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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For Annual and Transition Reports Pursuant to Sections 13

or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2005

OR

Commission File Number: 001-31918

IDERA PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its certificate of incorporation)

(617) 679-5500

(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

(Including Associated Preferred Stock Purchase Rights)

(Title of Class)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o    No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act.    Yes o    No þ

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

     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 the 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.    o

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

Large accelerated filer o         Accelerated filer o         Non-accelerated filer þ

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

     The approximate aggregate market value of the voting stock held by non-affiliates of the registrant was $54,133,722 based on the last sale price of the registrant’s common stock on the American Stock Exchange on June 30, 2005. As of February 1, 2006, the registrant had 111,495,117 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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IDERA PHARMACEUTICALS, INC.

FORM 10-K

INDEX

      Idera Pharmaceuticals^tm, Idera^tm, Amplivax^tm, CpR^tm, IMO^tm, Immunomer^tm, RpG^tm, YpG^tm and YpR^tm are our trademarks. IMOxine^® and GEM^® are our registered trademarks. All other trademarks and service marks appearing in this annual report are the property of their respective owners.

FORWARD-LOOKING STATEMENTS

      This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this report regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “projects,” “will,” and “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. These important factors include those set forth below under Item 1A. “Risk Factors.” These factors and the other cautionary statements made in this annual report should be read as being applicable to all related forward-looking statements whenever they appear in this annual report. In addition, any forward-looking statements represent our estimates only as of the date that this annual report is filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. We do not assume any obligation to update any forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

PART I.

Overview

      We are engaged in the discovery and development of novel therapeutics that modulate immune responses through Toll-like Receptors, or TLRs, for the treatment of multiple diseases. We have developed proprietary DNA-and RNA-based compounds that modulate TLRs and are targeted to TLR7, TLR8 or TLR9. We believe that these immune modulatory oligonucleotides, or IMO^tm compounds, are broadly applicable to large and growing markets where significant unmet medical needs exist, including oncology, asthma and allergies, infectious diseases and autoimmune diseases. IMO-2055, our lead drug candidate, is a synthetic DNA-based compound, which acts as an agonist for TLR9 and triggers the activation and modulation of the immune system. IMO-2055 is currently in a Phase 2 clinical trial as a monotherapy for renal cell carcinoma and a Phase 1/2 clinical trial in combination with chemotherapy agents for solid tumors. We have selected another TLR9 agonist, IMO-2125, as a lead compound for infectious diseases. We are also collaborating with Novartis International Pharmaceuticals, Ltd., or Novartis, to develop treatments for asthma and allergies using other of our TLR9 agonist compounds. Our IMO compounds targeted to TLR7 and TLR8 are in the discovery stage.

      On September 12, 2005, we changed our name from Hybridon, Inc. to Idera Pharmaceuticals, Inc. On September 13, 2005, Idera’s American Stock Exchange ticker symbol changed from “HBY” to “IDP”.

     Drug Development Programs

      We are developing IMO-2055, which we also refer to as HYB2055, for oncology applications under the name IMOxine. In October 2004, we commenced patient recruitment for an open label, multi-center Phase 2 clinical trial of IMO-2055 as a monotherapy in patients with metastatic or recurrent clear cell renal carcinoma. We originally planned to recruit a minimum of 46 patients who had failed one prior therapy, which we refer to as “second-line” patients, into the first stage of the trial. We also expected to enroll in the first stage of the trial some treatment-naïve patients, although the original protocol did not specify a target enrollment for treatment-naïve patients. On October 19, 2005, in response to a higher than expected enrollment rate of treatment-naïve patients in the Phase 2 trial, we submitted to the U.S. Food and Drug Administration, or FDA, a protocol amendment that provides for enrollment of up to 46 treatment-naïve patients in the first stage of the trial, in addition to the 46 second-line patients provided for by the original study design. As a result, we are now seeking to enroll a total of up to 92 patients in the first stage of the trial and plan to continue patient recruitment into the first half of 2006.

      On October 26, 2005, we initiated a Phase 1/2 clinical trial of IMO-2055 in combination with the chemotherapy agents gemcitabine, marketed by Eli Lilly and Company as Gemzar^®, and carboplatin at the Lombardi Comprehensive Cancer Center at Georgetown University Medical Center. We are seeking to enroll 12 to 18 refractory solid tumor patients in the Phase 1 portion of the trial to evaluate the safety of the combination. The protocol allows for a subsequent Phase 2 portion of the trial as first line treatment of non-small cell lung cancer patients using the Phase 1 data for dosage selection.

      We previously conducted a Phase 1 clinical trial of IMO-2055 as a monotherapy in patients with refractory solid tumor cancers at the Lombardi Comprehensive Cancer Center. Except for one patient who received IMO-2055 treatment in the trial for 24 months ending February 2006, treatment under the protocol was completed in September 2004 and results were presented at the American Society of Clinical Oncology annual meeting in May 2005. In the trial, 19 advanced cancer patients received weekly IMO-2055 treatment for at least four weeks. During this period, IMO-2055 dosage was escalated to 0.64 mg/kg/week and was well tolerated at all dose levels. IMO-2055 treatment also exhibited evidence of immunological activity as measured by several parameters.

      In addition to these IMO-2055 trials, we may in the future conduct trials in which we evaluate IMO-2055 for the treatment of other specific types of cancer, as a monotherapy and/or in combination with other anticancer agents, including chemotherapeutics, antibodies and vaccines.

      In late 2005, we selected our second IMO drug compound, IMO-2125, to advance to clinical development for the treatment of certain infectious diseases. IMO-2055 has demonstrated promising in vitro and in vivo preclinical activity and we have initiated preclinical IND-enabling studies.

     IMO Collaborations

      In addition to developing drug candidates on our own, we are seeking to establish alliances with other parties for the development and commercialization of products based on our IMO technologies. We believe that pharmaceutical and biotechnology companies may seek to use our IMO compounds as a monotherapy for the treatment of specific diseases or in combination with chemotherapeutics, vaccines and monoclonal antibodies.

      In May 2005, we entered into a research collaboration and option agreement and a license, development and commercialization agreement with Novartis to discover, optimize, develop and potentially commercialize immune modulatory oligonucleotides that are TLR9 agonists and that are identified as potential treatments for asthma and allergies. If specific conditions are met, Novartis may choose to expand the collaboration to use identified immune modulatory oligonucleotides for additional human diseases, other than oncology and infectious diseases, which will be subject to agreed upon milestone payments.

      IMO-2055 also has applications in combination with vaccines at lower dose levels. We refer to IMO-2055 in this context as Amplivax. We licensed Amplivax to The Immune Response Corporation for use in its development of a potential therapeutic and prophylactic HIV vaccine, REMUNE.

Our Product Pipeline

      The table below summarizes the principal products that we or our collaborators are developing and the therapeutic use and development status of these products.

Immunomodulatory Oligonucleotide (IMO) Technology

Overview

      Our IMO technology has evolved from our research and clinical experience with antisense oligonucleotides. We learned from this research and clinical experience that some types of oligonucleotides can act as potent stimulators of the immune system. Our early insights and those of others showed that oligonucleotides containing specific nucleotide segments, or motifs, mimic in the human body the immune stimulating effects of bacterial DNA. Nucleotides are the molecules that are linked together to form DNA. Using our DNA chemistry, we have designed and are developing a new, proprietary class of oligonucleotide compounds, which we refer to as IMO compounds.

      We are designing our IMO compounds to be used in the treatment of conditions such as cancer, asthma and allergies, infectious diseases and autoimmune diseases either alone as a monotherapy or in combination therapies with other therapies, including chemotherapeutics, vaccines and antibodies.

Background

      The human immune system protects the body against viruses, bacteria and other infectious agents, referred to as pathogens. It also acts to identify and eliminate abnormal cells, such as cancer cells. The immune system works through various mechanisms which recognize pathogens and abnormal cells. These mechanisms initiate a series of interactions resulting in stimulation of specific genes in response to the pathogens or abnormal cells. The activities of the immune system are undertaken by its two components: the innate immune system and the adaptive immune system.

      The role of the innate immune system is to provide a rapid, non-specific response to a pathogenic invasion or to the presence of a foreign substance in the body and to activate the adaptive immune system. The innate immune system consists of cells such as macrophages, dendritic cells and monocytes. When the body is presented with a foreign pathogen, cells of the innate immune system are activated, resulting in a cascade of signaling events that cause the production of proteins to fight the infection. Unlike the antibodies and proteins produced by the adaptive immune system described below, the proteins produced by the innate immune system are not pathogen-specific, but rather are active against a broad spectrum of pathogens. Moreover, once the infection is resolved, the innate immune system will not remember the pathogen.

      In contrast to the innate immune system, the adaptive immune system provides a pathogen-specific response to a pathogenic invasion. The adaptive immune system does this by recognition of specific cell surface proteins, called antigens, which signal the presence of a pathogen. This process is initiated through signals produced by the innate immune system. Upon recognition of a foreign antigen, the adaptive immune system produces antibodies and antigen-specific cytotoxic immune cells that specifically detect and destroy infected cells. This response is referred to as an antigen-specific immune response. An antigen-specific immune response normally takes several weeks to develop the first time. However, once activated by a specific pathogen, the adaptive immune system “remembers” the antigens of the pathogen. In this manner, if the pathogen again invades the body, the presence of the “remembered” antigens will allow the adaptive immune system to respond once more, this time in a matter of days. Scientists generally believe that the adaptive immune system also may be able to eliminate abnormal cells, such as cancer cells.

      The human immune reaction is initially commenced by activation of the innate immune system. One way this occurs is through recognition by the immune system of a pathogen-associated molecular pattern, referred to as a PAMP. Receptors which are known to recognize PAMPs are TLRs. TLR7, TLR8 and TLR9 are known to recognize certain RNA and DNA from pathogens and induce defensive immune responses.

      Our IMO compounds are intended to activate immune responses through TLR7, TLR8 or TLR9. Our most advanced programs are directed at TLR9. Our compounds targeted to TLR7 and TLR8 are in the discovery stage. We believe that our IMO compounds can trigger an immune response similar to the innate immune response. Results from our preclinical studies and our initial clinical trials of our IMO compounds suggest this response leads to signaling events that include production of cytokines. Cytokines are a specific type of immune system molecule that are known to have broad spectrum therapeutic properties against infectious disease as well as against cancer. These signals from the innate immune system also may trigger responses of the adaptive immune system.

