis elects to repay the loan in shares of Isis common stock,

repayment will be made at a share price equal to 90% of the average market value

over the 20 trading days preceding the maturity date. The balance under this

line of credit as of December 31, 1999 was $22,576,000, which approximated fair

value.



In December 1998, Isis purchased from Gilead Sciences, Inc., the

holdings of its antisense patent estate. This acquisition includes patents and

patent applications covering a broad proprietary suite of antisense chemistry

and antisense drug delivery systems. The purchase price was $6,000,000 payable

in four installments over three years. The first payment for $2,000,000 was paid

in December 1998 and an additional $1,000,000 was paid in December 1999. Isis

has recorded the net present value of the future







44

47



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999



payments, using a discount rate of 10%, as a long-term obligation on the balance

sheet. The balance of this obligation at December 31, 1999 was $2,568,000, which

approximated fair value.



Between September and November 1999, Isis borrowed a total of $2,213,000

under a $18,400,000 debt facility made available under the terms of its joint

venture with Elan Corporation, plc. The borrowed funds were used to fund

research and development costs associated with the joint venture. The terms of

the financing provide for a 6 year maturity on the debt, with interest at 12%

per annum, compounded semi-annually. No principal or interest payments are

required until the end of the loan. Because interest is deferred during the

first 5 years, the principal balance will be $4.2 million on April 19, 2005. The

principal may be repaid in cash or stock, at Isis' option. If Isis elects to

repay the loan in shares of Isis common stock, repayment will be made at a share

price equal to the average market value over the 60 trading days ending two

business days prior to the maturity date. The balance under this borrowing

facility as of December 31, 1999 was $2,284,000, which approximated fair value.



In September 1999, Isis borrowed $1,019,000 from Abbott Laboratories to

be used by Isis as its contribution toward costs associated with Abbott's design

and construction of a facility for commercial scale manufacturing of

oligonucleotides. The terms of the financing provide for a 2 year maturity on

the debt, with an annual interest rate of 2% over the Citibank prime rate

calculated at the date of borrowing and reset annually. Interest is payable

annually. The principal, which is due at maturity, can be paid in cash, stock

based on 100% of the average closing price for the 20 trading days preceding

loan maturity, or through increasing the price Isis would pay for the

oligonucleotides produced by Abbott until the loan is repaid. The balance under

this borrowing facility as of December 31, 1999 was $1,019,000, which

approximated fair value.



Isis leases equipment and certain office and lab space under

non-cancelable operating and capital leases with terms through February 2007.

Annual future minimum payments under operating leases and other long-term

obligations as of December 31, 1999 are as follows (in thousands):



<TABLE>

<CAPTION>

OPERATING         CAPITAL          CONTRACT          LONG-TERM

LEASES          LEASES          OBLIGATIONS          DEBT

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

<S>                                             <C>              <C>              <C>                <C>

2000                                            $   1,930        $   2,638         $   1,000         $   3,427

2001                                                2,023            2,226             2,000             3,364

2002                                                1,824            1,191                               9,611

2003                                                1,772              516                              28,955

2004                                                1,594                                               17,592

Thereafter                                          6,070                                              148,981

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

Total minimum payments                          $  15,213        $   6,571         $   3,000           211,930

=========

Less amount representing interest                                     (750)             (432)         (129,173)

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

Present value of future minimum payments                             5,821             2,568            82,757

Less current portion                                                (2,230)             (913)             (749)

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

Total                                                            $   3,591         $   1,655         $  82,008

=========         =========         =========

</TABLE>



Rent expense for the years ended December 31, 1999, 1998, and 1997 was

$1,736,000, $1,760,000 and $1,431,000, respectively. Cost of equipment under

capital leases at December 31, 1999 and 1998 was $8,394,000 and $7,101,000,

respectively. Accumulated depreciation of equipment under capital leases at

December 31, 1999 and 1998 was $4,633,000 and $3,140,000, respectively.







