<PAGE>   1
                                    FORM 10-Q


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(Mark One)

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


For the quarterly period ended June 30, 2001

                                       OR

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

For the transition period from ________________________to ______________________

Commission file number:  0-19825

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

<TABLE>
<CAPTION>
                            CALIFORNIA                                  94-3116852
                            ----------                                  ----------
<S>                                                                <C>
(State or other jurisdiction of incorporation or organization)     (I.R.S. employer
                                                                    Identification no.)


901 MARINER'S ISLAND BLVD., SUITE 205, SAN MATEO, CALIFORNIA              94404
------------------------------------------------------------              -----
             (Address of principal executive offices)                   (Zip code)
</TABLE>

                                 (650) 358-3456
              (Registrant's telephone number, including area code)

                                 NOT APPLICABLE
              (Former name, former address and former fiscal year,
                         if changed since last report)

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

               Yes [X}                    No [ ]


      As of June 30, 2001, 32,389,605 shares of the registrant's Common Stock,
no par value, were issued and outstanding.

<PAGE>   2

                         SCICLONE PHARMACEUTICALS, INC.


                                      INDEX

<TABLE>
<CAPTION>
PART I.     FINANCIAL INFORMATION                                               PAGE NO.
<S>         <C>                                                                 <C>

Item 1.     Condensed Consolidated Financial Statements (Unaudited)

                Condensed Consolidated Balance Sheets as of June 30, 2001
                    and December 31, 2000                                          3

                Condensed Consolidated Statements of Operations for the
                    Three-month and Six-month periods ended June 30, 2001          4
                    and 2000

                Condensed Consolidated Statements of Cash Flows for the
                    Six-month periods ended June 30, 2001 and 2000                 5

                Notes to Condensed Consolidated Financial Statements               6

Item 2.     Management's Discussion and Analysis of Financial Condition and
                Results of Operations                                              9

Item 3.     Quantitative and Qualitative Disclosures About Market Risk             23

PART II.    OTHER INFORMATION

Item 2.     Changes in Securities and Use of Proceeds                              24

Item 4.     Submission of Matters to a Vote of Security Holders                    24

Item 6.     Exhibits and Reports on Form 8-K                                       25

Signatures                                                                         26
</TABLE>

                                       2
<PAGE>   3

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                         SCICLONE PHARMACEUTICALS, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                         June 30,          December 31,
                                                                           2001                2000
                                                                       -----------         ------------
                                                                       (unaudited)            (Note 1)
<S>                                                                   <C>                 <C>
Current assets:
    Cash and cash equivalents                                         $  19,306,000       $  21,981,000
    Short-term investments                                                  896,000             516,000
    Accounts receivable, net                                              7,934,000           8,621,000
    Inventory                                                             2,296,000           2,020,000
    Prepaid expenses and other current assets                             1,988,000           1,233,000
                                                                      -------------       -------------
Total current assets                                                     32,420,000          34,371,000

Property and equipment, net                                                 186,000             214,000
Other assets                                                              1,498,000           1,582,000
                                                                      -------------       -------------
Total assets                                                          $  34,104,000       $  36,167,000
                                                                      =============       =============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                  $   2,409,000       $   2,327,000
    Accrued compensation and benefits                                       552,000             787,000
    Accrued clinical trials expense                                         239,000             202,000
    Accrued professional fees                                               608,000             281,000
    Other accrued expenses                                                  128,000             453,000
    Other current liabilities                                                52,000              40,000
                                                                      -------------       -------------
Total current liabilities                                                 3,988,000           4,090,000
Convertible notes payable                                                 5,600,000           4,000,000
Shareholders' equity:
   Common stock, no par value; 75,000,000 shares authorized;
      32,389,605 and 32,209,286 shares issued and outstanding at
      June 30, 2001 and December 31, 2000, respectively                 145,534,000         144,815,000
    Net unrealized gain on available-for-sale securities                     72,000               8,000
    Accumulated deficit                                                (121,090,000)       (116,746,000)
                                                                      -------------       -------------
Total shareholders' equity                                               24,516,000          28,077,000
                                                                      -------------       -------------
Total liabilities and shareholders' equity                            $  34,104,000       $  36,167,000
                                                                      =============       =============
</TABLE>

            See notes to condensed consolidated financial statements

                                       3
<PAGE>   4

                         SCICLONE PHARMACEUTICALS, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)


<TABLE>
<CAPTION>
                                                Three months ended                    Six months ended
                                                     June 30,                              June 30,
                                             2001               2000               2001               2000
                                         ------------       ------------       ------------       ------------
<S>                                      <C>                <C>                <C>                <C>
Product revenue                          $  3,250,000       $  4,206,000       $  6,363,000       $  7,705,000
Cost of product sales                         636,000            849,000          1,234,000          1,584,000
                                         ------------       ------------       ------------       ------------

Gross profit                                2,614,000          3,357,000          5,129,000          6,121,000

Operating expenses:
     Research and development               1,586,000          1,297,000          3,227,000          2,556,000
     Marketing                              2,651,000          2,036,000          4,928,000          3,952,000
     General and administrative               961,000            897,000          1,791,000          1,540,000
                                         ------------       ------------       ------------       ------------
Total operating expenses                    5,198,000          4,230,000         10,046,000          8,048,000
                                         ------------       ------------       ------------       ------------

Loss from operations                       (2,584,000)          (873,000)        (4,917,000)        (1,927,000)

Interest and investment income, net           365,000            284,000            573,000            463,000
                                         ------------       ------------       ------------       ------------

Net loss                                 $ (2,219,000)      $   (589,000)      $ (4,344,000)      $ (1,464,000)
                                         ============       ============       ============       ============

Net loss per common share (basic &
    diluted)                             $      (0.07)      $      (0.02)      $      (0.13)      $      (0.05)
                                         ============       ============       ============       ============

Weighted average shares used in
     computing per share amounts           32,289,857         31,442,890         32,266,474         29,599,825
                                         ============       ============       ============       ============
</TABLE>

            See notes to condensed consolidated financial statements

                                       4
<PAGE>   5

                         SCICLONE PHARMACEUTICALS, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                              Six months ended
                                                                                   June 30,
                                                                          2001               2000
                                                                       ------------       ------------
<S>                                                                    <C>                <C>
OPERATING ACTIVITIES:
Net loss                                                               $ (4,344,000)      $ (1,464,000)
Adjustments to reconcile net loss to net cash used in operating
    activities:
    Depreciation and amortization                                           261,000            295,000
    Changes in operating assets and liabilities:
        Prepaid expenses and other assets                                  (877,000)           (48,000)
        Accounts receivable                                                 687,000         (3,877,000)
        Inventory                                                          (276,000)           (73,000)
        Accounts payable and other accrued expenses                        (232,000)           418,000
        Accrued compensation and benefits                                  (235,000)          (200,000)
        Accrued clinical trials expense                                      38,000            397,000
        Accrued professional fees                                           327,000           (166,000)
                                                                       ------------       ------------
Net cash used in operating activities                                    (4,651,000)        (4,718,000)
                                                                       ------------       ------------
INVESTING ACTIVITIES:
    Purchase of property and equipment                                      (28,000)           (43,000)
    Purchase of marketable securities, net                                 (316,000)         1,803,000
                                                                       ------------       ------------
Net cash (used in) provided by investing activities                        (344,000)         1,760,000
                                                                       ------------       ------------
FINANCING ACTIVITIES:
    Proceeds from issuance of convertible note                            1,600,000                 --
    Proceeds from issuance of common stock, net of financing cost           720,000         19,131,000
                                                                       ------------       ------------
Net cash provided by financing activities                                 2,320,000         19,131,000
                                                                       ------------       ------------
Net (decrease) increase in cash and cash equivalents                     (2,675,000)        16,173,000
Cash and cash equivalents, beginning of period                           21,981,000          1,828,000
                                                                       ------------       ------------
Cash and cash equivalents, end of period                               $ 19,306,000       $ 18,001,000
                                                                       ============       ============
</TABLE>

            See notes to condensed consolidated financial statements

                                       5
<PAGE>   6

                         SCICLONE PHARMACEUTICALS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.    The accompanying unaudited consolidated financial statements have been
      prepared in conformity with generally accepted accounting principles
      consistent with those applied in, and should be read in conjunction with,
      the audited financial statements for the year ended December 31, 2000. The
      interim financial information reflects all normal recurring adjustments
      which are, in the opinion of management, necessary for a fair presentation
      of the results for the interim periods presented. The balance sheet data
      at December 31, 2000 is derived from the audited financial statements at
      that date but does not include all of the information and footnotes
      required by generally accepted accounting principles for complete
      financial statements. The interim results are not necessarily indicative
      of results for subsequent interim periods or for the full year.