      Our IMO compounds contain nucleotide motifs and novel structures and are unique in composition. We have a portfolio of these compounds, from which we can select appropriate compounds for different disease indications.

Therapeutic Potential of IMO Compounds

      Because IMO compounds can generate a broad range of immune responses, we believe they may provide therapeutic benefits in a number of areas:

IMO Drug Discovery

      Based on our expertise in synthetic oligonucleotide chemistry, we have developed a portfolio of IMO compounds containing different proprietary synthetic motifs and novel DNA and RNA structures. In preclinical studies of our IMO compounds and initial clinical trials of our lead IMO compound, our IMO compounds have triggered an immune response that has resulted in the expression of Th1-type cytokines. This immune response and the resulting expression of cytokines have varied depending on the sequence and structure of the IMO compound. We believe that by varying the synthetic motifs and structures in the IMO compounds, we can design IMO compounds that optimize immunostimulatory activity and induce different profiles of immune response. As a result, we believe we may create IMO compounds that are optimized for the treatment of different diseases.

IMO-2055 Clinical Lead Candidate

          IMO-2055

      We are focusing most of our internal drug development efforts on the lead drug candidate in our pipeline IMO-2055 for oncology applications. We selected IMO-2055 for clinical development because of the potency it demonstrated as an immune modulator in preclinical models, both in vitro and in vivo. We filed an Investigational New Drug Application, or IND, for IMO-2055 with the FDA that became effective March 6, 2003.

      In March 2004, we completed a Phase 1 clinical trial of IMO-2055 in 28 healthy volunteers over a broad range of dosing levels. In this trial, IMO-2055 was well tolerated by the volunteers, who did not experience any significant treatment-related adverse effects. In addition, IMO-2055 demonstrated biological activity in the volunteers, according to several parameters monitored in the study.

      In May 2003, we commenced a Phase 1 clinical trial of IMO-2055 in patients with refractory solid tumor cancers at the Lombardi Comprehensive Cancer Center at Georgetown University Medical Center in Washington, D.C. We enrolled 23 patients in this trial. One patient continued to receive IMO-2055 treatment for 24 months ending February 2006. Except for this one patient, treatment under the protocol was completed in September 2004. Results from this trial were presented at the American Society of Clinical Oncology, or ASCO, annual meeting in May 2005. In the trial, 19 of the 23 patients completed at least four consecutive weekly treatments with IMOxine. IMO-2055 dosage was escalated from 0.04 mg/kg/week to 0.64 mg/kg/week and was well tolerated at all dose levels. IMO-2055 treatment also exhibited evidence of immunological activity as measured by several parameters monitored in the study. Adverse events experienced by patients were consistent with the expected immune stimulation activity of IMO-2055, and primarily were mild to moderate injection site reactions, pain and “flu-like” symptoms including rigors/chills, fever, nausea, myalgia, headache, malaise and fatigue. Serious adverse events possibly related to IMO-2055 treatment included one patient with transient dyspnea with hypoxia, one patient with rigors/chills one hour post dose, one patient with abdominal pain with nausea/vomiting and two patients with anemia requiring transfusion. The one patient who continued to receive IMO-2055 therapy for 24 months exhibited no serious adverse effects during the treatment period that ended in February 2006. The results of this Phase 1 trial provided evidence of dose response effects on immunology parameters in patients with a variety of cancer types, including renal cell carcinoma, melanoma, colorectal cancer, sarcoma, breast cancer, non-small cell lung cancer and other cancers.

      We are currently conducting a Phase 2 clinical trial of IMO-2055 in patients with metastatic or recurrent clear cell renal carcinoma. The trial, for which we began patient recruitment in October 2004, is a two-stage, multi-center, open label study of IMO-2055 as a monotherapy. The primary objective of the study is to determine tumor response by Response Evaluation Criteria in Solid Tumors, or RECIST. Secondary study objectives include safety, duration of response, time to progression, survival one year after the last dose and the treatment effect on quality of life. In the trial, one of two dose levels of 0.16 or 0.64 mg/kg is administered by weekly subcutaneous injection. Treatment duration is defined as 24 weeks based on safety and the absence of disease progression. Patients can continue to receive IMO-2055 treatment beyond 24 weeks based on investigator recommendations and independent medical monitor concurrence. We originally planned to recruit a minimum of 46 patients who had failed one prior therapy, which we refer to as “second-line” patients, into the first stage of the trial. We also expected to enroll in the trial some treatment-naïve patients, although the original protocol did not specify a target enrollment for treatment-naïve patients. On October 19, 2005, in response to a higher than expected enrollment rate of treatment-naïve patients in the Phase 2 trial, we submitted to the FDA a protocol amendment that provides for enrollment of up to 46 treatment-naïve patients in the first stage of the trial, in addition to the 46 second-line patients provided for by the original study design. As a result, we are now seeking to enroll a total of up to 92 patients in the first stage of the trial and plan to continue patient recruitment into the first half of 2006.

      On October 26, 2005, we initiated a Phase 1/2 clinical trial of IMO-2055 in combination with the chemotherapy agents gemcitabine, marketed by Eli Lilly and Company as Gemzar^®, and carboplatin at the Lombardi Comprehensive Cancer Center at Georgetown University Medical Center. We are seeking to enroll 12 to 18 refractory solid tumor patients in the Phase 1 portion of the trial to evaluate the safety of the combination. The protocol allows for a subsequent Phase 2 portion of the trial as first line treatment of non-small cell lung cancer patients using the Phase 1 data for dosage selection.

      We licensed Amplivax to IRC for use in its development of a potential therapeutic and prophylactic HIV vaccine, REMUNE. We plan to seek additional licensees for Amplivax in the future.

IMO-2125 Preclinical Lead Compound

      In late 2005, we selected a second drug compound IMO-2125 to advance to clinical development for the treatment of certain infectious diseases. IMO-2125 has demonstrated promising in vitro and in vivo preclinical activity. We have initiated preclinical IND-enabling studies.

Antisense Technology

      We have been a pioneer in antisense technology. Although we are no longer developing this technology in-house, we believe that our antisense technology may be useful to pharmaceutical and biotechnology companies that are seeking to develop drug candidates that down-regulate gene targets discovered by, or proprietary to, such companies. As the owner or licensee of over 500 patents and patent applications in the antisense area, we have entered into nine collaboration and license agreements based upon these technologies. We plan to continue seeking additional collaborations using our antisense technologies and various antisense drug candidates.

Research and Development

      For the years ended December 31, 2005, 2004 and 2003, we spent approximately $12.7 million, $10.3 million and $10.8 million, respectively, on research and development activities. In 2005, Novartis sponsored approximately $1.0 million of our research and development activities. Our collaborators sponsored only a nominal portion of these research and development activities in 2004 and 2003.

Patents, Proprietary Rights and Trade Secrets

     Patents and Proprietary Rights

      Our success depends in part on our ability to obtain and maintain proprietary protection for our product candidates, technology and know-how, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

      As of December 31, 2005, we owned 48 U.S. patents and U.S. patent applications and 99 corresponding worldwide patents and patent applications for our IMO technology. These patents and patents applications include novel chemical compositions of matter and methods of use for our immunomodulatory compounds, including IMO-2055 and IMO-2125. To date all of our IMO intellectual property is based on discoveries made solely by us. The earliest of these issued patents expires in 2017.

      Our antisense patent portfolio as of December 31, 2005, included over 513 worldwide patents and patent applications, which we own or have exclusively licensed. Of this portfolio, 135 are U.S. patents and U.S. patent applications, and the remainder are issued or pending throughout the world. These antisense patents and patent applications include novel composition of matter and the use of these compositions for various genes, sequences and therapeutic targets, oral and other routes of administration. These issued patents expire at various dates ranging from 2006 to 2022.

      The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of our patent applications or those patent applications which we license will result in the issuance of any patents. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, and the rights granted thereunder may not provide us proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thus reducing any advantage of the patent, which could adversely affect our ability to protect future drug development and, consequently, our operating results and financial position.

      Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, we cannot be certain that we were the first to make the inventions claimed in each of our issued patents or pending patent applications, or that we were the first to file for protection of the inventions set forth in these patent applications.

      Litigation may be necessary to defend against or assert claims of infringement, to enforce patents issued to us, to protect trade secrets or know-how owned by us, or to determine the scope and validity of the proprietary rights of others. In addition, the U.S. Patent and Trademark Office may declare interference proceedings to determine the priority of inventions with respect to our patent applications or reexamination or reissue proceedings to determine if the scope of a patent should be narrowed. Litigation or any of these other proceedings could result in substantial costs to and diversion of effort by us, and could have a material adverse effect on our business, financial condition and results of operations. These efforts by us may not be successful.

Trade Secrets

      We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and other contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may also arise as to the rights in related or resulting know-how and inventions.

Corporate Alliances

IMO Technology

      An important part of our business strategy is to enter into research and development collaborations, licensing agreements and other strategic alliances, primarily with biotechnology and pharmaceutical corporations, to develop and commercialize drugs based on our IMO technology.

      On May 31, 2005, we entered into a research collaboration and option agreement and a license, development and commercialization agreement with Novartis International Pharmaceutical, Ltd. to discover, develop and potentially commercialize immune modulatory oligonucleotides that are TLR9 agonists and that are identified as potential treatments for asthma and allergies.

      Under the terms of the agreements, Novartis paid us a $4.0 million license fee in July 2005. In addition to the $4.0 million upfront payment, Novartis agreed to fund substantially all research activities and make milestone payments to Idera upon the achievement of clinical development, regulatory approval and cumulative net sales milestones. If Novartis elects to exercise its option to develop and commercialize licensed IMOs in the initial collaboration disease areas, Novartis is potentially obligated to pay us up to $132.0 million in milestone payments. Novartis is also obligated to pay us a royalty on net sales of all products, if any, commercialized by Novartis, its affiliates and sublicensees. We are recognizing the $4.0 million upfront payment as revenue over the two-year term of the research collaboration. If specific conditions are met, Novartis may choose to expand the collaboration to use identified immune modulatory oligonucleotides for additional human diseases, other than oncology and infectious diseases, which will be subject to agreed upon milestone payments.

      We licensed Amplivax to The Immune Response Corporation for use in combination with its vaccine, REMUNE, which it is developing.