45

48



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999



4. STOCKHOLDERS' EQUITY



Stock Option Plans and Other Employee Option Grants--In June 1989, Isis

adopted a stock option plan which provides for the issuance of incentive and

non-qualified stock options for the purchase of up to 10,200,000 shares of

common stock to its employees and certain other individuals. In addition to the

options issued under the terms of the 1989 plan, non-qualified options to

purchase 319,000 shares of common stock have been granted to certain employees.

The plan also includes provisions for the issuance of stock pursuant to

restricted stock purchases and bonuses. Typically options expire 10 years from

the date of grant. Options granted after December 31, 1995 vest over a 4 year

period, with 25% exercisable at the end of 1 year from the date of the grant and

the balance vesting ratably thereafter. Options granted before January 1, 1996

generally vest over a 5 year period. At December 31, 1999, a total of 5,127,000

shares were exercisable, and 945,000 were available for future grant.



In July 1992, Isis adopted the 1992 Non-Employee Directors' Stock Option

Plan which provides for the issuance of non-qualified stock options for the

purchase of up to 300,000 shares of common stock to its non-employee directors.

Options under this plan expire 10 years from the date of grant. Options granted

after December 31, 1995 become exercisable in 4 equal annual installments

beginning 1 year after the date of grant. Options granted before January 1, 1996

vest over a 5 year period. At December 31, 1999, 163,000 shares issued under

this plan were exercisable and 60,000 Shares were available for future grant.



The following table summarizes stock option activity for the years ended

December 31, 1997 through December 31, 1999 (in thousands, except per share

data):



<TABLE>

<CAPTION>

NUMBER OF                                WEIGHTED AVG

SHARES      PRICE PER SHARE              PRICE/SHARE

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

<S>                                     <C>         <C>                          <C>

Outstanding at December 31, 1996          6,093     $  .14 to $20.00              $    8.48

Granted                                   1,071      13.19 to  19.88

Exercised                                  (395)       .14 to  16.00

Terminated                                 (327)      3.75 to  18.25

------

Outstanding at December 31, 1997          6,442        .14 to  20.00                   9.80

Granted                                   1,168       7.06 to  15.44

Exercised                                  (320)       .14 to  14.50

Terminated                                 (304)      3.75 to  20.00

------

Outstanding at December 31, 1998          6,986        .14 to  19.88                  10.27

Granted                                   1,539       4.00 to  18.00

Exercised                                  (333)       .14 to  14.50

Terminated                                 (490)      3.88 to  19.75

------

Outstanding at December 31, 1999          7,702        .43 to  19.88                  10.68

======

</TABLE>







46

49



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999



The following table summarizes information concerning currently

outstanding and exercisable options (in thousands, except contractual life and

exercise price data):



<TABLE>

<CAPTION>

OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE

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

WEIGHTED

AVERAGE                                    WEIGHTED

NUMBER         REMAINING     WEIGHTED           NUMBER      AVERAGE

RANGE OF           OUTSTANDING      CONTRACTUAL     AVERAGE        EXERCISABLE    EXERCISE

EXERCISE PRICE      AS OF 12/31/99         LIFE     EXERCISE PRICE   AS OF 12/31/99    PRICE

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

<S>                 <C>                <C>          <C>              <C>            <C

$ 0.43 - $ 5.38             881            4.16         $ 3.76             870        $ 3.75

$ 5.50 - $ 6.75           1,091            3.51         $ 6.28           1,088        $ 6.28

$ 6.81 - $ 9.75             942            3.41         $ 8.49             855        $ 8.40

$ 9.88 - $12.00             992            8.14         $10.92             298        $11.14

$12.06 - $12.75             970            7.08         $12.36             575        $12.37

$12.81 - $13.13           1,362            7.51         $13.02             620        $13.12

$13.18 - $17.75             873            6.83         $14.68             534        $14.81

$17.88 - $19.88             591            6.72         $18.11             450        $18.11

-----                                          -----

$ 0.43 - $19.88           7,702            5.95         $10.68           5,290         $9.81