2.    In June 1998, the Financial Accounting Standards Board issued Statement
      No. 133, "Accounting for Derivative Instruments and Hedging Activities"
      ("SFAS 133"), which is required to be adopted for the year ending December
      31, 2001. The adoption of SFAS 133 did not have a significant impact on
      results of operations or the financial position of the Company.

3.    In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
      "Accounting for Certain Transactions Involving Stock Compensation, an
      Interpretation of Opinion No. 25" for (a) the definition of employee for
      purposes of applying Opinion No. 25, (b) the criteria for determining
      whether a plan qualifies as a noncompensatory plan, (c) the accounting
      consequences of various modifications to the terms of a previously fixed
      stock option or award, and (d) the accounting for an exchange of stock
      compensation awards in a business combination. FIN 44 became effective
      July 1, 2000, but certain conclusions cover specific events that occur
      after either December 15, 1998, or January 12, 2000. The adoption of
      certain provisions of FIN 44 did not have a material impact on the
      Company's financial position or results of operations.

4.    For the six-month periods ended June 30, 2001 and 2000, the Company's
      total comprehensive loss amounted to $(4,280,000) and $(1,454,000),
      respectively.

5.    The following is a summary of available-for sale securities at June 30,
      2001:

<TABLE>
<CAPTION>
                                                    Available-for-sale securities
                                 ---------------------------------------------------------------------
                                                      Gross              Gross
                                   Amortized        Unrealized         Unrealized         Estimated
                                     Cost             Gains              Losses           Fair Value
                                 ------------      ------------       ------------       ------------
<S>                              <C>               <C>                <C>                <C>
Agency obligations               $  6,000,000      $         --       $         --       $  6,000,000
Corporate obligations               9,104,000             3,000             (4,000)         9,103,000
Corporate equity securities                --            73,000                 --             73,000
                                 ------------      ------------       ------------       ------------
                                 $ 15,104,000      $     76,000       $     (4,000)      $ 15,176,000
                                 ============      ============       ============       ============
</TABLE>

   As of June 30, 2001, the average portfolio duration was less than one year.

                                       6
<PAGE>   7


6.    The following is a summary of inventories at June 30, 2001:

<TABLE>
<S>                          <C>
      Raw materials          $1,593,000
      Finished goods            703,000
                             ----------
                             $2,296,000
</TABLE>

7.    The following is a summary of other assets at June 30, 2001:

<TABLE>
<S>                                       <C>
      Intangible product rights - net     $1,296,000
      Other                                  202,000
                                          ----------
                                          $1,498,000
</TABLE>

      ZADAXIN(R) product rights that the Company acquired are being amortized
      over six years beginning in September 1998. The Company identifies and
      records impairment losses, as circumstances dictate, on intangible product
      rights when events and circumstances indicate that the assets might be
      impaired and the undiscounted cash flows estimated to be generated by
      those assets are less than the carrying amounts of those assets. The
      Company to date has not identified any impairment losses on these assets.

8.    In March 2001, the Company completed a $1.6 million senior unsecured
      convertible note with an investment affiliate of UBS AG. The $1.6 million
      note is convertible into 276,530 shares of the Company's common stock at a
      fixed conversion price of $5.7860 per share. The note will accrue interest
      at a rate of 6% per year and will mature in March 2006. The note is not
      convertible prior to March 21, 2002. The Company also received $360,000
      for granting the investor the right to purchase approximately $2.3 million
      of senior unsecured convertible notes due March 2006. The $360,000 was
      accounted for as an increase to shareholders' equity. If issued, the notes
      will bear no interest (zero coupon) and will be convertible into 276,530
      shares of the Company's common stock at a fixed conversion price of
      $8.5532 per share.

9.    For the three-month period ended June 30, 2001, the Company received
      approximately $228,000 in connection with exercises of outstanding options
      to purchase 118,654 shares of common stock.

10.   The Company does not have any minimum purchase requirements under its
      contract manufacturing supply agreements for ZADAXIN and CPX.

11.   The Company recognizes revenue from product sales to importing agents in
      the People's Republic of China and to distributors elsewhere at the time
      of shipment when legal title to the products is transferred to them. The
      Company's importing agents and distributors do not have a contractual
      right of return except under limited terms regarding product quality. The
      Company recognizes contract/grant revenue when services have been
      performed.

12.   The Company accounts for equity instruments issued to non-employees in
      accordance with the provisions of SFAS 123 and Emerging Issues Task Force
      ("EITF") 96-18. Warrants issued in connection with equity and debt
      arrangements are valued using the Black-Scholes option valuation model.
      Warrants issued to placement agents and similar parties in connection with
      equity financing efforts are accounted as stock issuance cost with an
      equal amount recorded as common stock. Warrants issued to purchasers of
      the Company's equities are not specifically accounted for as their value
      is a sub-component of common stock. The fair value of warrants issued in
      connection with debt

                                       7
<PAGE>   8

      arrangements, if material, is accounted for as a debt discount and
      amortized as additional interest expense over the term of the related
      debt.

13.   Net loss per share is computed using the weighted average number of shares
      of common stock outstanding. Common equivalent shares from stock options
      and warrants are excluded, as their effect is antidilutive.

                                       8
<PAGE>   9

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

      The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our condensed
consolidated financial statements and related notes appearing elsewhere in this
report. This discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. "Forward --- looking statements"
include those relating to expense levels and expectations regarding clinical
trials as well as statements including the words "expects", "anticipates",
"believes" or similar words. The actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
such as those set forth under "Risk Factors" and the risks discussed in our
other SEC filings, including our Annual Report on Form 10-K filed March 29, 2001
with the SEC.

OVERVIEW

      We develop and commercialize novel medicines for treating a broad range of
the world's most serious diseases. Our current product development and
commercial activities are focused on the following diseases:

      -     hepatitis C, an infectious disease affecting 170 million people
            worldwide;

      -     hepatocellular carcinoma, the most common and deadliest form of
            liver cancer worldwide;

      -     malignant melanoma, the deadliest form of skin cancer and one of the
            most rapidly increasing types of cancer worldwide;

      -     hepatitis B, an infectious disease affecting 350 million people
            worldwide;

      -     HIV, the virus that causes AIDS;

      -     drug-resistant tuberculosis, an infectious disease reaching pandemic
            proportions worldwide; and

      -     cystic fibrosis, the most common fatal genetic disease among
            Caucasians.