Antisense Technology

      We have been a pioneer in antisense technology. Although we are no longer developing this technology in-house, we believe that our antisense technology may be useful to pharmaceutical and biotechnology companies that are seeking to develop drug candidates that down-regulate gene targets discovered by, or proprietary to, such companies.

      In May 2001, we entered into a collaboration and license agreement with Isis Pharmaceuticals, Inc. Under the agreement, we granted Isis a license, with the right to sublicense, to our antisense chemistry and delivery patents and patent applications and retained the right to use these patents and patent applications in our own drug discovery and development efforts and in collaborations with third parties. In addition to payments made by Isis to us during 2001, Isis agreed to pay us a portion of the income it received from specified types of sublicense of our patents and patent applications. Also under this agreement, Isis granted us a license to use specified antisense patents and patent applications, principally Isis’ suite of RNase H patents and patent applications. We have the right under the agreement to use these patents and patent applications in our drug discovery and development efforts and in some types of collaborations with third parties. In addition to a payment made by us to Isis during 2002, we agreed to pay Isis a nominal annual maintenance fee and a modest royalty on sales of products covered by specified patents and patent applications Isis sublicensed to us. The licenses granted under the Isis agreement terminate upon the last to expire of the patents and patent applications licensed under the agreement. We may terminate at any time the sublicense by Isis to us of the patents and patent applications for which we have maintenance fee and royalty obligations to Isis.

      We are a party to seven other collaboration and license arrangements involving the use of our antisense technologies and specified indications. Some of these include:

      Under these arrangements, we typically license to our collaborators our chemistries and delivery patents and patent applications on a non-exclusive basis. In consideration for the license and these services, we typically are entitled to receive license fees and are entitled to receive research payments, payments upon achievement of development milestones and royalties on product sales and sublicensing, if earned. The licenses granted under these agreements typically terminate upon the later of the last to expire of the patents licensed under the agreements or a specified number of years after the first commercial sale of products covered by the agreements. These agreements may be terminated by either party upon a material breach. Our collaborators may terminate these agreements at any time upon written notice.

     Other Antisense Licenses

      We are a party to a number of royalty-bearing license agreements under which we have acquired rights to the patents, patent applications and technology of third parties. Our principal antisense license agreement is with University of Massachusetts Medical Center, under which we are the worldwide, exclusive licensee of several U.S. issued patents and pending patent applications owned by the University of Massachusetts Medical Center. Many of these U.S. patents and patent applications have foreign counterparts . The patents licensed to us by the University of Massachusetts Medical Center expire between 2006 and 2019, and the license agreement expires upon the expiration of the last to expire of such patents. Additionally, as part of a 2003 interference resolution, a settlement was made that will enable us to receive a defined percentage of the royalty amounts received by the National Institutes of Health for the sale of a product that is covered by the patent that was the subject of that interference.

      We are also the licensee of other antisense related technologies, including: Louisiana State University (exclusive license covering mdm2 antisense related technologies), Genzyme Corporation (non-exclusive license covering mdm2 antisense related technologies), Integrated DNA Technologies, Inc., (non-exclusive license covering chemical modifications to synthetic DNA), Dr. Yoon S. Cho-Chung (exclusive license covering Protein Kinase A antisense related technologies), and Children’s Hospital Medical Center (exclusive license covering VEGF antisense related technologies).

      Under these licenses we are obligated to pay royalties on net sales by us of products or processes covered by a valid claim of a patent or patent application licensed to us. In certain cases, we are required to pay a specified percentage of any sublicense income that we may receive. All of these licenses impose various commercialization, sublicensing, insurance and other obligations on us, and our failure to comply with these requirements could result in termination of the licenses. Each of these licenses automatically terminates upon the expiration of the last to expire patent covered by the license.

Academic and Research Collaborations

      We have entered into a number of collaborative research relationships with independent researchers, leading academic and research institutions and U.S. government agencies. These research relationships allow us to augment our internal research capabilities and obtain access to specialized knowledge and expertise.

      In general, our collaborative research agreements require us to pay various amounts to support the research. If in the course of conducting research under its agreement with us a collaborator, solely or jointly with us, creates any invention, we generally have an option to negotiate an exclusive, worldwide, royalty-bearing license to the invention. Inventions developed solely by our scientists in connection with a collaborative relationship generally are owned exclusively by us. Most of these collaborative agreements are nonexclusive and can be cancelled with limited notice.

Government Regulation

      The testing, manufacturing, labeling, advertising, promotion, distribution, import, export, and marketing, among other things, of drugs are extensively regulated by governmental authorities in the United States and other countries. In the U.S., the FDA regulates pharmaceutical products under the Federal Food, Drug, and Cosmetic Act, or FDCA, and other laws. Both before and after approval for marketing is obtained, violations of regulatory requirements may result in various adverse consequences, including the FDA’s delay in

approving or refusal to approve a drug, withdrawal of approval, suspension or withdrawal of an approved product from the market, operating restrictions, warning letters, product recalls, product seizures, injunctions, fines, and the imposition of civil or criminal penalties.

      The steps required before a product may be approved for marketing in the U.S. generally include:

      Preclinical tests include laboratory evaluation of the product, as well as animal studies to assess the potential safety and efficacy of a drug. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may be commenced. The IND will automatically become effective 30 days after its receipt by the FDA, unless the FDA before that time raises concerns or questions about the conduct of the trials as outlined in the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. If these issues are unresolved, the FDA may choose to not allow the clinical trials to commence. There is no guarantee that submission of an IND will result in the FDA allowing clinical trials to begin.

      Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be combined. Clinical trials are conducted under protocols detailing the objectives of the trials, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND prior to beginning the trial. Each trial must be reviewed and approved by an independent Institutional Research Board before it can begin. Subjects must provide informed consent for all trials.

Phase 1, 2, and 3 testing may not be completed successfully within any specified period, or at all. We, an Institutional Review Board, or the FDA, may suspend or terminate clinical trials at any time on various grounds, including a finding that the patients are being exposed to an unacceptable health risk.

      The results of the preclinical and clinical studies, together with other detailed information, including information on the manufacture and composition of the product, are submitted to the FDA as part of an NDA for approval prior to the marketing and commercial shipment of the product. In most cases, the NDA must be accompanied by a substantial user fee. The FDA also will inspect the manufacturing facility used to produce the product for compliance with cGMPs. The FDA may deny a new drug application if all applicable regulatory criteria are not satisfied or may require additional clinical, toxicology or manufacturing data. Even after an NDA results in approval to market a product, the FDA may limit the indications or place other limitations that restrict the commercial application of the product. After approval, some types of changes to

the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. The FDA may withdraw product approval if compliance with regulatory standards is not maintained or if safety problems occur after the product reaches the market. In addition, the FDA requires surveillance programs to monitor the consistency of manufacturing and the safety of approved products that have been commercialized. Holders of an approved NDA are required to report certain adverse reactions and production problems to the FDA to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling. The agency has the power to require changes in labeling or to prevent further marketing of a product based on new data that may arise after commercialization. Also, new federal, state, or local government requirements may be established that could delay or prevent regulatory approval of our products under development.

      We will also be subject to a variety of foreign regulations governing clinical trials and sales of our products. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing of the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that required for FDA approval. For marketing outside the U.S., we are also subject to foreign regulatory requirements governing human clinical trials. The requirements governing the conduct of clinical trials, product licensing, approval, pricing, and reimbursement vary greatly from country to country.

      In addition to regulations enforced by the FDA, we are also subject to regulation under the Occupational Safety and Health Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act, and other present and potential future federal, state, or local regulations. Our research and development activities involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources.

Manufacturing

      We were a party to a supply agreement with Avecia Biotechnology, which was formally known as Boston Biosystems Inc., under which we purchased our requirements for oligonucleotide compounds from Avecia at a preferential price, which expired in March 2004. We have continued to purchase all of the oligonucleotides we are using in our ongoing clinical trials and preclinical testing from Avecia. We expect that we will enter into a longer term arrangement with Avecia or new arrangements with other third-party manufacturers to supply us with the oligonucleotide compounds that we need for our research, preclinical, clinical and if we receive approval of a product, commercial supply purposes.

Competition

      We expect that our product candidates will address several different markets defined by the potential indications for which these product candidates are developed and ultimately approved by regulatory authorities. For several of these indications, these product candidates will be competing with products and therapies either currently existing or expected to be developed, including compounds targeting TLR7, TLR8 or TLR9 developed by third parties. Many of these existing products and therapies are marketed by large pharmaceutical companies, have recognized brand names and are widely accepted by physicians and patients.

      Competition among these products and therapies will be based, among other things, on product efficacy, safety, reliability, availability, price, and patent position.

      The timing of market introduction of our products and competitive products will also affect competition among products. We also expect 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 to be an important competitive factor. Our competitive position will also depend upon our ability to attract and retain qualified personnel, to obtain patent protection or otherwise develop proprietary products or processes and to secure sufficient capital resources for the often substantial period between technological conception and commercial sales.

      There are a number of companies, both privately and publicly held, that are conducting research and development, preclinical and clinical and commercial activities relating to technologies and products that are similar to our technologies and products, including large pharmaceutical companies with programs in CpG DNA compounds that have a similar mechanism of action as our IMO compounds. Our principal competitors include Coley Pharmaceutical Group, Dynavax Technologies Corp, Anadys Pharmaceutical, Inc. and 3M.

      The primary indications for which we are developing our IMO compounds are cancer, allergy and respiratory diseases and infectious diseases. None of our competitors is currently marketing any compounds targeting to TLR7, TLR8 or TLR9 for cancer, allergy and respiratory diseases or infectious diseases, except 3M. However, our competitors are developing a number of product candidates for cancer, allergy and respiratory diseases and infectious diseases that are currently in clinical trials.

      Many of our competitors, particularly the pharmaceutical and biotechnology companies with which we compete, have substantially greater financial, technical and human resources than we have. In addition, many of our competitors have significantly greater experience than we have in undertaking preclinical studies and human clinical trials of new pharmaceutical products, obtaining FDA and other regulatory approvals of products for use in health care and manufacturing, marketing and selling approved products.

Employees

      As of March 1, 2006, we employed 27 individuals full-time, including 19 employees in research and development. Thirteen of our employees hold a doctoral degree. None of our employees are covered by a collective bargaining agreement, and we consider relations with our employees to be good.