=====                                          =====

</TABLE>



Employee Stock Purchase Plan--In 1991, the Board of Directors adopted

the Employee Stock Purchase Plan and reserved 500,000 shares of common stock for

issuance thereunder. The plan permits full-time employees to purchase common

stock through payroll deductions (which cannot exceed 10% of each employee's

compensation) at the lower of 85% of fair market value at the beginning of the

offer or the end of each six-month purchase period. During 1999, 96,000 shares

were issued to employees at prices ranging from $8.71 to $10.73 per share. At

December 31, 1999, 45,000 shares were available for purchase under this plan.



Stock-Based Employee Compensation--Isis has adopted the disclosure-only

provision of Statement of Financial Accounting Standards No. 123, "Accounting

for Stock-Based Compensation." Accordingly, no compensation expense has been

recognized for the stock option plans. Had compensation expense been determined

consistent with Statement No. 123, Isis' net loss and basic net loss per share

would have been changed to the following pro forma amounts (in thousands, except

per share amounts):



<TABLE>

<CAPTION>

1999               1998               1997

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

<S>                                           <C>                <C>                <C>

Net loss - as reported                        $  (59,645)        $  (42,983)        $  (31,066)

Net loss - pro forma                             (69,446)           (49,761)           (38,004)



Basic net loss per share - as reported        $    (2.08)        $    (1.60)        $    (1.17)

Basic net loss per share - pro forma               (2.42)             (1.85)             (1.44)

</TABLE>



The fair value of each option grant is estimated on the date of grant

using the Black-Scholes option pricing model with the following weighted-average

assumptions for 1997, 1998 and 1999: expected life of 1 year from vesting date

for regular employees, 2 years from vesting date for Directors and Vice

Presidents, and 4 years from vesting date for Executive Officers; expected

dividend yield of zero percent and expected volatility of 60 percent. The risk -

free interest rate was based on the Treasury Bill rate at the end of each year







47

50



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999



during 1997, 1998 and 1999. The weighted average risk free interest rates for

1997, 1998 and 1999 were 5.7%, 4.6%, and 6.2%, respectively. All options granted

during the year were valued using the same risk-free rate for the year. The

weighted average fair value of options granted was $8.50 for 1997, $5.98 for

1998 and $6.41 for 1999.



Warrants -- In 1997 and 1998, Isis issued 500,000 and 300,000 warrants,

respectively, in conjunction with a private debt financing agreement. As of

December 31, 1999, all of the warrants remain outstanding at an exercise price

of $25 per share. The warrants expire November 1, 2004. See Note 3.



In 1999, Isis issued 215,000 warrants to Elan International Services,

Ltd. as part of the joint venture collaboration between Isis and Elan. As of

December 31, 1999, all of the warrants remain outstanding at an exercise price

of $24 per share. The warrants expire April 19, 2004.



As of December 31, 1999, total common shares reserved for future

issuance was 9,722,000.



5. INCOME TAXES



Significant components of Isis' deferred tax assets as of December 31,

1999 and 1998 are shown below. Valuation allowances of $113,814,000 and

$90,931,000 have been recognized for 1999 and 1998, respectively, to offset the

net deferred tax assets as realization of such assets is uncertain.



<TABLE>

<CAPTION>

1999                  1998

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

<S>                                                          <C>                   <C>

Deferred tax assets:

Capitalized research expense                       $   9,800,000         $   8,320,000

Net operating loss carryforwards                      87,990,000            69,661,000

Research and development credits                      13,910,000            10,849,000

Other, net                                             6,404,000             5,314,000

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

Total deferred tax assets                            118,104,000            94,144,000



Deferred tax liabilities:

Patent expense                                        (4,290,000)           (3,213,000)

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

Total deferred tax liabilities                        (4,290,000)           (3,213,000)



Total net deferred tax assets                        113,814,000            90,931,000

Valuation allowance for deferred tax assets         (113,814,000)          (90,931,000)

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

Net deferred tax assets                            $           0         $           0

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

</TABLE>



At December 31, 1999, approximately $5,114,000 of the valuation

allowance for deferred tax assets relates to stock option deductions which, when

recognized, will be allocated directly to additional paid-in capital.