      Our flagship drug is ZADAXIN, an immune system enhancer or ISE. An ISE
drug, such as ZADAXIN, is one that helps stimulate, maintain and direct the
body's antiviral or anticancer responses. ZADAXIN boosts the body's immune
system in the fight against multiple types of cancer and infectious diseases.
ZADAXIN is in or expected to enter phase 2 and phase 3 development in the U.S.,
Europe and Japan, the three markets that represent approximately 90% of the
world's pharmaceutical market. We have initiated a phase 3 clinical program in
the U.S. for the treatment of hepatitis C using ZADAXIN as part of a combination
therapy with Pegasys(R), pegylated interferon alfa-2a, proprietary product of F.
Hoffmann-La Roche Ltd. In this U.S. phase 3 program site selection has been
completed, the clinical research organization has been engaged and the
investigational review board approval process has commenced. In addition to
hepatitis C, current ZADAXIN clinical research focuses on hepatocellular
carcinoma, malignant melanoma and hepatitis B. Approximately 3,000 patients have
been treated with ZADAXIN in over 70 clinical trials covering a broad range of
life-threatening diseases in which the immune system plays a key role in the
patient's ability to fight back.

                                       9
<PAGE>   10

      ZADAXIN has been approved for sale in many emerging growth nations,
principally for the treatment of hepatitis B and hepatitis C, and we are
currently selling ZADAXIN primarily in the People's Republic of China. The net
cash flow from our international sales efforts are used to partially fund our
U.S. clinical trial programs. Our total ZADAXIN sales for 2000 were $15,357,000,
a 69% increase over 1999 sales of $9,091,000, and for the six months ended June
30, 2001, sales were $6,363,000, a 17% decrease compared to sales of $7,705,000
for the six months ended June 30, 2000.

      Our second product in clinical development, CPX, is a novel protein-repair
therapy for cystic fibrosis, the most common fatal genetic disease among
Caucasians. Currently approved drugs treat only the symptoms of cystic fibrosis,
not the underlying cause of the disease. CPX, which we have in-licensed from the
U.S. National Institutes of Health, is designed to repair the underlying
protein-associated defect responsible for cystic fibrosis in most patients, not
just the symptoms of the disease. CPX is currently in a phase 2 development
program in the U.S.

      Additional drug candidates in our pipeline include SCV-07, the lead,
orally active, compound in our new class of immune system enhancer drugs and
DAX. SCV-07 has entered phase 1 testing for drug-resistant tuberculosis and we
expect to develop SCV-07 for cancer and viral hepatitis. DAX is targeted at
cystic fibrosis.

RESULTS OF OPERATIONS

      Total revenue was approximately $3,250,000 and $6,363,000 for the
three-month and six-month periods ended June 30, 2001, as compared to
approximately $4,206,000 and $7,705,000 for the corresponding periods in 2000.
This 17 percent decrease for the six-month period was primarily due to lower
sales to importing agents in the People's Republic of China who supply our
distributors in China with ZADAXIN, greater sales last year to certain countries
using ZADAXIN on a pre-approval named patient basis and to increased competition
from other hepatitis B therapies. For the three-month period ended June 30,
2001, all of our total revenue was derived from sales of ZADAXIN, and China
accounted for 88% of this revenue. Sales emphasis is concentrated in China
because, as one of our more developed markets, marketing expenditures are more
likely to benefit sales and profits compared to newer markets-which require
investment and development spending.

      Cost of product sales was approximately $636,000 and $1,234,000 for the
three-month and six-month periods ended June 30, 2001, as compared to
approximately $849,000 and $1,584,000 for the corresponding periods in 2000. We
expect cost of product sales to vary from quarter to quarter, depending
primarily on the level of ZADAXIN sales to distributors who tend to place a few
larger orders during the year, the absorption of fixed product-related costs,
and any charges associated with excess or expiring finished product.

      Research and development expenses were approximately $1,586,000 and
$3,327,000 for the three-month and six-month periods ended June 30, 2001, as
compared to approximately $1,297,000 and $2,556,000 for the corresponding
periods in 2000. The increase was primarily attributable to increases in
clinical trial expenses, product research expenses and payroll expenses. The
initiation and continuation of ZADAXIN, CPX and other product clinical
development programs has had, and will continue to have, significant effect on
our research and development expenses and may require us to seek additional
capital resources. In general, we expect product research and development
expenses to increase significantly in absolute dollars over the next several
years and to vary quarter to quarter as we pursue our strategy of initiating
additional preclinical and clinical trials and testing, acquiring product
rights, and expanding regulatory activities.

                                       10
<PAGE>   11

      Marketing expenses were approximately $2,651,000 and $4,928,000 for the
three-month and six-month periods ended June 30, 2001, as compared to
approximately $2,036,000 and $3,952,000 for the corresponding periods in 2000.
The increase primarily relates to increased payroll expenses and expenses for
advertising associated with the expansion in our existing ZADAXIN markets. We
expect our marketing expenses to increase in absolute dollars in the next
several quarters as we expand our commercialization and marketing efforts and
pursue additional strategic collaborations.

      General and administrative expenses were approximately $961,000 and
$1,791,000 for the three-month and six-month periods ended June 30, 2001, as
compared to approximately $897,000 and $1,540,000 for the corresponding periods
in 2000. The increase was primarily attributable to increased fees for
professional services. In the near term, we expect general and administrative
expenses to vary quarter to quarter as we augment our general and administrative
activities and resources to support increased expenditures on preclinical and
clinical trials and testing, and regulatory, pre-commercialization and marketing
activities.

      Net interest and investment income was approximately $365,000 and $573,000
for the three-month and six-month periods ended June 30, 2001, as compared to
approximately $284,000 and $463,000 for the corresponding periods in 2000. The
increase primarily resulted from increase in other income due to the repayment
of a loan from a former officer, offset by decreased interest and investment
income due to lower average invested cash balances.

      Management intends to give priority use of the Company's financial
resources to its clinical programs in the United States.

LIQUIDITY AND CAPITAL RESOURCES

      At June 30, 2001 and 2000, we had approximately $20,202,000 and
$18,001,000, respectively, in cash, cash equivalents, short-term investments and
marketable securities. The marketable securities consist primarily of highly
liquid short-term investments.

      Net cash used by us in operating activities amounted to approximately
$4,651,000 for the six-month period ended June 30, 2001. Net cash used in
operating activities in the 2001 period was greater than our net loss for that
period due to decreases in accounts payable, decreases in accrued compensation
and benefits and increases in prepaid expenses and inventory, partially offset
by decreases in accounts receivable.

      Net cash used by us in investing activities amounted to approximately
$344,000 for the six-month period ended June 30, 2001 and related to the net
purchase of approximately $316,000 of marketable securities and the purchase of
approximately $28,000 in equipment and furniture.

      For the six-month period ended June 30, 2001, net cash provided by
financing activities amounted to approximately $2,320,000 in net proceeds. Of
this amount, net cash provided by the issuance of common stock under our
employee stock purchase plan amounted to approximately $51,000 in net proceeds;
net cash provided by the exercises of outstanding options under our employee
stock option plans amounted to approximately $315,000; net cash provided by the
issuance of a convertible note amounted to approximately $1,600,000; net cash
resulting from the issuance to certain investors of a right to purchase
approximately $2,300,000 of senior unsecured convertible notes amounted to
approximately $360,000 offset by approximately $6,000 in financing costs.

      Management believes our existing capital resources and interest on funds
available are adequate to maintain our current and planned operations into 2003.
The initiation and continuation of U.S. and Japanese clinical development
programs could require additional

                                       11
<PAGE>   12

funding either from a collaborative source or through equity or debt financing.
The need, timing and amount of additional funding will depend upon numerous
factors, including the level of ZADAXIN sales, the timing and amount of
manufacturing costs related to ZADAXIN and CPX, the availability of
complementary products, technologies and businesses, the initiation and
continuation of preclinical and clinical trials and testing, particularly
ZADAXIN trials in the U.S. and Japan, the timing of regulatory approvals,
developments in relationships with existing or future collaborative parties and
the status of competitive products. In the event we need to raise additional
financing, the unavailability or the timing of any financing could prevent or
delay our long-term product development and commercialization programs, either
of which would severely hurt our business.