Information Available on the Internet

      Our internet address is www.iderapharma.com. The contents of our website are not part of this Annual Report of Form 10-K and our internet address is included in this document as an inactive textual reference. We make available free of charge through our web site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 12(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission.

RISK FACTORS

      Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before purchasing our common stock. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer, possibly materially. In that case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock.

Risks Relating to Our Financial Results and Need for Financing

      We have incurred losses in every year since our inception, except for 2002 when our recognition of revenues under a license and collaboration agreement resulted in us reporting net income for that year. As of December 31, 2005, we had incurred operating losses of approximately $313.0 million. We expect to continue to incur substantial operating losses in future periods. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets and working capital.

      We have received no revenues from the sale of drugs. To date, almost all of our revenues have been from collaborative and license agreements. We have devoted substantially all of our efforts to research and development, including clinical trials, and we have not completed development of any drugs. Because of the numerous risks and uncertainties associated with developing drugs, we are unable to predict the extent of any future losses, whether or when any of our products will become commercially available, or when we will become profitable, if at all.

      We will require substantial funds to conduct research and development, including preclinical testing and clinical trials of our drugs. We will also require substantial funds to conduct regulatory activities and to establish commercial manufacturing, marketing and sales capabilities. We believe that, based on our current operating plan, our existing cash, cash equivalents and short-term investments, together with the $8.9 million in net proceeds that we raised in March 2006 through the sale of common stock and warrants less $0.9 million in direct expenses associated with the financing commitment discussed below, will be sufficient to fund our operations through January 2007. In March 2006, we secured a commitment from an investor to purchase up to $9.8 million of our common stock upon drawdowns made at our discretion. Our ability to access this commitment and sell common stock to such investor is subject to stockholder approval of an increase in the number of authorized shares of common stock, which we plan to seek at our annual meeting of stockholders in June 2006, and the effectiveness of a registration statement covering the resale of the shares to be sold. If we are able to make drawdowns under this commitment and sell the full $9.8 million of common stock under it, we expect to have sufficient cash and investments to be able to pursue our clinical and preclinical development programs and continue operations through mid 2007.

      We will need to raise additional funds to operate our business beyond such time. We believe that the key factors that will affect our ability to obtain additional funding are:

      Additional financing may not be available to us when we need it or may not be available to us on favorable terms. We could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, drug candidates or drugs which we would otherwise pursue on our own. In addition, if we raise additional funds by issuing equity securities, our then existing stockholders will experience dilution. The terms of any financing may adversely affect the holdings or the rights of existing stockholders. If we are unable to obtain adequate funding on a timely basis or at all, we may be required to significantly curtail one or more of our discovery or development programs. For example, we significantly curtailed expenditures on our research and development programs during 1999 and 2000 because we did not have sufficient funds available to advance these programs at planned levels.

Risks Relating to Our Business, Strategy and Industry

      We are investing a significant portion of our time and financial resources in the development of our lead drug candidate, IMO-2055. We anticipate that our ability to generate product revenues will depend heavily on the successful development and commercialization of this product. The commercial success of this product will depend on several factors, including the following:

      Our efforts to commercialize this product are at an early stage, as we are currently conducting a Phase 2 clinical trial in patients with metastatic or recurrent clear cell renal carcinoma. If we are not successful in commercializing this product, or are significantly delayed in doing so, our business will be materially harmed.

      We may not be able to successfully complete any clinical trial of a potential product within any specified time period. In some cases, we may not be able to complete the trial at all. Moreover, clinical trials may not show our potential products to be both safe and efficacious. Thus, the FDA and other regulatory authorities may not approve any of our potential products for any indication.

      In order to obtain regulatory approvals for the commercial sale of our products, we will be required to complete extensive clinical trials in humans to demonstrate the safety and efficacy of our drug candidates. We may not be able to obtain authority from the FDA or other equivalent foreign regulatory agencies to complete these trials or commence and complete any other clinical trials.

      The results from preclinical testing of a drug candidate that is under development may not be predictive of results that will be obtained in human clinical trials. In addition, the results of early human clinical trials may not be predictive of results that will be obtained in larger scale, advanced stage clinical trials. A failure of one or more of our clinical trials can occur at any stage of testing. Further, there is to date little data on the long-term clinical safety of our lead compounds under conditions of prolonged use in humans, nor on any long-term consequences subsequent to human use. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or inhibit our ability to receive regulatory approval or commercialize our products, including:

      As an example, in 1997, after reviewing the results from the clinical trial of GEM91, a 1st generation antisense compound and our lead drug candidate at the time, we determined not to continue the development of GEM91 and suspended clinical trials of this product candidate.

      The rate of completion of clinical trials is dependent in part upon the rate of enrollment of patients. The statistical design of our ongoing Phase 2 clinical trial of IMO-2055 in renal cell carcinoma was originally based on patients who had already failed one course of therapy, whom we refer to as second-line patients. As of October 2005, our enrollment of second-line patients was less than anticipated, whereas the enrollment of treatment-naïve patients was more than expected. As a result, the trial protocol was amended in October 2005 to accommodate statistical endpoints for both treatment-naïve and second-line patients, thus extending the completion of the trial beyond the time we expected. Patient accrual is a function of many factors, including:

      Our product development costs will increase if we experience delays in our clinical trials. We do not know whether planned clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant clinical trial delays also could allow our competitors to bring products to market before we do and impair our ability to commercialize our products.

      The biotechnology industry is highly competitive and characterized by rapid and significant technological change. We face, and will continue to face, intense competition from organizations such as pharmaceutical and biotechnology companies, as well as academic and research institutions and government agencies. Some of these organizations are pursuing products based on technologies similar to our technologies. Other of these organizations have developed and are marketing products, or are pursuing other technological approaches designed to produce products, that are competitive with our product candidates in the therapeutic effect these competitive products have on diseases targeted by our product candidates. Our competitors may discover, develop or commercialize products or other novel technologies that are more effective, safer or less costly than any that we are developing. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours. As examples, the FDA recently approved Sutent^® and Nexavar^® for use in renal cell carcinoma, which is the indication for which we are evaluating IMO-2055 monotherapy in our Phase 2 trial. Two of our competitors are currently evaluating TLR9 agonists in Phase 3 clinical trials.

      Many of our competitors are substantially larger than we are and have greater capital resources, research and development staffs and facilities than we have. In addition, many of our competitors are more experienced than we are in drug discovery, development and commercialization, obtaining regulatory approvals and drug manufacturing and marketing.

      We anticipate that the competition with our products and technologies will be based on a number of factors including product efficacy, safety, availability and price. The timing of market introduction of our products and competitive products will also affect competition among products. We expect 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 to be important competitive factors. Our competitive position will also depend upon our ability to attract and retain qualified personnel, to obtain patent protection or otherwise develop proprietary products or processes and to secure sufficient capital resources for the period between technological conception and commercial sales.

      The commercial success of any of our products for which we may obtain marketing approval from the FDA or other regulatory authorities will depend upon their acceptance by the medical community and third party payors as clinically useful, cost-effective and safe. Many of the products that we are developing are based upon technologies or therapeutic approaches that are relatively new and unproven. The FDA has not granted marketing approval to any products based on IMO technology or TLR9 agonists and no such products are currently being marketed. The FDA has also approved a small molecule against TLR7 which 3M Pharmaceuticals is selling under the name Aldara cream for the treatment of genital warts, basal cell carcinoma and actinic keratosis. As a result, it may be more difficult for us to achieve regulatory approval or market acceptance of our products. Our efforts to educate the medical community on these potentially unique approaches may require greater resources than would be typically required for products based on conventional technologies or therapeutic approaches. The safety, efficacy, convenience and cost-effectiveness of our products as compared to competitive products will also affect market acceptance.

      Our success is highly dependent on the retention of principal members of our technical and management staff, including Sudhir Agrawal and Robert Karr. Dr. Agrawal serves as our Chief Executive Officer and Chief Scientific Officer. Dr. Karr serves as our President. Dr. Agrawal has made significant contributions to the field of antisense technology, and has led the development of IMO Technology. He is named as an inventor on over 230 patents and patent applications worldwide. Dr. Karr has extensive experience in the pharmaceutical industry. Drs. Agrawal and Karr provide us the leadership for management, research and development activities. The loss of either Dr. Agrawal’s or Dr. Karr’s services would be detrimental to our ongoing scientific progress and the execution of our business plan.

      We are a party to an employment agreement with Dr. Agrawal for a term ending on October 19, 2008, subject to annual renewals. This agreement may be terminated by us or Dr. Agrawal for any reason or no reason at any time upon notice to the other party. We do not carry key man life insurance for Dr. Agrawal.

      We are a party to an employment agreement with Dr. Karr for a term ending on December 5, 2007, subject to annual renewals. This agreement may be terminated by us or Dr. Karr for any reason or no reason at any time upon notice to the other party. We do not carry key man life insurance for Dr. Karr.

      Furthermore, our future growth will require hiring a significant number of qualified technical and management personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we are not able to continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow.

Regulatory Risks

      All of the products that we are developing or may develop in the future will require additional research and development, extensive preclinical studies and clinical trials and regulatory approval prior to any commercial sales. This process is lengthy, often taking a number of years, is uncertain and is expensive. Since

our inception, we have conducted clinical trials of a number of compounds. In 1997, we determined not to continue clinical development of GEM91, our lead product candidate at the time. Currently, we are conducting clinical trials of IMO-2055.

      We may need to address a number of technological challenges in order to complete development of our products. Moreover, these products may not be effective in treating any disease or may prove to have undesirable or unintended side effects, unintended alteration of the immune system over time, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

      The testing, manufacturing, labeling, advertising, promotion, export and marketing of our products are subject to extensive regulation by governmental authorities in Europe, the United States and elsewhere throughout the world.

      In general, submission of materials requesting permission to conduct clinical trials may not result in authorization by the FDA or any equivalent foreign regulatory agency to commence clinical trials. Further, permission to continue ongoing trials may be withdrawn by the FDA or other regulatory agency at any time after initiation, based on new information available after the initial authorization to commence clinical trials. In addition, submission of an application for marketing approval to the relevant regulatory agency following completion of clinical trials may not result in the regulatory agency approving the application if applicable regulatory criteria are not satisfied, and may result in the regulatory agency requiring additional testing or information.