At December 31, 1999, Isis had federal and California tax net operating

loss carryforwards of approximately $245,904,000 and $33,451,000, respectively.

Isis also had federal and California research credit carryforwards of

approximately $10,678,000 and $4,970,000, respectively. The difference between

the tax loss carryforwards for federal and California purposes was attributable

to the capitalization of research and development expenses for California tax

purposes and a required 50% limitation in the utilization of California loss

carryforwards. The federal tax loss carryforward and the research credit

carryforwards will begin expiring









48

51



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999



in 2004 unless previously utilized. Approximately $198,000 of the California tax

loss carryforward expired during 1999 and the related deferred tax asset and tax

loss carryforward amounts have been reduced accordingly. The remaining

California tax loss carryforward will begin expiring in 2000, unless utilized.



Annual use of Isis' net operating loss and credit carryforwards will be

limited under the Internal Revenue Code as a result of cumulative changes in

ownership of more than 50% during the periods ended December 31, 1989 and 1991.

However, Isis believes that such limitations will not have a material impact

upon the utilization of the carryforwards.



6. RESEARCH AND DEVELOPMENT COLLABORATIVE ARRANGEMENTS AND LICENSING AGREEMENTS



In 1990, Isis entered into a collaborative agreement with Novartis to

discover and investigate oligonucleotide compounds active against specific

targets. In 1996, Isis and Novartis signed a definitive agreement broadening the

companies' antisense research and development collaboration to include the

development of ISIS 3521 and ISIS 5132, anticancer compounds that were

discovered through the research collaboration. The broadened collaboration also

included research to discover additional therapeutic compounds. Under the terms

of the expanded collaboration, Novartis funded the development of both ISIS 3521

and ISIS 5132. During 1999, Novartis concluded its participation in the

development of ISIS 3521 and ISIS 5132. Included in the statement of operations

for the years ended December 31, 1999, 1998 and 1997 are contract revenues

arising from this collaboration totaling $7,527,000, $15,641,000 and

$21,106,000, respectively.



In July 1997, Isis and CIBA Vision Corporation entered into an agreement

granting CIBA Vision exclusive worldwide distribution rights for Vitravene(TM)

(fomivirsen). Under the terms of the agreement, Isis will manufacture and sell

Vitravene(TM) to CIBA Vision at a price that will allow Isis and CIBA Vision to

share the commercial value of the product. CIBA Vision will market and sell

Vitravene(TM) worldwide and will be responsible for regulatory approvals outside

of the United States and Europe. Additionally, CIBA Vision received the option

to acquire the exclusive license to market and distribute a second generation

antisense compound to treat CMV retinitis (ISIS 13312) which Isis is currently

developing. At the inception of the agreement, CIBA Vision paid us a $5 million

non-refundable pre-commercial fee to partially reimburse Isis for the costs

incurred in discovering and developing Vitravene(TM) to that point. That payment

was recognized as revenue in 1997 and included in the statement of operations as

contract revenue. In August 1998, the FDA approved Vitravene(TM) for marketing,

and in the fourth quarter of the year CIBA Vision began selling Vitravene(TM)

commercially. Isis delivered its first commercial shipment of Vitravene(TM) to

CIBA Vision in the third quarter of 1998 and recorded $560,000 in net product

revenues. Isis did not recognize any revenue during 1999 for sales of

Vitravene(TM) but expects to recognize modest revenues early in 2000. Under the

CIBA Vision agreement, Isis received a $2,500,000 milestone payment in 1999 and

earned contract revenue of $7,500,000 in 1998 and $5,000,000 (which represents

the pre-commercial fee described above) in 1997.



In July 1995, Isis and Boehringer Ingelheim International GmbH signed

definitive agreements and completed the formation of a major collaboration in

cell adhesion drug design, discovery, development and commercialization.