RISK FACTORS

      You should carefully consider the risks described below, together with all
of the other information included in this report on Form 10-Q, before making an
investment decision. The risks below are not the only ones we face. If any of
the following risks actually occurs, our business, financial condition or
operating results could be harmed. In such case, the trading price of our common
stock could decline, and you may lose all or part of your investment.

IF WE FAIL TO SATISFY AND COMPLY WITH GOVERNMENTAL REGULATIONS OR IF GOVERNMENT
REGULATIONS CHANGE, OUR BUSINESS WILL SUFFER.

      All new drugs, including our products which have been developed or are
under development, are subject to extensive and rigorous regulation by the FDA,
and comparable agencies in state and local jurisdictions and in foreign
countries. These regulations change from time to time. In prior years,
legislation was introduced in the U.S. Congress that would restrict the duration
of the marketing exclusivity of an orphan drug. There can be no assurances that
this type of legislation will not be reintroduced and passed into law, or that
the benefits of the existing statute will remain in effect. Our failure to
satisfy and comply with regulations by the FDA, and comparable agencies in state
and local jurisdictions and in foreign countries can delay or stop approval of
our drugs. These regulations govern, among other things, the development,
testing, manufacturing, labeling, storage, premarket approval, importation,
advertising, promotion, sale and distribution of our products. Satisfaction of
these regulations typically takes several years and the time needed to satisfy
them varies substantially, based on the type, complexity and novelty of the
pharmaceutical product. As a result, government regulation may cause us to delay
the introduction of, or prevent us from marketing, our existing or potential
products for a considerable period of time and to impose costly procedures upon
our activities. If regulatory approval of our products is granted, such approval
may impose limitations on the indicated uses for which our products may be
marketed. The pegylated interferon we will use in our phase 3 program in the
U.S. has not yet been approved by the FDA. While we anticipate that such
approval will be obtained, we would need to conduct an additional trial with an
approved form, resulting in additional delays and expenses, if it is not
obtained.

IF WE FAIL TO OBTAIN REGULATORY APPROVALS IN COUNTRIES WHERE WE HAVE TARGETED
REGULATORY APPROVAL FOR OUR PRODUCTS, WE MAY NOT BE ABLE TO SUSTAIN OR INCREASE
OUR REVENUES AND OUR STOCK PRICE MAY DECLINE.

      The research, preclinical and clinical development, manufacturing,
marketing and sale of ZADAXIN, CPX and our other drug candidates are subject to
extensive regulation by governmental authorities. ZADAXIN, CPX and any other
products we may sell must be approved by the FDA or its foreign counterparts
before they can be sold in any jurisdiction. Obtaining regulatory approval is
time-consuming and expensive. In some countries where we are contemplating
marketing and selling ZADAXIN, the regulatory approval process for drugs that
have not been previously approved in countries with established clinical trial
review procedures

                                       12
<PAGE>   13

is uncertain, and this may delay the grant of regulatory approvals for ZADAXIN.
In addition, to secure these regulatory approvals, for ZADAXIN and CPX, we will
need, among other things, to demonstrate favorable results from additional
clinical trials of ZADAXIN and the safety and efficacy of CPX as a treatment for
cystic fibrosis in preclinical and clinical trials. Our failure to obtain the
required regulatory approvals so that we can develop, market and sell our
products in countries where we currently do not have such rights may limit our
revenues.

      There can be no assurance that we will ultimately obtain regulatory
approvals in our targeted countries in a timely and cost-effective manner or at
all. Failure to comply with applicable U.S. or foreign regulatory requirements
can, among other things, result in warning letters, fines, suspensions of
regulatory approvals, product recalls or seizures, operating restrictions,
injunctions, total or partial suspension of production, civil penalties, and
criminal prosecutions. Further, additional government regulation may be
established or imposed by legislation or otherwise, which could prevent or delay
regulatory approval of ZADAXIN, CPX or any of our future products. Adverse
events related to our products in any of our existing or future markets could
cause regulatory authorities to withdraw market approval for such products, if
any, or prevent us from receiving market approval in the future.

      We may not be able to commence or complete the clinical trials we have
sponsored or are planning relating to ZADAXIN and CPX in a timely or
cost-effective manner. Even if completed, these trials may not fulfill the
applicable regulatory approval criteria, in which case we will not be able to
obtain regulatory approvals in these countries. Failure to obtain additional
regulatory approvals will harm our operating results. In addition, adverse
results in our development programs also could result in restrictions on the use
of ZADAXIN and, if approved, CPX.


WE ARE IMPLEMENTING A PHASE 3 PROGRAM IN THE U.S. FOR THE APPROVAL IN THE U.S.
OF ZADAXIN IN COMBINATION WITH PEGYLATED INTERFERON FOR THE TREATMENT OF
HEPATITIS C. OUR SCIENTIFIC AND CLINICAL RESEARCH DATA RELATING TO ZADAXIN IN
COMBINATION WITH INTERFERON FOR THE TREATMENT OF HEPATITIS C IS BASED ON THE USE
OF THE NON-PEGYLATED FORM OF INTERFERON.

      The results from our previous phase 2 and phase 3 hepatitis C studies have
enabled us to produce a conservatively designed phase 3 study program based on
the use of ZADAXIN in combination with non-pegylated interferon. We are
proceeding with this program and have completed site selection and engaged the
clinical research organization, and the investigational review board approval
process has commenced. However, there can be no assurances that the results that
produced this conservative design will carryover to the design of the study
program using the combination of ZADAXIN and pegylated interferon. The pegylated
form of interferon may perform better than anticipated in comparison to the
combination of ZADAXIN and pegylated interferon. If that results, our efforts to
market and sell ZADAXIN in combination with pegylated interferon will be
delayed, which will hurt our expectations.

WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT. WE EXPECT TO
CONTINUE TO INCUR LOSSES IN THE NEAR TERM AND MAY NEVER ACHIEVE PROFITABILITY.

      We have experienced significant operating losses since our inception and
as of June 30, 2001, we had an accumulated deficit of $121,090,000. We expect
our operating expenses to increase over the next several years as we plan to
dedicate substantially all of our resources to expanding our development,
testing and marketing capabilities, particularly in the U.S. Accordingly, we may
never achieve profitability. Our failure to achieve profitability may cause our
stock price to decline.

                                       13
<PAGE>   14

IF WE DO NOT INCREASE THE AMOUNT OF REVENUE WE DERIVE FROM SALES OF ZADAXIN WE
WILL NEED TO OBTAIN ADDITIONAL CAPITAL TO SUPPORT OUR LONG-TERM PRODUCT
DEVELOPMENT AND COMMERCIALIZATION PROGRAMS.

      Our strategy in the near term is to invest in phase 2 and 3 clinical
studies in the U.S. Europe and Japan and continue to maintain and develop our
international ZADAXIN business. Our ability to achieve and sustain operating
profitability depends in large part on our ability to:

      -     commence, execute and complete clinical programs for, and obtain
            additional regulatory approvals for, ZADAXIN, CPX, and/or future
            products, particularly in the U.S., Europe and Japan;

      -     increase ZADAXIN sales in existing markets; and

      -     launch ZADAXIN in new markets;

      Although we remain optimistic regarding the prospects of ZADAXIN, we
cannot assure you that we will ever achieve significant levels of sales or that
we will receive additional ZADAXIN market approvals.