      Any regulatory approval of a product may contain limitations on the indicated uses for which the product may be marketed or requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Any product for which we obtain marketing approval, along with the facilities at which the product is manufactured, any post-approval clinical data and any advertising and promotional activities for the product will be subject to continual review and periodic inspections by the FDA and other regulatory agencies.

      Both before and after approval is obtained, violations of regulatory requirements may result in:

      We have only limited experience in filing the applications necessary to gain regulatory approvals. Moreover, the products that result from our research and development programs will likely be based on new technologies and new therapeutic approaches that have not been extensively tested in humans. The regulatory requirements governing these types of products may be more rigorous than for conventional drugs. As a result, we may experience a longer regulatory process in connection with obtaining regulatory approvals of any product that we develop.

Risks Relating to Collaborators

      An important element of our business strategy includes entering into collaborative relationships for the development and commercialization of products based on our discoveries. We face significant competition in seeking appropriate collaborators. Moreover, these arrangements are complex to negotiate and time-consuming to document. We may not be successful in our efforts to establish collaborative relationships or other alternative arrangements.

      The success of collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Our collaborators will have significant discretion in determining the efforts and resources that they will apply to these collaborations. The risks that we face in connection with these collaborations include the following:

      Given these risks, it is possible that any collaborative arrangements into which we enter may not be successful. In May 2005, we entered into collaborative arrangements with Novartis involving our IMO technology for application in asthma and allergies. Previous collaborative arrangements to which we were a party with F. Hoffmann-La Roche and G.D. Searle & Co., involving our antisense technology, were terminated prior to the development of any product. The failure of any of our collaborative relationships could delay our drug development or impair commercialization of our products.

Risks Relating to Intellectual Property

      Our patent positions, and those of other drug discovery companies, are generally uncertain and involve complex legal, scientific and factual questions.

      Our ability to develop and commercialize drugs depends in significant part on our ability to:

      We do not know whether any of our patent applications or those patent applications which we license will result in the issuance of any patents. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, and the rights granted thereunder may not provide us proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thus reducing any advantage of the patent.

      Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications.

      We may not have rights under some patents or patent applications related to our products. Third parties may own or control these patents and patent applications in the United States and abroad. Therefore, in some cases, to develop, manufacture, sell or import some of our products, we or our collaborators may choose to seek, or be required to seek, licenses under third party patents issued in the United States and abroad or under patents that might issue from United States and foreign patent applications. In such an event, we would be required to pay license fees or royalties or both to the licensor. If licenses are not available to us on acceptable terms, we or our collaborators may not be able to develop, manufacture, sell or import these products.

      We are party to seven royalty-bearing license agreements in the field of antisense technology under which we have acquired rights to patents, patent applications and technology of third parties. Under these licenses we are obligated to pay royalties on net sales by us of products or processes covered by a valid claim of a patent or patent application licensed to us. We also are required in some cases to pay a specified percentage of any sublicense income that we may receive. These licenses impose various commercialization, sublicensing, insurance and other obligations on us. Our failure to comply with these requirements could result in termination of the licenses. These licenses generally will otherwise remain in effect until the expiration of all

valid claims of the patents covered by such licenses or upon earlier termination by the parties. The issued patents covered by these licenses expire at various dates ranging from 2006 to 2022. If one or more of these licenses is terminated, we may be delayed in our efforts, or be unable, to develop and market the products that are covered by the applicable license or licenses.

      There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the biotechnology industry. We may become a party to various types of patent litigation or other proceedings regarding intellectual property rights from time to time even under circumstances where we are not practicing and do not intend to practice any of the intellectual property involved in the proceedings. For instance, in 2002, 2003, and 2005, we became involved in two interference proceedings declared by the United States Patent and Trademark Office, or USPTO, for certain of our antisense and ribozyme patents. All of these interferences have since been resolved. We are neither practicing nor intending to practice the intellectual property that is associated with any of these interference proceedings.

      The cost to us of any patent litigation or other proceeding, including the interferences referred to above, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the cost of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. If any patent litigation or other proceeding is resolved against us, we or our collaborators may be enjoined from developing, manufacturing, selling or importing our drugs without a license from the other party and we may be held liable for significant damages. We may not be able to obtain any required license on commercially acceptable terms or at all.

      Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

Risks Relating to Product Manufacturing, Marketing and Sales and Reliance on Third Parties

      We have limited manufacturing experience and no commercial scale manufacturing capabilities. In order to continue to develop our products, apply for regulatory approvals and ultimately commercialize products, we need to develop, contract for or otherwise arrange for the necessary manufacturing capabilities.

      We currently rely upon third parties to produce material for preclinical and clinical testing purposes and expect to continue to do so in the future. We also expect to rely upon third parties to produce materials that may be required for the commercial production of our products.

      There are a limited number of manufacturers that operate under the FDA’s current good manufacturing practices regulations capable of manufacturing our products. As a result, we may have difficulty finding manufacturers for our products with adequate capacity for our needs. If we are unable to arrange for third party manufacturing of our products on a timely basis, or to do so on commercially reasonable terms, we may not be able to complete development of our products or market them.

      Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including:

      We purchased oligonucleotides for preclinical and clinical testing from Avecia Biotechnology at a preferential price under a supply agreement, which expired in March 2004. We have continued to purchase all of the oligonucleotides we are using in our ongoing clinical trials and preclinical testing from Avecia. The terms of the agreement have been extended until such time as a new agreement is negotiated. If Avecia determines not to accept any purchase order for oligonucleotides or we are unable to enter into a new manufacturing arrangement with Avecia or a new contract manufacturer on a timely basis or at all, our ability to supply the product needed for our clinical trials could be materially impaired.

      If we receive regulatory approval to commence commercial sales of any of our products, we will face competition with respect to commercial sales, marketing and distribution. These are areas in which we have no experience. To market any of our products directly, we would need to develop a marketing and sales force with technical expertise and with supporting distribution capability. In particular, we would need to recruit a large number of experienced marketing and sales personnel. Alternatively, we could engage a pharmaceutical or other healthcare company with an existing distribution system and direct sales force to assist us. However, to the extent we entered into such arrangements, we would be dependent on the efforts of third parties. If we are unable to establish sales and distribution capabilities, whether internally or in reliance on third parties, our business would suffer materially.

      We do not have the ability to independently conduct the clinical trials required to obtain regulatory approval for our products. We depend on independent clinical investigators, contract research organizations and other third party service providers in the conduct of the clinical trials of our products and expect to continue to do so. For example, we have contracted with PAREXEL International to manage our Phase 2 clinical trial of IMO-2055 in renal cell carcinoma. We rely heavily on these parties for successful execution of our clinical trials, but do not control many aspects of their activities. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as good clinical practices, for conducting, recording and reporting clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our products. If we seek to conduct any of

these activities ourselves in the future, we will need to recruit appropriately trained personnel and add to our infrastructure.

      Most patients will rely on Medicare and Medicaid, private health insurers and other third party payors to pay for their medical needs, including any drugs we may market. If third party payors do not provide adequate coverage or reimbursement for any products that we may develop, our revenues and prospects for profitability will suffer. Congress recently enacted a limited prescription drug benefit for Medicare recipients in the Medicare Prescription Drug and Modernization Act of 2003. While the program established by this statute may increase demand for our products, if we participate in this program, our prices will be negotiated with drug procurement organizations for Medicare beneficiaries and are likely to be lower than we might otherwise obtain. Non-Medicare third party drug procurement organizations may also base the price they are willing to pay on the rate paid by drug procurement organizations for Medicare beneficiaries.

      A primary trend in the United States healthcare industry is toward cost containment. In addition, in some foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost effectiveness of our product candidates or products to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in commercialization of our products.

      Third party payors are challenging the prices charged for medical products and services, and many third party payors limit reimbursement for newly-approved healthcare products. In particular, third party payors may limit the indications for which they will reimburse patients who use any products that we may develop. Cost control initiatives could decrease the price we might establish for products that we may develop, which would result in lower product revenues to us.

      Our business exposes us to the risk of product liability claims that is inherent in the manufacturing, testing and marketing of human therapeutic drugs. Although we have product liability and clinical trial liability insurance that we believe is adequate, this insurance is subject to deductibles and coverage limitations. We may not be able to obtain or maintain adequate protection against potential liabilities. If we are unable to obtain insurance at acceptable cost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may materially and adversely affect our business and financial position. These liabilities could prevent or interfere with our commercialization efforts.

Risks Relating to an Investment in Our Common Stock

      Section 203 of the Delaware General Corporation Law and our certificate of incorporation, by-laws and stockholder rights plan contain provisions that might enable our management to resist a takeover of our company or discourage a third party from attempting to take over our company. These provisions include:

      These provisions could have the effect of delaying, deferring, or preventing a change in control of us or a change in our management that stockholders may consider favorable or beneficial. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.

      Our stock price has been volatile. During the period from January 1, 2003 to February 28, 2006, the closing sales price of our common stock ranged from a high of $1.69 per share to a low of $0.41 per share. The stock market has also experienced significant price and volume fluctuations, and the market prices of biotechnology companies in particular have been highly volatile, often for reasons that have been unrelated to the operating performance of particular companies. The market price for our common stock may be influenced by many factors, including:

      In addition, our common stock has historically been traded at low volume levels and may continue to trade at low volume levels. As a result, any large purchase or sale of our common stock could have a significant impact on the price of our common stock and it may be difficult for investors to sell our common stock in the market without depressing the market price for the common stock or at all.

      As a result of the foregoing, investors may not be able to resell their shares at or above the price they paid for such shares. Investors in our common stock must be willing to bear the risk of fluctuations in the price of our common stock and the risk that the value of their investment in our stock could decline.

      In May 2005, we sold approximately $5.0 million in principal amount of 4% convertible subordinated notes. On April 30, 2008, the entire outstanding principal amount of our 4% convertible subordinated notes will become due and payable, unless the notes are converted to common stock prior to expiration. In addition, we may be required to redeem all or part of the convertible subordinated notes prior to the final maturity date if specified events occur. We may not have sufficient funds or may be unable to arrange for additional financing to pay the amount due under the convertible subordinated notes at maturity or to pay the price to repurchase the convertible subordinated notes. Any future borrowing arrangements or debt agreements to which we may become a party may restrict or prohibit us from repaying or repurchasing the convertible subordinated notes. If we are prohibited from repaying or repurchasing the convertible subordinated notes, we could try to obtain the consent of lenders under those arrangements, or we could attempt to refinance the indebtedness that contains the restrictions. If we could not obtain the necessary consents or refinance the indebtedness, we would be unable to repay or repurchase the convertible subordinated notes. Any such failure would constitute an event of default under the agreement with the holders of the 4% convertible subordinated notes, which could, in turn, constitute a default under the terms of any future indebtedness.