Boehringer Ingelheim purchased 2,000,000 shares of common stock for $28,500,000

in cash plus certain license rights. Of the $28,500,000, $21,300,000 was

accounted for as equity and $7,200,000 was accounted for as deferred revenue,

representing Boehringer Ingelheim's advance payment of research and







49

52



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999



development costs under the collaboration. In December 1996, coinciding with the

achievement of a milestone, Boehringer Ingelheim purchased 409,000 shares of

common stock for $10,000,000. Of that total, $6,000,000 was accounted for as

equity and $4,000,000 as deferred revenue. In September 1999 we announced that

we had reacquired full rights to ISIS 2302 from Boehringer Ingelheim. Boehringer

Ingelheim and Isis provided equal funding for the combined research and

development program. Boehringer Ingelheim had also provided Isis with a line of

credit to be used in support of the combined programs. As of December 31, 1999,

the outstanding balance under this line of credit was $22,576,000. Since we have

reacquired the rights to ISIS 2302, there will be no further draws against this

line. The statement of operations for the years ended December 31, 1999, 1998

and 1997 reflects contract revenues of $6,974,000, $6,544,000 and $5,603,000,

respectively, from this collaboration.



In June 1998, Isis entered into a research collaboration with Merck &

Co. to discover small molecule drug candidates to treat patients infected with

Hepatitis C virus ("HCV"). Isis and Merck will design, synthesize, and evaluate

novel compounds that Merck will screen in its proprietary assays for identifying

HCV replication inhibitors. Merck will commercialize drugs arising from the

collaboration, and Isis retains the right to use technology developed in the

collaboration in our antisense program. The three year collaboration provides us

with annual research support plus technology access fees, and milestone payments

and royalties upon commercialization. The statement of operations for the years

ended December 31, 1999 and 1998, reflects contract revenues of $3,500,000 and

$3,875,000, respectively, from Merck under the terms of this agreement.



In August 1998, Isis granted an exclusive license to our patents

covering immune stimulation by phosphorothioate oligonucleotides to CpG

ImmunoPharmaceuticals, Inc. The agreement grants exclusive worldwide rights to

the methods and applications covered by issued U.S. Patents No. 5,663,153; No.

5,723,335; and related patent applications, not including claims for antisense

therapeutics. Under the terms of the agreement, Isis received $5 million in 1998

and a 5% equity position in CpG ImmunoPharmaceuticals, Inc. Isis will also

receive a portion of any sublicensing revenue relating to the technology. In

1998, Isis recorded revenue for the $5 million licensing fee, as there are no

further performance obligations. Isis did not record revenue for the value of

the 5% equity position, since realization of this asset is uncertain.



In November 1998, Isis sublicensed to Pantheco A/S, a Danish

biotechnology company, our Peptide Nucleic Acid technology for the creation of

anti-infective drugs. As the exclusive licensee, Isis will retain the rights for

all other areas of human therapeutics. As part of this transaction, Isis

received a 24.9% equity position in Pantheco A/S. Isis did not record any

revenue related to this transaction, since realization of the value of the

equity interest in Pantheco is uncertain.



In December 1998, Isis purchased from Gilead Sciences, Inc. the holdings

of its antisense patent estate. This acquisition includes patents and patent

applications covering a broad proprietary suite of antisense chemistry and

antisense drug delivery systems. The purchase price was $6,000,000 payable in

four installments over three years. Isis made the initial $2,000,000 payment in

December 1998 and a second payment of $1,000,000 in December 1999. Isis has

recorded the net present value of the future payments as a long-term obligation

on the balance sheet. The balance of this obligation as of December 31, 1999 and

December 31, 1998 was $2,568,000 and $3,238,000, respectively. Isis acquired the

Gilead patents to enhance its dominant proprietary position in antisense

technology. Isis also believes that the acquisition of the Gilead patents may

reduce the risk of possible future patent infringement claims. Effort will be

required by Isis' scientists to determine if the acquired patents can be

developed into potentially viable products. The scope of the effort to be

invested by Isis' scientists is within the bounds of its existing research and

development budgets. Because Isis scientists are just beginning to work with the

Gilead patents and there is no assurance that research and development efforts

related to these patents will be successful, Isis wrote off the acquired patents

in 1998.