      If we do not increase the revenue we derive from the sales of ZADAXIN and
achieve operating profitability, we will need to obtain additional financing to
support our long-term product development and commercialization programs. We may
seek additional funds through public and private stock offerings, arrangements
with corporate partners, borrowings under lease lines of credit or other
sources. If we cannot raise the necessary funds, we will have to reduce our
capital expenditures, scale back our development of new products, reduce our
workforce and out-license to others products or technologies that we otherwise
would seek to commercialize ourselves.

      The amount of capital we need will depend on many factors, including:

      -     the level of future ZADAXIN sales;

      -     the timing, location, scope and results of ongoing and planned
            preclinical studies and clinical trials;

      -     the cost of manufacturing or obtaining preclinical and clinical
            materials;

      -     expense levels for our international sales and marketing efforts;

      -     the timing and cost involved in applying for and obtaining FDA and
            international regulatory approvals;

      -     the costs involved in filing, prosecuting and enforcing patent
            claims;

      -     competing technological and market developments;

      -     whether any or all of our outstanding common stock warrants are
            exercised and the timing and amount of these exercises;

      -     our ability to establish and maintain strategic arrangements for
            development, sales, manufacturing and marketing of our products; and

                                       14
<PAGE>   15

      -     whether we elect to establish additional partnering arrangements for
            development, sales, manufacturing, and marketing of our products.

      Many of the foregoing factors are not within our control. If we need to
raise additional funds and such funds are not available on reasonable terms, we
may be required to delay or cancel our product development and commercialization
programs. Any additional equity financing will be dilutive to shareholders, and
any debt financing, if available, may include restrictive covenants.

WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP OR COMMERCIALIZE OUR PRODUCTS.

      Many of our products are in the development stage and will require the
commitment of substantial resources, devoted to extensive research, development,
preclinical testing, clinical trials, manufacturing scale-up and regulatory
approval prior to being ready for sale. We can not assure you that commercially
viable products will result from these efforts. We face significant
technological risks inherent in developing these products. We may also abandon
some or all of our proposed products before they become commercially viable. If
any of our products, even if developed and approved, cannot be successfully
commercialized in a timely manner, our business will be harmed and the price of
our stock may decline.

      We have not yet sold any product other than ZADAXIN. Our future revenue
growth depends on increased market acceptance and commercialization of ZADAXIN
in additional countries, particularly the U.S. and European countries. If we
fail to successfully market ZADAXIN, or if we cannot commercialize this drug in
the U.S. and other additional markets, our revenue and operating results will
suffer. Our future revenue will also depend in part on our ability to develop
other commercially viable and accepted products. Market acceptance of our
products will depend on many factors, including our ability to:

      -     convince prospective customers that our products are an attractive
            alternative to other treatments and therapies;

      -     convince prospective strategic partners that our products are an
            attractive alternative to other treatments and therapies; and,

      -     manufacture products in sufficient quantities with acceptable
            quality and at an acceptable cost.

WE ARE DEPENDENT ON THE SALE OF ZADAXIN IN FOREIGN COUNTRIES, PARTICULARLY
CHINA, AND IF WE EXPERIENCE DIFFICULTIES IN OUR FOREIGN SALES EFFORTS, OUR
FINANCIAL CONDITION WILL BE HARMED.

      Our financial condition in the near term is highly dependent on the sale
of ZADAXIN in foreign countries. If we experience difficulties in our foreign
sales efforts, our business will suffer and our financial condition will be
harmed. The majority of our ZADAXIN sales are to customers in the People's
Republic of China. Sales of ZADAXIN in China may be limited due to its low
average income, poorly developed infrastructure and existing and potential
competition from other products, possibly including generics. China uses a
tiered method to import and distribute finished pharmaceutical products. At each
port of entry, and prior to moving the product forward to the distributors,
government licensed importing agents must process and evaluate each shipment to
determine whether such shipment satisfies China's quality assurance
requirements. In order to efficiently manage this process, the importing agents
place relatively few orders from time to time over any six month period and each
order is typically for large quantities. Therefore, our sales to an importing
agent can vary substantially from quarter to quarter depending on the size and
timing of the orders, which may cause our quarterly results to

                                       15
<PAGE>   16

fluctuate. In addition, our ZADAXIN sales and operations in other parts of Asia,
as well as in Latin America and the Middle East, are subject to a number of
risks, including:

      -     difficulties and delays in obtaining pricing approvals and
            reimbursement;

      -     difficulties and delays in obtaining product health registration;

      -     difficulties and delays in obtaining importation permits;

      -     unexpected changes in regulatory requirements;

      -     difficulties in staffing and managing foreign operations;

      -     long payment cycles;

      -     difficulties in accounts receivable collection;

      -     currency fluctuations; adverse or deteriorating economic conditions;
            and

      -     potential adverse tax consequences.

      We do not have product sales in the U.S. with which to offset any decrease
in our revenue from ZADAXIN sales in Asia, Latin America and the Middle East. In
addition, some countries in these regions regulate pharmaceutical prices and
pharmaceutical importation. These regulations may reduce prices for ZADAXIN to
levels significantly below those that would prevail in an unregulated market or
limit the volume of product which may be imported and sold, either of which may
limit the growth of our revenues or cause them to decline.

WE HAVE LIMITED SALES, MARKETING AND DISTRIBUTION CAPABILITIES, WHICH MAY
ADVERSELY AFFECT OUR ABILITY TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.

      We currently have limited sales, marketing and distribution capabilities,
and we anticipate that we will be relying on third-party collaborators to sell,
market and distribute our products in the foreseeable future. If our
arrangements with these third parties are not successful, or if we are unable to
enter into additional third-party arrangements, we may need to substantially
expand our sales, marketing and distribution force. Our efforts to expand may
not succeed, or we may lack sufficient resources to expand in a timely manner,
either of which will harm our operating results. If we are able to further
develop our sales, marketing and distribution capabilities, we will compete with
other companies that have experienced and well funded operations. If we cannot
successfully compete with them, our revenues may not grow and our business may
suffer.

IF WE ARE NOT ABLE TO ESTABLISH AND MAINTAIN ADEQUATE MANUFACTURING AND SUPPLY
RELATIONSHIPS, THE DEVELOPMENT AND SALE OF OUR PRODUCTS COULD BE IMPAIRED.

      To be successful, our products must be manufactured in commercial
quantities, in compliance with regulatory requirements and at an acceptable
cost. We may not be able to maintain the long-term manufacturing relationships
we currently have with our suppliers of ZADAXIN and CPX. Manufacturing
interruptions, if any, could significantly delay clinical development of
potential products and reduce third-party or clinical researcher interest and
support of proposed trials. These interruptions could also impede
commercialization of our products, including sales of ZADAXIN in approved
markets, and impair our competitive position. Any of these developments would
harm our business. In some countries, a change may require additional regulatory
approvals. If we do not obtain the required regulatory approvals of

                                       16
<PAGE>   17

this manufacturing change in a timely fashion, new ZADAXIN marketing approvals
may be delayed or sales may be interrupted until the manufacturing change is
approved. Either of these results will hurt our business.

      Manufacturing, supply and quality control problems may arise as we, either
alone or with subcontractors, attempt to scale-up our manufacturing procedures.
We may not be able to scale-up in a timely manner or at a commercially
reasonable cost. Problems could lead to delays or pose a threat to the ultimate
commercialization of our products and harm us.

IF WE DO NOT OBTAIN RIGHTS TO ADDITIONAL PRODUCTS FROM THIRD PARTIES, OUR
PROSPECTS FOR FUTURE REVENUE MAY DECLINE.