      None.

      We lease approximately 26,000 square feet of laboratory and office space, including 6,000 square feet of specialized preclinical lab space, in Cambridge, Massachusetts under a lease that expires April 30, 2007. We believe these facilities are adequate to accommodate our needs for the next year. In 2006, we expect to look for a new facility to lease and if no satisfactory space is located we plan to seek to renegotiate the lease of our current facility.

      None.

      None.

Executive Officers and Key Employees of Idera Pharmaceuticals

      The following table sets forth the names, ages and positions of our executive officers and other key employees as of March 1, 2006:

      Dr. Sudhir Agrawal is our Chief Executive Officer and Chief Scientific Officer. He joined us in 1990 and has served as our Chief Scientific Officer since January 1993, our Senior Vice President of Discovery since March 1994, our President from February 2000 to October 2005, a director since March 1993 and our Chief Executive Officer since August 2004. Prior to his appointment as Chief Scientific Officer, he served as our

Principal Research Scientist from February 1990 to January 1993 and as our Vice President of Discovery from December 1991 to January 1993. He served as Acting Chief Executive Officer from February 2000 until September 2001. Prior to joining us, Dr. Agrawal served as a Foundation Scholar at the Worcester Foundation for Experimental Biology from 1987 through 1991 and at the Medical Research Council’s Laboratory of Molecular Biology in Cambridge, England from 1985 to 1986. Dr. Agrawal received a D. Phil. in chemistry in 1980 from Allahabad University in India. He has authored more than 260 research papers and reviews. He is a member of the editorial board of several scientific journals. Dr. Agrawal is the co-author of more than 230 patents worldwide.

      Dr. Robert W. Karr, M.D. is our President. He was appointed a member of our Board of Directors in June 2005 and became our President in December 2005. From June 2000 through December 2004, Dr. Karr was a senior executive for Global Research & Development for Pfizer, Inc., a pharmaceutical company, where he served as Senior Vice President, Strategic Management from 2003-2004. Prior to its merger with Pfizer, Dr. Karr served as Vice President, Research & Development Strategy for Warner-Lambert Company, a pharmaceutical company. He currently serves on the Board of Directors of GTx, Inc., a biotechnology company. Dr. Karr received his B.S. with honors from Southwestern University in 1971 and his M.D. from the University of Texas Medical Branch in 1975. Dr. Karr completed his internship and residency in internal medicine at Washington University School of Medicine and served as a faculty member at both the University of Iowa College of Medicine and Washington University School of Medicine.

      Robert G. Andersen is our Chief Financial Officer and Vice President of Operations. He joined us in November 1996 as Vice President of Systems Engineering and Management Information Systems and has served as our Vice President of Operations and Planning since 1997, our Treasurer since March 1998 and our Chief Financial Officer since February 2000. Prior to joining us, Mr. Andersen held a variety of management positions at Digital Equipment Corporation from 1986 to 1996, most recently as Group Manager of the Applied Objects Business Unit. From 1978 to 1986, Mr. Andersen held technical management positions at United Technologies Corporation, most recently as Director of Quality for Otis Elevator Company’s European Operations based in Paris, France and Worldwide Director of Controls for Otis Group. Mr. Andersen received an M.S. in Management from Northeastern University in 1978 and his B.E.E. magna cum laude in Electrical Engineering from The City College of New York in 1972. He is also a graduate of the United Technologies Advanced Studies Program.

      Dr. Timothy Sullivan is our Vice President of Development Programs. He joined us in 2002 as Senior Director, Preclinical Drug Development. His prior professional experience includes positions as Executive Director of Non-clinical Drug Safety Evaluation for Purdue Pharma L.P. from 1999 to 2002 and Vice President of Eastern Operations for Oread, Inc., a contract drug development organization, from 1997 to 1999. Prior to 1997, Dr. Sullivan held a variety of technical management roles with other pharmaceutical companies and contract research organizations (Adria, Battelle, Roma Toxicology Centre), and in veterinary medicine (International Minerals & Chemical). Dr. Sullivan brings broad expertise in the design, execution, and application of drug development programs. Dr. Sullivan earned his B.S. in Microbiology from Michigan State University in 1975. His graduate studies were at Purdue University, where he earned a M.S. degree in Health Physics in 1978 and a Ph.D. in Toxicology in 1981.

PART II.

Market Information

      On September 12, 2005, we changed our name from Hybridon, Inc. to Idera Pharmaceuticals, Inc. On September 13, 2005, Idera’s American Stock Exchange ticker symbol changed from “HBY” to “IDP”.

      The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock during each of the quarters set forth below as reported on the American Stock Exchange. These prices reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

      The number of common stockholders of record on March 1, 2006 was 415.

      We have never declared or paid cash dividends on our common stock, and we do not expect to pay any cash dividends on our common stock in the foreseeable future.

      Since December 4, 2003, our series A convertible preferred stock has paid dividends at 1.0% per year, payable semi-annually in arrears. We may pay these dividends either in cash or in additional shares of series A convertible preferred stock, at our discretion.

Sales of Unregistered Securities

      Sales by us during 2005 of securities that were not registered under the Securities Act of 1933, as amended, consist of:

      The following selected financial data are derived from the consolidated financial statements of Idera Pharmaceuticals, Inc. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein.

Quarterly Operating Results (Unaudited)

      The following table presents the unaudited statement of operations data for each of the eight quarters in the period ended December 31, 2005. The information for each of these quarters is unaudited, but has been prepared on the same basis as the audited financial statements appearing elsewhere in this Annual Report on Form 10-K. In our opinion, all necessary adjustments, consisting only of normal recurring adjustments, have been made to present fairly the unaudited quarterly results when read in conjunction with the audited financial statements and the notes thereto appearing elsewhere in this document. These operating results are not necessarily indicative of the results of operations that may be expected for any future period.

      We are engaged in the discovery and development of novel therapeutics that modulate immune responses through Toll-like Receptors, or TLRs, for the treatment of multiple diseases. We have developed proprietary DNA-and RNA-based compounds that modulate TLRs and are targeted to TLR7, TLR8 or TLR9. We believe that these immune modulatory oligonucleotide, or IMO^tm, compounds are broadly applicable to large and growing markets where significant unmet medical needs exist, including oncology, asthma and allergies, infectious diseases and autoimmune diseases. IMO-2055, our lead drug candidate, is a synthetic DNA-based compound, which acts as an agonist for TLR9 and triggers the activation and modulation of the immune system. IMO-2055 is currently in a Phase 2 clinical trial as a monotherapy for renal cell carcinoma and a Phase 1/2 clinical trial in combination with chemotherapy agents for solid tumors. We have selected another TLR9 agonist, IMO-2125, as a lead compound for infectious diseases. We are also collaborating with Novartis to develop treatments for asthma and allergies using other of our TLR9 agonist compounds. Our IMO compounds targeted to TLR7 and TLR8 are in the discovery stage.

      Since 2003, we have devoted substantially all of our research and development efforts to our IMO technology and products and expect to continue that focus in future years. Although we were a pioneer in the development of antisense technology and are the owner or licensee of over 500 patents and patent applications in this area, we are no longer developing our antisense technologies in-house and continue to seek additional collaborators to develop our antisense technologies externally.

      We have incurred total losses of $313.0 million through December 31, 2005 and expect to incur substantial operating losses in the future. In order to commercialize our therapeutic products, we need to address a number of technological challenges and to comply with comprehensive regulatory requirements. In 2006, we expect that our research and development expenses will be higher than those in 2005 as we continue to advance IMO-2055 through clinical development.

Application of Critical Accounting Policies

      This management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      We regard an accounting estimate or assumption underlying our financial statements as a “critical accounting estimate” where (i) the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and (ii) the impact of the estimates and assumptions on financial condition or operating performance is material.

      Our significant accounting policies are described in Note 2 of the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Not all of these significant policies, however, fit the definition of critical accounting estimates. We believe that our accounting policies relating to revenue recognition fit the description of critical accounting estimates.

      We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, or SAB 104. SAB 104 requires that four basic criteria be met before revenue can be recognized:

      Determination of the last three criteria are based on management’s judgments regarding the fixed nature of the fee charged for services rendered or products delivered and the collectibility of these fees. Should changes in conditions cause management to determine these criteria are not met for any future transactions, revenues recognized for any reporting period could be adversely affected.

      We recognize license fees and other upfront fees, not specifically tied to a separate earnings process, ratably over the term of the contract or the term in which we must fulfill an obligation to aid in the research or use of the licensed technology.

      We recognize service and research and development revenue when the services are performed.

      For payments that are specifically associated with a separate earnings process, we recognize revenue when the specific performance obligation is completed. Performance obligations typically consist of significant milestones in the development life cycle of the related technology, such as initiation of clinical trials, filing for approval with regulatory agencies and approvals by regulatory agencies.

Results of Operations

Years ended December 31, 2005, 2004 and 2003

      Total revenues increased by $1.6 million, or 162%, from $0.9 million in 2004 to $2.5 million in 2005. Total revenues remained fairly constant at $0.9 million for both 2003 and 2004. The difference in revenues between 2005 and 2004 was primarily due to license fees and reimbursed third party expenses we recognized under our collaboration agreement entered into in May 2005 with Novartis. In July 2005, we received from Novartis the $4.0 million upfront fee under the Novartis agreement. Of this $4.0 million, we recognized $1.2 million as revenue in 2005 with the balance being recorded in deferred revenue. Our revenues for 2005, 2004 and 2003 were comprised of payments under various collaboration and licensing agreements for research and development, including reimbursement of third party expenses, and as license fees, sublicense fees, and royalty payments. Revenues for 2004 and 2003 also included milestone payments.

      Research and development expenses increased by approximately $2.4 million, or 23%, from $10.3 million in 2004 to $12.7 million in 2005 and decreased by approximately $0.5 million, or 5%, from $10.8 million in 2003 to $10.3 million in 2004. The increase in 2005 was primarily attributable to (1) costs associated with our Phase 2 clinical trial of IMO-2055, (2) studies leading to the selection of a second lead compound IMO-2125, and (3) manufacturing of IMO-2125. The year 2005 also included costs associated with our collaboration with Novartis. The decrease between 2003 and 2004 was primarily attributable to a decrease in spending on GEM231 and lower salary expenses due to the retirement of one of our officers and a decrease in bonus awards. These decreases were partially offset by an increase in our IMO-2055 manufacturing and clinical related study costs in 2004.