50

53



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999



In December 1998, Isis entered into a collaborative research agreement

with AstraZeneca Pharmaceuticals to discover, develop and commercialize novel

antisense-based cancer drugs. Under the terms of this collaboration, Isis will

create and, with AstraZeneca, screen antisense-based candidates for certain

cancer targets. The agreement specifies that Isis will receive from AstraZeneca

at least $7 million for a technology access fee and annual research funding

during the first two years of the collaboration. Isis estimates that it may

potentially receive more than $40 million from this collaboration, including a

technology access fee, annual research funding, and milestone payments for drugs

progressing into clinical development. Isis will receive royalties on the sales

of any marketed drug arising out of the collaboration. The initial term of the

research collaboration is three years. In December 1998, AstraZeneca paid

$2,000,000 in technology access fees which was accounted for as deferred

revenue. The statement of operations for the year ended December 31, 1999

reflects contract revenues of $3,420,000 from AstraZeneca under the terms of

this agreement.



Also in December 1998, Isis entered into a research collaboration with

Abbott Laboratories, Inc. to prioritize drug development targets using Isis'

Antisense Target Validation Technology. The collaboration will enable Abbott to

validate numerous gene targets, identify the function of these genes and

prioritize the targets. Isis received from Abbott an upfront fee, and will

receive quarterly research fees, milestone payments and royalties on net sales

of any Abbott non-antisense product arising from the collaboration. Isis will

receive rights to Abbott genes to develop antisense drugs. The initial term of

the research collaboration is two years. In December 1998, Isis received an

initial payment of $250,000 which was accounted for as deferred revenue. The

statement of operations for the year ended December 31, 1999 reflects contract

revenues of $1,250,000 from Abbott under the terms of this agreement.



In April 1999, Isis and Elan Corporation, plc formed a joint venture to

develop technology for the formulation of oral oligonucleotide drugs. The joint

venture, Orasense, Ltd. is a Bermuda limited company which is currently owned

80.1% by Isis and 19.9% by Elan. Isis and Elan each contributed rights to

certain oral drug delivery technology to the joint venture. In addition, Isis

contributed rights to a proprietary oligonucleotide, which will be the first

candidate for oral formulation by Orasense. Isis and Elan will provide

development and manufacturing services to Orasense and will be entitled to

royalties on milestone payments and royalties received by Orasense for

development of orally formulated oligonucleotide drugs. If Isis enters into an

agreement with Orasense for oral formulation of any Isis oligonucleotide drug,

Isis will pay Orasense royalties and a portion of certain third party milestone

payments with respect to the drug. In April 1999, Isis contributed $12,015,000

to Orasense as the purchase price for 9,612 shares of Orasense common stock.

During the year, Elan purchased convertible debt from Isis in the amount of

$2,213,000, which Isis used to provide additional development funding to

Orasense. For the year ended December 31, 1999, Isis recorded $4,402,000 in

revenue from Orasense, and recorded $7,242,000 as equity in the net loss of

Orasense.



In September 1999, Isis entered into a collaboration with Aventis S.A.