      We are only actively pursuing clinical development of ZADAXIN and CPX at
this time. If we do not advance SCV-07 and DAX, the other products to which we
have in-licensed rights, from preclinical into clinical development we may lose
the rights to these products. We may also have a shortage of drugs to develop
and commercialize if we do not license or otherwise acquire rights to additional
drugs. Any shortage in the number of drugs that we are able to develop and
commercialize may reduce our prospects for future revenue.

COMMERCIALIZATION OF SOME OF OUR PRODUCTS DEPENDS ON COLLABORATIONS WITH OTHERS.
IF OUR COLLABORATORS ARE NOT SUCCESSFUL, OR IF WE ARE UNABLE TO FIND FUTURE
COLLABORATORS, WE MAY NOT BE ABLE TO PROPERLY DEVELOP AND COMMERCIALIZE OUR
PRODUCTS.

      We depend in part on our distributors and business partners to develop
and/or promote our drugs, and if they are not successful in their efforts or
fail to do so, our business will suffer. We generally do not have control over
the amount and timing of resources that our business partners devote to ZADAXIN
and they have not always performed as or when expected. If they do not perform
their obligations as we expect, our development expenses would increase and the
development and/or sale of our products could be limited or delayed, which could
cause our business to suffer and our stock price to decline. In addition, our
relationships with these companies may not be successful. Disputes may arise
over ownership rights to intellectual property, know-how or technologies
developed with our collaborators, and we may not be able to negotiate similar
additional arrangements in the future to develop and commercialize ZADAXIN.

IF WE FAIL TO PROTECT OUR PRODUCTS, TECHNOLOGIES AND TRADE SECRETS, WE MAY NOT
BE ABLE TO SUCCESSFULLY USE, MANUFACTURE OR MARKET AND SELL OUR PRODUCTS OR WE
MAY FAIL TO ADVANCE OR MAINTAIN OUR COMPETITIVE POSITION.

      Our success depends significantly on our ability to obtain and maintain
meaningful patent protection for our products and technologies, to preserve our
trade secrets and to avoid infringing on the proprietary rights of third
parties. Our pending patent applications may not result in the issuance of
patents in the future. Our patent applications may not have priority over
others' applications and, even if any patents are issued, they may not provide a
competitive advantage to us or may be invalidated or circumvented by our
competitors. Others may independently develop similar products or design around
patents issued or licensed to us. Patents issued to, or patent applications
filed by, other companies could harm our ability to use, manufacture or market
our products or maintain our competitive position with respect to our products.
Many of our patents relating to ZADAXIN have expired, and we have rights to
other patents and patent applications relating to ZADAXIN under exclusive
licenses. If we breach the terms of any of these licenses, we could lose our
rights to these patents and patent applications.

      Our commercial success also depends in part on us not infringing valid,
enforceable patents or proprietary rights of third parties, and not breaching
any licenses that may relate to our technologies and products. We are aware of
third-party patents that may relate to our products. It

                                       17
<PAGE>   18

is possible that we may unintentionally infringe these patents or other patents
or proprietary rights of third parties. We may in the future receive notices
claiming infringement from third parties as well as invitations to take licenses
under third-party patents. Any legal action against us or our collaborative
partners claiming damages and seeking to enjoin commercial activities relating
to our products and processes affected by third-party rights may require us or
our collaborative partners to obtain licenses in order to continue to
manufacture or market the affected products and processes. Our efforts to defend
against any of these claims, even if unmeritorious, would require us to devote
resources and attention that could have been directed to our operation and
growth plans. In addition, these actions may subject us to potential liability
for damages. We or our collaborative partners may not prevail in a patent action
and any license required under a patent may not be made available on
commercially acceptable terms, or at all.

      Pharmaceuticals are either not patentable or have only recently become
patentable in some of the countries other than the U.S., in which we have
exclusive rights to ZADAXIN. Past enforcement of intellectual property rights in
many of these countries has been limited or non-existent. Future enforcement of
patents and proprietary rights in many other countries will likely be
problematic or unpredictable. Moreover, the issuance of a patent in one country
does not assure the issuance of a similar patent in another country. Claim
interpretation and infringement laws vary by nation, so the extent of any patent
protection is uncertain and may vary in different jurisdictions.

IF WE MAKE ANY ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER
REALIZE THE ANTICIPATED BENEFITS.

      If appropriate opportunities become available, we may attempt to acquire
products, product candidates or businesses that we believe fit strategically
with our business. We currently have no commitments or agreements with respect
to material acquisitions. If we do undertake any transaction of this sort, the
process of integrating an acquired product, product candidate or business may
result in operating difficulties and expenditures and may absorb significant
management attention that would otherwise be available for our ongoing business
development plans. Moreover, we may never realize the anticipated benefits of
any acquisition. Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt, contingent liabilities
and/or amortization expenses related to goodwill and other intangible assets,
which could adversely affect our business, financial condition and results of
operations.

WE MAY LOSE MARKET SHARE OR OTHERWISE FAIL TO COMPETE EFFECTIVELY IN THE
INTENSELY COMPETITIVE BIOPHARMACEUTICAL INDUSTRY.

      Competition in the biopharmaceutical industry is intense and we expect
that competition to increase. Our success depends on our ability to compete. We
believe that the principal competitive factors in this industry include the
efficacy, safety, price, therapeutic regimen and manufacturing quality assurance
associated with a given drug. Our competitors include biopharmaceutical
companies, biotechnology firms, universities and other research institutions,
both in the U.S. and abroad, that are actively engaged in research and
development of products in the therapeutic areas we are pursuing, particularly
cancer, hepatitis B, hepatitis C, HIV and cystic fibrosis. In certain instances,
our competitors are currently marketing drugs for cancer, hepatitis B, hepatitis
C and HIV or have products in late-stage clinical trials.

      Most of our competitors, particularly large biopharmaceutical companies,
have substantially greater financial, technical, regulatory, manufacturing,
marketing and human resource capabilities than we do. Most of them also have
extensive experience in undertaking the preclinical and clinical testing and
obtaining the regulatory approvals necessary to market drugs. Additional mergers
and acquisitions in the pharmaceutical industry may result in even more
resources being concentrated with our competitors. Principal competitive factors
in the

                                       18
<PAGE>   19

pharmaceutical field include efficacy, safety, and therapeutic regimen. Where
comparable products are marketed by other companies price is also a competitive
factor. Increased competitive pressure could lead to intensified price-based
competition resulting in lower prices and margins, which would hurt our
operating results.

      We currently rely on sales of ZADAXIN as a treatment for hepatitis C and
hepatitis B as our primary source of revenue. However, several large
biopharmaceutical companies have substantial commitments to alpha interferon, an
approved drug for treating hepatitis B and hepatitis C and to lamivudine, an
approved drug to treat hepatitis B. We cannot assure you that we will compete
successfully against our competitors or that our competitors, or potential
competitors, will not develop drugs or other treatments for hepatitis C,
hepatitis B, cystic fibrosis, cancer and other diseases that will be superior to
ours. However, in the area of immune system enhancer therapy, we anticipate that
our competition for ZADAXIN may be reduced by the fact that ZADAXIN,
administered in combination with numerous antiviral and anti-cancer agents, is
expected to be complementary rather than competitive to these agents in
enhancing the immune system. We believe that we can position ZADAXIN as a
complementary rather than competitive drug to many therapies, but cannot
guarantee that we will be successful in this endeavor. We expect continuing
advancements in and increasing awareness of the use of immune system enhancer
therapy to fight cancer and infectious diseases may create new competitors as
well as numerous new opportunities for expanded use of ZADAXIN worldwide.