      Our current research and development efforts relate primarily to IMO-2055. In 2005, 2004 and 2003, we incurred approximately $3.9, $2.5 and $2.3 million, respectively, in direct expenses in connection with developing IMO-2055. These expenses reflected payments to independent contractors and vendors for clinical

and preclinical studies and drug manufacturing and related costs but exclude internal costs such as payroll and overhead. In October 2004, we commenced patient recruitment for an open label, multi-center Phase 2 clinical trial of IMO-2055 as a monotherapy in patients with metastatic or recurrent clear cell renal carcinoma. We originally planned to recruit a minimum of 46 patients who had previously failed one prior therapy, or “second-line” patients, into the first stage of the trial. We also expected to enroll in the first stage of the trial some treatment-naïve patients, although the original protocol did not specify a target enrollment for treatment-naïve patients. On October 19, 2005, in response to a higher than expected enrollment rate of treatment-naïve patients in the Phase 2 trial, we submitted to the FDA a protocol amendment that provides for enrollment of up to 46 treatment-naïve patients in the first stage of the trial, in addition to the 46 second-line patients provided for by the original study design. As a result, we are now seeking to enroll up to 92 patients in the first stage of the trial and we plan to continue patient recruitment into the first half of 2006.

      On October 26, 2005, we initiated a Phase 1/2 clinical trial of IMO-2055 in combination with the chemotherapy agents gemcitabine, marketed by Eli Lilly and Company as Gemzar^®, and carboplatin at the Lombardi Comprehensive Cancer Center at Georgetown University Medical Center. We are seeking to enroll 12 to 18 refractory solid tumor patients in the Phase 1 portion of the trial to evaluate the safety of the combination. If successful, we plan to use Phase 1 data for dose selection for the subsequent Phase 2 portion of the trial as first line treatment of non-small cell lung cancer patients.

      Because our IMO-2055 development and our other research and development programs are in the early stage of development and given the technological and regulatory hurdles likely to be encountered in the development and commercialization of our products, the future timing and costs of our various research and development programs are uncertain.

      General and administrative expenses decreased by approximately $0.8 million, or 18%, from $4.3 million in 2004 to $3.5 million in 2005 and decreased by approximately $2.6 million, or 38%, from $6.9 million in 2003 to $4.3 million in 2004. General and administrative expenses consisted primarily of salary expense, consulting fees and professional legal fees associated with our regulatory filing requirements and business development. These costs were generally consistent from period to period.

      The $2.6 million decrease in 2004 from 2003 primarily reflects the one-time expense for the $1.9 million premium paid in repurchasing shares of our common stock in 2003 and other consulting and professional fees related to the repurchase of our common stock in 2003. The 2004 decrease also reflects a decrease in legal expenses due mainly to the winding down of a patent interference proceeding conducted in 2003. The resignation of our former Chief Executive Officer in 2004 resulted in a $0.7 million charge which was the primary reason for the $0.8 million decrease in 2005, as compared to 2004, and partially offset the 2004 decreases mentioned above, as compared to 2003.

      As a result of our repricing of stock options in September 1999, some of our outstanding stock options have been subject to variable plan accounting which requires us to measure the intrinsic value of the repriced options through the earlier of the date of exercise, cancellation or expiration at each reporting date. In 2005, we incurred stock-based compensation expense of $0.1 million in operating results, which resulted from an increase in the intrinsic value of these options. We recorded a credit to operating results of approximately $0.7 million in 2004 as a result of a decrease in the intrinsic value of these options. In 2003, we incurred stock-based compensation expense of $0.5 million in operating results, which resulted from an increase in the intrinsic value of these options.

      As explained in Note 2(l) to the financial statements included in this annual report, on January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. Pursuant to

SFAS No. 123(R), the Statement of Operations will no longer include the effects of marking repriced options to market. The impact of adopting SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123(R) in a prior period, the impact of applying that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net loss and net loss per share in Note 2(j) to the financial statements included in this annual report, adjusted for estimated forfeitures, if any.

      Investment income increased by approximately $0.2 million from $0.2 million in 2004 to $0.4 million in 2005 and remained relatively constant at approximately $0.2 million in 2003 and $0.2 million in 2004. The increase from 2004 to 2005 is primarily attributable to higher interest rates.

      Interest expense increased by approximately $223,000 from $29,000 in 2004 to $252,000 in 2005 and decreased by $89,000 from $118,000 in 2003 to $29,000 in 2004. The increase in 2005 consisted of interest on our 4% notes issued in May 2005 and amortization of deferred financing costs associated with these notes. The interest in 2004 and 2003 related to our 9% notes. The decrease from 2003 to 2004 resulted from our 9% notes maturing on April 1, 2004. Upon the maturity of those notes, we paid $1.3 million to the investors, representing the outstanding principal amount of our 9% notes, plus accrued interest.

      The $104,000 gain on the sale of securities in 2003 represents a gain on the sale of shares of Migenix common stock that were received as payment under our agreement with Migenix. There were no gains on sales of securities during 2005 and 2004.

      On December 4, 2003, shareholders approved amendments to our Certificate of Incorporation that:

      During the 60-day conversion period, the conversion ratio was increased such that the series A convertible preferred shareholders received approximately 29.41 shares of common stock for each preferred share converted instead of the 23.53 shares that they would normally have received. During the conversion period holders of 99.9% of the series A convertible preferred stock converted their preferred stock to common stock.

      The preferred stock dividends for each of the three years ended December 31, 2005 were as follows:

      As shown above, the value of the 25% additional shares issued during the special preferred stock conversion periods is recorded as an addition to dividends in the statement of operations during 2004 of $3.2 million and during 2003 of $1.6 million. As a result of the amendment to our Certificate of Incorporation and the series A convertible preferred stock conversions, the preferred stock liquidation preference was reduced from $73.1 million at December 3, 2003 to $0.5 million at December 31, 2003 and $655 at December 31, 2004 and 2005.

      All preferred stock dividends are payable, at our election, either in cash or shares of series A convertible preferred stock.

      As of December 31, 2005, we had cumulative net operating losses of approximately $266.7 million and tax credit carryforwards of approximately $4.7 million. The Tax Reform Act of 1986 contains provisions that may limit our ability to utilize net operating loss and tax credit carryforwards in any given year if certain events occur, including cumulative changes in ownership interests in excess of 50% over a three-year period. We have completed several financings since the effective date of the Tax Act, which, as of December 31, 2005, have resulted in ownership changes, as defined under the Tax Act, which will limit our ability to utilize all of our available net operating loss and tax credit carryforwards in the future. We have not prepared an analysis to determine the effect of the ownership change limitation on our ability to utilize our net operating losses and tax credit carryforwards.

Liquidity and Capital Resources

      We require cash to fund our operating expenses, to make capital expenditures and to pay debt service. Historically, we have funded our cash requirements primarily through the following:

      In March 2006, we raised approximately $9.8 million in gross proceeds from a private placement to institutional investors. In the private placement, we sold for a purchase price of $0.44 per share 22,159,092 shares of common stock and warrants to purchase 16,619,319 shares of common stock. The warrants to purchase common stock have an exercise price of $0.65 per share and will expire if not exercised on or prior to September 24, 2011. The warrants may be exercised by cash payment only and are exercisable any time on or after September 24, 2006. After March 24, 2010, we may redeem the warrants for $0.01 per warrant share following notice to the warrant holders if the volume weighted average of the closing sales price of the common stock exceeds 300% of the warrant exercise price for the 15 day period preceding the notice. We may exercise our right to redeem the warrants by providing 20 days prior written notice to the holders of

the warrants. The net proceeds to us from the offering, excluding the proceeds of any future exercise of the warrants, total approximately $8.9 million. We are required to file a registration statement covering the common stock and the common stock issuable upon exercise of the warrants and to use our best efforts to make the registration statement effective.

      In March 2006, we secured a commitment from an investor to purchase up to $9.8 million of our common stock between June 24, 2006 and December 31, 2006. We may require the investor to purchase in up to three drawdowns, which shall be made at our discretion, up to $9.8 million of newly-issued shares of our common stock at a price that is equal to the greater of 80% of the volume weighted average closing price during a five day pricing period preceding the date that we notify the investor of the sale and a floor price of $0.64 per share. Our ability to make drawdowns is conditioned upon (i) the effectiveness of a registration statement covering the resale of the shares to be issued under the commitment, except that we may drawdown up to $2,500,000 prior to such registration statement being declared effective, and (ii) stockholder approval of an increase in our authorized common stock, which we expect to seek at our 2006 annual meeting of stockholders. No drawdown may occur within 45 days of any other drawdown, and no single drawdown may exceed $4.0 million. Based on the floor price, a maximum of 15,234,375 shares of common stock could be issued under the commitment. We are not obligated to sell any of the $9.8 million of common stock available under the commitment and there are no minimum commitments or minimum use penalties. The commitment does not contain any restrictions on our operating activities, automatic pricing resets or minimum market volume restrictions. The agent fees and other costs directly related to securing the commitment amount to approximately $0.9 million. If we elect to sell the entire $9.8 million of our common stock pursuant to the commitment, the net proceeds to us, excluding the proceeds of any future exercise of the warrants, will be approximately $8.9 million. As part of the arrangement, we issued warrants to the investor to purchase 6,093,750 shares of our common stock at an exercise price of $0.74 per share. The warrants are exercisable by cash payment only. The warrants are exercisable beginning on September 24, 2006. The warrants expire if not exercised by September 24, 2011. On or after March 24, 2010, we may redeem the warrants for $0.01 per warrant share following notice to the warrant holders if the closing sales price of the common stock exceeds 250% of the warrant exercise price for 15 consecutive trading days prior to the notice. We may exercise our right to redeem the warrants by providing at least 30 days prior written notice to the holders of the warrants.