(formerly Rhone-Poulenc Rorer) under which Isis will use its prorietary

Antisense Target Validation technology to assess genes identified within

Aventis' genomics programs. This collaboration will enable Aventis to determine

the function and therapeutic value of numerous novel gene targets and use this

information about gene function to develop pharmaceutical products. It also will

provide Isis with valuable information on these targets to assist in the

development of novel antisense drugs. The agreement specifies that Isis will

receive from Aventis a commitment fee, as well as success and proof of concept

fees, based on Isis demonstrating target inhibition as specified in the

contract. Isis will be entitled to certain milestone payments based on

milestones achieved by Aventis. Isis will also be obligated to pay certain

milestone payments based on milestones achieved by Isis. In addition, Isis will

be required to pay Aventis royalty payments based on net sales of any Isis

royalty bearing







51

54



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999



products. In 1999, Isis received $613,000 in commitment and proof of concept

fees from Aventis. The statement of operations for the year ended December 31,

1999 reflects contract revenues of $200,000 from Aventis under the terms of this

agreement, with the balance recorded on the balance sheet as deferred revenue.



7. JOINT VENTURE SUPPLEMENTARY DISCLOSURE



Due to the significant minority investor rights retained by Elan

Corporation, plc and its subsidiaries, Isis accounts for its investment in

Orasense under the equity method of accounting. The following table presents

summary financial information (in thousands, except per share amounts) for

Orasense, Ltd as of December 31, 1999.



<TABLE>

<CAPTION>

1999

--------

BALANCE SHEET:

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

Assets

------

<S>                                                                <C>

Cash and cash equivalents                                $      6

In-license costs, net                                      11,250

--------

Total assets                                       $ 11,256

========



Liabilities and Stockholders' Equity

Amounts due to affiliates                                $  2,534

Common stock, $1.00 par value; 12,000 shares

authorized, 12,000 shares outstanding

at December 31, 1999                                        12

Additional paid-in capital                                 17,751

Accumulated deficit                                        (9,041)

--------

Total liabilities and stockholders' equity        $ 11,256

========



RESULTS OF OPERATIONS:

Revenues                                                 $     --

--------

Research and development expenses                           9,041

--------



Net loss                                                 $ (9,041)

========

</TABLE>







52

55



ISIS PHARMACEUTICALS, INC.



NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

DECEMBER 31, 1999



8. SUBSEQUENT EVENTS



In December 1999, the unexpected failure of our pivotal clinical trial

of ISIS 2302 in Crohn's disease prompted the restructuring of the company. In

January 2000, we announced a restructuring plan to reduce expenses and focus

resources on the development of antisense drugs with significant commercial

potential. In conjunction with this restructuring, we will reduce Isis'

workforce by approximately 140 employees in the first four months of 2000. We

estimate that costs associated with this restructuring will approximate $2

million which will be recorded in the first quarter of 2000.



In January 2000, Isis and Elan Corporation agreed to form a new

subsidiary of Isis to develop an antisense drug, ISIS 14803, to treat patients

chronically infected with Hepatitis C virus (HCV). The new subsidiary is called

HepaSense and plans to develop and commercialize this novel therapeutic for HCV

while investigating delivery of the therapeutic with Elan's proprietary

MEDIPAD(R) Drug Delivery System, a disposable subcutaneous infusion device. ISIS

14803 began Phase I clinical trials in early 2000. Isis and Elan have each

licensed technology to HepaSense. As part of the transaction, Elan will purchase

$7.5 million of Isis common stock in April 2000 and potentially an additional

$7.5 million of common stock upon completion of a mutually agreed milestone.

Both tranches will be purchased at a premium to Isis' market price. Elan will

also purchase Isis Series B Preferred Stock which will be convertible in the

future into either Isis common stock or stock in HepaSense. In addition, Elan

will make available to Isis a $12.0 million line of credit for Isis' funding

commitment to HepaSense.



On March 8, 2000, we sold 1,000,000 shares of our common stock to an

institutional investor at a negotiated price of $27.25 per share. In addition,

during the first quarter of 2000 we sold 1,551,614 shares of our common stock to

Ridgeway Investment Limited at an average purchase price of $9.67 per share

under the terms of the Common Stock Purchase Agreement filed as an exhibit to

the prospectus dated December 6, 1999. The $9.67 per share average purchase

price reflects the average trading prices of the common stock on the Nasdaq

National Market during the respective drawdown periods. We did not pay any other

compensation in conjunction with these sales of our common stock.







53