IF THE CURRENT ECONOMIC SLOWDOWN IN THE U.S. CAUSES THE ECONOMIES OF OTHER
COUNTRIES, PARTICULARLY THOSE IN ASIA, LATIN AMERICA AND THE MIDDLE EAST TO
EXPERIENCE A SLOWDOWN OR RECESSION, OUR BUSINESS WILL SUFFER.

      The U.S. is the world's largest consumer and as such, the current economic
slowdown in the U.S. may adversely affect the economies of other countries,
including the developing countries in Asia, Latin America and the Middle East
from which we derive all of our revenues. If the economic conditions in the U.S.
continue or worsen, these developing countries may also experience an economic
slowdown or recession, which would likely result in a decrease of sales of
ZADAXIN. Any decrease in sales of ZADAXIN would harm our operating results,
delay our efforts to achieve profitability, and likely cause our stock price to
decline.

WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR BUSINESS AND INCREASE OUR EXPENSES.

      California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for California fall below 1.5%, electricity
providers have on some occasions implemented, and may in the future continue to
implement, rolling blackouts. The majority of our operations are located in
California; however, we currently do not have backup generators or alternate
sources of power in the event of a blackout. If blackouts interrupt our power
supply, we would be temporarily unable to continue operations at our facilities.
Any such interruption in our ability to continue operations at our facilities
could damage our reputation and harm our development efforts, which could
adversely affect our business and results of operation.

IF THIRD-PARTY REIMBURSEMENT IS NOT AVAILABLE OR PATIENTS CANNOT OTHERWISE PAY
FOR ZADAXIN, WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET ZADAXIN.

      Our ability to successfully commercialize our products may depend in part
on the extent to which coverage and reimbursement to patients for our products
will be available from government health care programs, private health insurers
and other third party payors or organizations. Significant uncertainty exists as
to the reimbursement status of new therapeutic products, such as ZADAXIN, and we
cannot assure you that third party insurance coverage and

                                       19
<PAGE>   20

reimbursement will be available for therapeutic products we might develop. In
most of the emerging markets in which we sell ZADAXIN or intend to sell ZADAXIN,
reimbursement for ZADAXIN under government or private health insurance programs
is not yet widely available. The failure to obtain third-party reimbursement for
our products, particularly in the U.S., Europe and Japan, will hurt our
business. In the U.S., proposed health care reforms could limit the amount of
third-party reimbursement available for our products. We cannot assure you that
future additional limitations will not be imposed in the future on drug coverage
and reimbursement. In many emerging markets where we have marketing rights to
ZADAXIN, government resources and per capita income may be so low that our
products will be prohibitively expensive. In these countries, we may not be able
to market our products on economically favorable terms, if at all.

      Efforts by governmental and third-party payors to contain or reduce health
care costs could cause us to reduce the prices at which we market our drugs,
which will reduce our gross margins and may harm our business. Various
governments and third-party payors are trying to contain or reduce the costs of
health care through various means. We expect that there will continue to be a
number of legislative proposals to implement government controls. The
announcement of proposals or reforms could cause us to reduce the prices at
which we market our drugs, which will reduce our gross margins and may harm our
business.

IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL, HIGHLY
SKILLED PERSONNEL REQUIRED FOR THE EXPANSION OF OUR ACTIVITIES, OUR BUSINESS
WILL SUFFER.

      We are highly dependent upon our ability to attract and retain qualified
personnel because of the specialized, scientific and international nature of our
business. There is intense competition for qualified management, scientific and
technical personnel in the pharmaceutical industry, and we may not be able to
attract and retain the qualified personnel we need to grow and develop our
business globally. In addition, numerous key responsibilities at SciClone are
assigned to a small number of individuals. If we are unable to attract and
retain qualified personnel as needed or promptly replace those employees who are
critical to our product development and commercialization, the development and
commercialization of our products would adversely be affected. At this time, we
do not maintain "key person" life insurance on any of our key personnel.

WE MAY BE SUBJECT TO PRODUCT LIABILITY LAWSUITS AND OUR INSURANCE MAY BE
INADEQUATE TO COVER DAMAGES.

      Clinical trials or marketing of any of our current and potential products
may expose us to liability claims from the use of these products. We currently
carry product liability insurance. However, we cannot be certain that we will be
able to maintain insurance on acceptable terms for clinical and commercial
activities or that the insurance would be sufficient to cover any potential
product liability claim or recall. If we fail to have sufficient coverage, our
business, results of operation and cash flows could be adversely affected.

IF WE ARE UNABLE TO COMPLY WITH ENVIRONMENTAL LAWS AND REGULATIONS, OUR BUSINESS
MAY BE HARMED.

      We are subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of hazardous materials and
waste products. We currently maintain a supply of hazardous materials at our
facilities. In the event of an accident, we could be liable for any damages that
result, and the liability could exceed our resources. While we outsource our
research and development programs involving the controlled use of biohazardous
materials, if in the future we conduct these programs ourselves, we might be
required to incur significant cost to comply with the environmental laws and
regulations.

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<PAGE>   21

THE PRICE OF OUR COMMON STOCK HAS EXPERIENCED SUBSTANTIAL VOLATILITY AND MAY
FLUCTUATE DUE TO FACTORS BEYOND OUR CONTROL.

      There has been significant volatility in the market prices for publicly
traded shares of pharmaceutical and biotechnology companies, including ours. The
following factors may have an adverse impact on the market price of our common
stock:

      -     significant negative changes in the major equity market indices;

      -     announcements of technical or product developments by us or our
            competitors;

      -     governmental regulation;

      -     health care legislation;

      -     public announcements regarding advances in the treatment of the
            disease states that we are targeting;

      -     public announcements from government officials relating to the
            biotechnology or pharmaceutical industries;

      -     patent or proprietary rights developments;

      -     changes in third-party reimbursement policies for our products; and

      -     fluctuations in our operating results.

      The price of our common stock may not remain at or exceed current levels.

OUR INDEBTEDNESS MAY RESULT IN FUTURE LIQUIDITY PROBLEMS.

      As of June 30, 2001, we had $5.6 million in convertible notes payable, of
which $4.0 million were issued in the quarter ended December 31, 2000 and $1.6
million were issued in the quarter ended March 31, 2001. This increased
indebtedness has and will continue to impact us by increasing expense and making
it more difficult to obtain additional financing. The notes are payable five
years after issuance unless converted into common stock at the sole discretion
of the holder. If we are unable to satisfy our debt service requirements,
substantial liquidity problems could result which would negatively impact our
future prospects. As of June 30, 2001 we had cash and short-term investments of
$20.2 million.

SUBSTANTIAL SALES OF OUR STOCK OR CONVERTIBLE SECURITIES MAY IMPACT THE MARKET
PRICE OF OUR COMMON STOCK.

      As of June 30, 2001, stock options for 5,065,696 shares of common stock
were outstanding, of which options for 3,105,411 shares were exercisable, and
there were warrants exercisable for 1,970,500 shares of common stock
outstanding. Two issues of convertible notes payable as of June 30, 2001 were
convertible into a total of 684,137 shares of common stock beginning one year
from date of issuance of the notes. In addition, the investors were given the
right to purchase senior unsecured convertible notes due December 2005 and March
2006. If issued, the additional notes will bear no interest (zero coupon) and
will be convertible into 684,137 shares of our common stock. Upon exercise of
options or warrants, or conversion of the notes, these issued shares of common
stock will be freely tradable.

                                       21
<PAGE>   22

      Future sales of substantial amounts of our common stock could adversely
affect the market price of our common stock. Similarly, if we raise additional
funds through the issuance of common stock or securities convertible into or
exercisable for common stock, the percentage ownership of our shareholders will
be reduced and the price of our common stock may fall.