      In May 2005, we issued approximately $5.0 million in principal amount of 4% convertible subordinated notes due April 30, 2008 to overseas investors. Interest on the 4% convertible subordinated notes was payable in arrears on December 15, 2005 for the period from issuance to that date, and thereafter semi-annually on April 30 and October 30 and at maturity or upon conversion. We have the option to pay interest on the 4% convertible subordinated notes in cash or in shares of common stock at the then current market value of the common stock. In December 2005, we issued 159,704 shares of common stock as interest based on the market value of our common stock at the time. Holders of the 4% Notes may convert, at any time prior to maturity, the principal amount of the 4% Notes (or any portion thereof) into shares of our common stock at a conversion price of $0.89 per share. We may cause the principal amount of the 4% Notes to be converted into shares of our common stock at the then current conversion price at any time prior to May 24, 2006 if the volume weighted average of the closing sales prices of our common stock for 10 consecutive trading days is equal to at least $1.78 per share or at any time on or after May 24, 2006 if the volume weighted average of the closing sales prices of our common stock for 10 consecutive trading days is equal to at least $1.12 per share. If we conduct a financing resulting in greater than $10.0 million in gross proceeds, we may elect to convert the 4% Notes into shares of our common stock at the then current conversion price if the purchase price paid by the new investors in the financing (on a common stock equivalent basis) is greater than the then current conversion price of the 4% Notes. Holders of the 4% Notes may demand that we redeem the 4% Notes upon a change in control, a merger with an independent company, or a change in our listing status. The net proceeds from the offering totaled approximately $4.6 million.

      In August 2004, we raised approximately $5.1 million in gross proceeds from a private placement to institutional and overseas investors. In the private placement, we sold 8,823,400 shares of common stock and warrants to purchase 1,764,680 shares of common stock. The warrants to purchase common stock have an

exercise price of $0.67 per share and will expire if not exercised on or prior to August 27, 2009. The warrants may be exercised by cash payment only. On or after February 27, 2005, we may redeem the warrants if the closing sales price of the common stock for each day of any 20 consecutive trading day period is greater than or equal to $1.34 per share. The redemption price will be $0.01 per share of common stock underlying the warrants. We may exercise our right to redeem the warrants by providing 30 days prior written notice to the holders of the warrants. The net proceeds to us from the offering, excluding the proceeds of any future exercise of the warrants, totaled approximately $4.7 million.

      In April 2004, we raised approximately $11.8 million in gross proceeds through a registered direct offering. In the offering, we sold 16,899,800 shares of common stock and warrants to purchase 3,041,964 shares of common stock to institutional and other investors. The warrants to purchase common stock have an exercise price of $1.14 per share and are exercisable at any time on or after October 21, 2004 and on or prior to April 20, 2009. The warrants may be exercised by cash payment only. On or after October 21, 2005, we may redeem the warrants if the closing sales price of the common stock for each day of any 20 consecutive trading day period ending within 30 days prior to providing notice of redemption is greater than or equal to $2.60 per share. The redemption price will be $0.01 per share of common stock underlying the warrants. We may exercise our right to redeem the warrants by providing 30 days prior written notice to the holders of the warrants. The net proceeds to us from the offering, excluding the proceeds of any future exercise of the warrants, totaled approximately $10.7 million.

      In August 2003, we raised approximately $14.6 million in gross proceeds from a private placement to institutional and accredited investors. In the private placement, we sold 20,053,022 shares of our common stock and warrants to purchase 6,015,934 shares of our common stock. The warrants to purchase common stock have an exercise price of $1.00 per share and will expire if not exercised by August 28, 2008. The warrants may be exercised by paying cash or by invoking a cashless exercise feature. We may redeem the warrants at a price of $0.05 per share of common stock issuable upon exercise of the warrants if the average closing price of our common stock for a ten consecutive trading day period is greater than or equal to $2.00 per share. The net proceeds to us from the placement, excluding the proceeds of any future exercise of the warrants, totaled approximately $13.1 million. As part of this transaction, we issued to selected dealers and placement agents warrants to purchase 2,458,405 shares of common stock at an exercise price of $0.73 per share and warrants to purchase 1,325,342 shares of common stock at an exercise price of $1.00 per share.

      In May 2005, we entered into a research collaboration and option agreement and a license, development and commercialization agreement with Novartis International Pharmaceutical, Ltd. to discover, develop and potentially commercialize immune modulatory oligonucleotides that are TLR9 agonists and that are identified as potential treatments for asthma and allergies. Under the terms of the agreements, Novartis paid us a $4.0 million license fee in July 2005.

      As of December 31, 2005, we had approximately $8.4 million in cash and cash equivalents and investments, a net decrease of approximately $6.0 million from December 31, 2004. We used $10.5 million of cash in operating activities during 2005, principally to fund our research and development expenses and our general and administrative expenses. The $10.5 million primarily consists of our $13.7 million net loss for the period, as adjusted for the $2.7 million increase in deferred revenue which primarily reflects the unamortized part of the upfront license fee from Novartis and for non-cash expenses including interest, depreciation, amortization and stock-based compensation.

      The net cash provided by investing activities during 2005 of $1.8 million reflects our purchase of approximately $19.9 million in securities offset by our sale of $16.9 million of securities and the proceeds of approximately $5.0 million from securities that matured in 2005. The net cash provided by investing activities also reflects our 2005 purchases of laboratory equipment.

      The net cash provided by financing activities during 2005, reflects the approximately $5.0 million in net proceeds that we received from the issuance of our 4% notes offset by the expenses associated with their issuance. The net cash provided by financing also reflects $0.1 million in proceeds received from the exercise of stock options.

      We have incurred operating losses in most fiscal years and had an accumulated deficit of $313.0 million at December 31, 2005. We had cash, cash equivalents and short-term investments of $8.4 million at December 31, 2005. We believe that, based on our current operating plan, our existing cash, cash equivalents and short-term investments, together with the $8.9 million in net proceeds that we raised in March 2006 through the sale of common stock and warrants, less $0.9 million in direct expenses associated with the commitment discussed below, will be sufficient to fund our operations through January 2007. In addition, in March 2006, we entered into an agreement with an investor under which the investor agreed to purchase up to $9.8 million of our common stock upon drawdowns made at our discretion. Our ability to access this commitment and sell common stock to such investor is subject to stockholder approval of an increase in the number of authorized shares of common stock, which we plan to seek at our annual meeting of stockholders in June 2006, and the effectiveness of a registration statement covering the resale of the shares to be sold. If we are able to access the commitment and sell the full $9.8 million under it, we expect to have sufficient cash and investments to be able to pursue our clinical and preclinical development programs and continue operations through mid 2007.

      We do not expect to generate significant additional funds internally until we successfully complete development and obtain marketing approval for products, either alone or in collaboration with third parties, which we expect will take a number of years. In addition, we have no committed external sources of funds. As a result in order for us to continue to pursue our clinical and preclinical development programs and continue operations beyond January 2007, or mid-2007 if we drawdown all of the funds pursuant to the commitment, we must raise additional funds in 2006 from debt, equity financings or from collaborative arrangements with biotechnology or pharmaceutical companies. If we do utilize our commitment, we expect to continue to pursue our clinical and preclinical development programs and continue operations through mid 2007. There can be no assurance that the requisite funds will be available in the necessary time frame or on terms acceptable to us. Should we be unable to raise sufficient funds, we may be required to significantly curtail our operating plans and possibly relinquish rights to portions of our technology or products. In addition, increases in expenses or delays in clinical development may adversely impact our cash position and require further cost reductions. No assurance can be given that we will be able to operate profitably on a consistent basis, or at all, in the future.

      We believe that the key factors that will affect our internal and external sources of cash are:

      As of December 31, 2005, our contractual obligations were as follows:

      Our only material lease commitment relates to our facility in Cambridge, Massachusetts. Under our license agreements, we are obligated to make milestone payments upon achieving specified milestones and to pay royalties to our licensors. These contingent milestone and royalty payment obligations are not included in

the above table. We may make material leasehold improvement expenditures in 2006 dependant upon whether or not we decide to locate to a new facility.

      Historically, our primary exposures have been related to nondollar-denominated operating expenses in Europe. As of December 31, 2005, we have no assets and liabilities related to nondollar-denominated currencies.

      We maintain investments in accordance with our investment policy. The primary objectives of our investment activities are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Although our investments are subject to credit risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investments. We do not own derivative financial investment instruments in our investment portfolio.

      Based on a hypothetical ten percent adverse movement in interest rates, the potential losses in future earnings, fair value of risk sensitive financial instruments, and cash flows are immaterial, although the actual effects may differ materially from the hypothetical analysis.

      All financial statements required to be filed hereunder are filed as listed under Item 15(a) and are incorporated herein by this reference.

      None.

      (a) Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2005, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

      (b) Changes in Internal Controls. No change in our internal control over financial reporting occurred during the fiscal year ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

      None.

PART III.

      The response to the Part III items incorporate by reference certain sections of our Proxy Statement for our annual meeting of stockholders to be held on June 7, 2006.

      The response to this item is contained under the following captions in the 2006 Proxy Statement: “Election of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Board Committees”, which sections are incorporated herein by reference. See Part I of this Annual Report on 10-K under the caption “Executive Officers and Key Employees of Idera Pharmaceuticals.”

      We have adopted a written code of business conduct and ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We intend to disclose any amendments to, or waivers from, our code of business conduct and ethics on our website which is located at www.iderapharma.com.

      The response to this item is contained in the 2006 Proxy Statement under the captions: “Certain Transactions,” and “Director Compensation” and “Executive Compensation”, which sections are incorporated herein by reference.

      The response to this item is contained in the 2006 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management” which section is incorporated herein by reference.

      The response to this item is contained in the 2006 Proxy Statement under the captions “Certain Transactions,” and “Director Compensation”, which sections are incorporated herein by reference.

      The response to this item is contained in the 2006 Proxy Statement under the caption “Principal Accountant Fees and Services”, which section is incorporated herein by reference.

PART IV.

      (a)(1) Financial Statements.

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 27th day of March 2006.

      Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

IDERA PHARMACEUTICALS, INC.

INDEX TO FINANCIAL STATEMENTS

December 31, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Idera Pharmaceuticals, Inc.

      We have audited the accompanying consolidated balance sheets of Idera Pharmaceuticals, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 consolidated financial position of Idera Pharmaceuticals, Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

Boston, Massachusetts

February 24, 2006, except for Notes 1 and 16

as to which the date is March 24, 2006

IDERA PHARMACEUTICALS, INC.

BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

IDERA PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements.

IDERA PHARMACEUTICALS, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)