ISSUING PREFERRED STOCK WITH RIGHTS SENIOR TO THOSE OF OUR COMMON STOCK COULD
ADVERSELY AFFECT HOLDERS OF COMMON STOCK.

      Our charter documents give our board of directors the authority to issue
additional series of preferred stock without a vote or action by our
shareholders. The board also has the authority to determine the terms of
preferred stock, including price, preferences and voting rights. The rights of
holders of our common stock may be adversely affected by the rights granted to
holders of preferred stock. For example, a series of preferred stock may be
granted the right to receive a liquidation preference -- a pre-set distribution
in the event SciClone is liquidated -- that would reduce the amount available
for distribution to holders of common stock. In addition, the issuance of
preferred stock could make it more difficult for a third party to acquire a
majority of our outstanding voting stock. As a result, common shareholders could
be prevented from participating in transactions that would offer an optimal
price for their shares.

                                       22
<PAGE>   23

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we invest in highly liquid and high
quality debt securities. Our investments in debt securities are subject to
interest rate risk. To minimize the exposure due to adverse shift in the
interest rates we invest in short term securities and maintain an average
maturity of less than one year. A hypothetical 60 basis point increase in
interest rates would result in an approximate $99,659 decrease (0.6%) in fair
value of our available-for-sale securities.

      The potential change noted above is based on sensitivity analyses
performed on our financial positions at June 30, 2001. Actual results may differ
materially.

                                       23
<PAGE>   24

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)   Recent Sales of Unregistered Securities

None

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

      We held our Annual Meeting of Shareholders on May 31, 2001 to elect seven
(7) directors and to ratify the appointment of the independent auditors of our
Company.

      At the Annual Meeting, all of the nominees were elected as follows:

<TABLE>
<CAPTION>
                                                        Votes
                                                        -----
                                               For              Withheld
                                            ----------          --------
<S>                                         <C>                 <C>
         Jere E. Goyan, Ph.D.               24,062,401          191,517
         Donald R. Sellers                  23,932,513          321,405
         John D. Baxter, M.D.               24,117,792          136,126
         Edwin C. Cadman,  M.D.             24,083,417          170,501
         Rolf H. Henel                      24,117,092          136,826
         Jon S. Saxe                        24,055,523          198,395
         Dean S. Woodman                    24,061,346          192,572
</TABLE>

      The shareholders then ratified the appointment of Ernst & Young LLP as
independent auditors for the Company for the fiscal year ending December 31,
2001 with voting as follows: 24,057,379 for; 170,549, against; and 25,990
abstaining.

                                       24
<PAGE>   25

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

      3(i).1  Restated Articles of Incorporation (incorporated by reference from
              the Company's Registration Statement on Form S-1 (No. 33-45446),
              declared effective by the Commission on March 17, 1992).

      3(i).2  Certificate of Amendment of Restated Articles of Incorporation
              (incorporated by reference from the Company's Registration
              Statement on Form S-8 (No. 33-66832) filed with the Commission on
              August 3, 1993).

      3(i).3  Certificate of Determination (incorporated by reference from the
              Company's Current Report on Form 8-K filed on October 14, 1997).

      3(ii).1 Bylaws (incorporated by reference from the Company's Registration
              Statement on Form S-1 (No. 33-45446), declared effective by the
              Commission on March 17, 1992).

      3(ii).2 Certificate of Amendment of Bylaws (incorporated by reference from
              the Company's Registration Statement on Form S-8 (No. 33-66832)
              filed with the Commission on August 3, 1993).

      4.2     Rights Agreement, dated as of July 25, 1997, between the Company
              and ChaseMellon Shareholder Services, LLC. (incorporated by
              reference to the Company's Current Report on Form 8-K filed on
              October 14, 1997).

      4.3*    6% Convertible Note dated as of March 21, 2001 by the Company in
              favor of UBS AG, London Branch.

      4.4*    Option Agreement dated as of February 16, 2001 by and between the
              Company and UBS AG, London Branch.

      4.5*    Amendment No. 1 to Option Agreement dated as of March 21, 2001 by
              and between the Company and UBS AG, London Branch.

      4.6*    Amendment No. 1 to 6% Convertible Note Due 2005 and Amendment
              No. 2 to Option Agreement by and between the Company and UBS AG,
              London Branch.

      10.1*   Registration Rights Agreement dated as of February 16, 2001 by and
              between the Company and UBS AG, London Branch.

      10.2*   Materials Transfer Agreement dated as of December 21, 2000
              executed as of January 8, 2001 by and between the Company and
              F. Hoffmann-La Roche Ltd.

      10.3*   Manufacturing Services Agreement by and between SciClone
              Pharmaceuticals International, Ltd. and ISF S.p.A.

      10.4*   Registration Rights Agreement dated as of October 26, 2000 by and
              between the Company and UBS AG, London Branch.

(b)   Reports on Form 8-K

      None.

----------
* Certain information in this exhibit has been omitted and filed separately with
  the Securities and Exchange Commission pursuant to a Confidential Treatment
  Request under 17 C.F.R. Sections 200.80, 200.83 and 230.406.

                                       25
<PAGE>   26

                                   SIGNATURES

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

                                            SCICLONE PHARMACEUTICALS, INC.
                                                    (Registrant)


Date: August 3, 2001                            /s/ Richard A. Waldron
                                      ------------------------------------------
                                                 Richard A. Waldron
                                               Chief Financial Officer
                                      (Principal Financial & Accounting Officer)

                                       26
<PAGE>   27

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION
-------       -----------
<S>           <C>
3(i).1        Restated Articles of Incorporation (incorporated by reference from
              the Company's Registration Statement on Form S-1 (No. 33-45446),
              declared effective by the Commission on March 17, 1992).

3(i).2        Certificate of Amendment of Restated Articles of Incorporation
              (incorporated by reference from the Company's Registration
              Statement on Form S-8 (No. 33-66832) filed with the Commission on \
              August 3, 1993).

3(i).3        Certificate of Determination (incorporated by reference from the
              Company's Current Report on Form 8-K filed on October 14, 1997).

3(ii).1       Bylaws (incorporated by reference from the Company's Registration
              Statement on Form S-1 (No. 33-45446), declared effective by the
              Commission on March 17, 1992).

3(ii).2       Certificate of Amendment of Bylaws (incorporated by reference from
              the Company's Registration Statement on Form S-8 (No. 33-66832)
              filed with the Commission on August 3, 1993).

4.2           Rights Agreement, dated as of July 25, 1997, between the Company
              and ChaseMellon Shareholder Services, LLC. (incorporated by
              reference to the Company's Current Report on Form 8-K filed on
              October 14, 1997).

4.3*          6% Convertible Note dated as of March 21, 2001 by the Company in
              favor of UBS AG, London Branch.

4.4*          Option Agreement dated as of February 16, 2001 by and between the
              Company and UBS AG, London Branch.

4.5*          Amendment No. 1 to Option Agreement dated as of March 21, 2001 by
              and between the Company and UBS AG, London Branch.

4.6*          Amendment No. 1 to 6% Convertible Note Due 2005 and Amendment
              No. 2 to Option Agreement by and between the Company and UBS AG,
              London Branch.

10.1*         Registration Rights Agreement dated as of February 16, 2001 by and
              between the Company and UBS AG, London Branch.

10.2*         Materials Transfer Agreement dated as of December 21, 2000
              executed as of January 8, 2001 by and between the Company and
              F. Hoffmann-La Roche Ltd.

10.3*         Manufacturing Services Agreement by and between SciClone
              Pharmaceuticals International, Ltd. and ISF S.p.A.

10.4*         Registration Rights Agreement dated as of October 26, 2000 by and
              between the Company and UBS AG, London Branch.
</TABLE>