##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2003

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)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 94-3116852                          
|                                                               |  |                                     
|(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)                          

(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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

|         |  |       
|-------- |  | ------
|Yes [  ] |  | No [X]

As of March 31, 2003, 37,487,394 shares of the registrants Common Stock,
no par value, were issued and outstanding.





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TABLE OF CONTENTS



|                                         |                                                                                               |                                                      |  |  |  |  |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION           
|                                         | Item 1. Condensed Consolidated Financial Statements                                          
|                                         |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                         |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                         |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                         |                                                                                               | Notes to Condensed Consolidated Financial Statements
|                                         | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                         | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                         | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION              
|                                         | Item 2. Changes in Securities and Use of Proceeds                                            
|                                         | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                              
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER
|Exhibit 99.1                            
|Exhibit 99.2                            



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SCICLONE PHARMACEUTICALS, INC.

INDEX

|               |  |                                                                                                           |  |         
|-------------- |  | --------------------------------------------------------------------------------------------------------- |  | --------
|               |  |                                                                                                           |  | PAGE NO.
|PART I.        |  | FINANCIAL INFORMATION                                                                                     |  |         
|Item 1.        |  | Condensed Consolidated Financial Statements (Unaudited)                                                   |  |         
|               |  | Condensed Consolidated Balance Sheets as of March 31,
2003 and December 31, 2002                          |  | 3       
|               |  | Condensed Consolidated Statements of Operations for the
Three-month periods ended March 31, 2003 and 2002 |  | 4       
|               |  | Condensed Consolidated Statements of Cash Flows for the
Three-month periods ended March 31, 2003 and 2002 |  | 5       
|               |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 6       
|Item 2.        |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                     |  | 11      
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 28      
|Item 4.        |  | Controls and Procedures                                                                                   |  | 28      
|PART II.       |  | OTHER INFORMATION                                                                                         |  |         
|Item 2.        |  | Changes in Securities and Use of Proceeds                                                                 |  | 29      
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                          |  | 29      
|Signatures     |  |                                                                                                           |  | 31      
|Certifications |  |                                                                                                           |  | 32      

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Condensed Consolidated Financial Statements




SCICLONE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                                         |   |             |              |              |   |            |              |  
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | ------------ | ------------ | - | ---------- | ------------ | -
|                                           |                                                                                                                                                                         |   | March 31,   |              | December 31,
|                                           |                                                                                                                                                                         |   | 2003        |              | 2002        
|                                           |                                                                                                                                                                         |   |             |              |             
|                                           |                                                                                                                                                                         |   | (unaudited) |              | (Note 1)    
|ASSETS                                     |                                                                                                                                                                         |   |             |              |              |   |            |             
|Current assets:                            |                                                                                                                                                                         |   |             |              |              |   |            |             
|                                           | Cash and cash equivalents                                                                                                                                               |   | $           | 16,687,000   |              |   | $          | 20,233,000   |  
|                                           | Restricted short-term investments                                                                                                                                       |   |             | 685,000      |              |   |            | 685,000      |  
|                                           | Other short-term investments                                                                                                                                            |   |             | 213,000      |              |   |            | 232,000      |  
|                                           | Accounts receivable, net of allowances
of $638,000 in 2003 and 2002                                                                                                     |   |             | 10,541,000   |              |   |            | 9,276,000    |  
|                                           | Inventories                                                                                                                                                             |   |             | 3,385,000    |              |   |            | 3,431,000    |  
|                                           | Prepaid expenses and other current assets                                                                                                                               |   |             | 2,380,000    |              |   |            | 2,297,000    |  
|                                           |                                                                                                                                                                         |   |             |              |              |   |            |             
|Total current assets                       |                                                                                                                                                                         |   | 33,891,000  |              |              |   | 36,154,000 |             
|Property and equipment, net                |                                                                                                                                                                         |   | 94,000      |              |              |   | 111,000    |             
|Intangible assets, net                     |                                                                                                                                                                         |   | 665,000     |              |              |   | 682,000    |             
|Other assets                               |                                                                                                                                                                         |   | 157,000     |              |              |   | 164,000    |             
|                                           |                                                                                                                                                                         |   |             |              |              |   |            |             
|Total assets                               |                                                                                                                                                                         | $ | 34,807,000  |              |              | $ | 37,111,000 |             
|                                           |                                                                                                                                                                         |   |             |              |              |   |            |             
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                                                                                                                                         |   |             |              |              |   |            |             
|Current liabilities:                       |                                                                                                                                                                         |   |             |              |              |   |            |             
|                                           | Accounts payable                                                                                                                                                        |   | $           | 2,691,000    |              |   | $          | 3,150,000    |  
|                                           | Accrued compensation and employee benefits                                                                                                                              |   |             | 565,000      |              |   |            | 1,089,000    |  
|                                           | Accrued clinical trials expense                                                                                                                                         |   |             | 937,000      |              |   |            | 966,000      |  
|                                           | Accrued professional fees                                                                                                                                               |   |             | 562,000      |              |   |            | 679,000      |  
|                                           | Deferred revenue                                                                                                                                                        |   |             | 895,000      |              |   |            | 895,000      |  
|                                           | Other accrued expenses                                                                                                                                                  |   |             | 242,000      |              |   |            | 259,000      |  
|                                           |                                                                                                                                                                         |   |             |              |              |   |            |              |  
|Total current liabilities                  |                                                                                                                                                                         |   | 5,892,000   |              |              |   | 7,038,000  |             
|Deferred revenue                           |                                                                                                                                                                         |   | 895,000     |              |              |   | 1,119,000  |             
|Convertible notes payable                  |                                                                                                                                                                         |   | 5,600,000   |              |              |   | 5,600,000  |             
|Commitments and contingencies              |                                                                                                                                                                         |   |             |              |              |   |            |             
|Shareholders equity:                      |                                                                                                                                                                         |   |             |              |              |   |            |             
|                                           | Common stock, no par value; 75,000,000
shares authorized; 37,487,394 and
36,904,916 shares issued and outstanding
at March 31, 2003 and December 31, 2002,
respectively |   |             | 158,239,000  |              |   |            | 156,290,000  |  
|                                           | Accumulated other comprehensive income                                                                                                                                  |   |             | 58,000       |              |   |            | 79,000       |  
|                                           | Accumulated deficit                                                                                                                                                     |   |             | (135,877,000 | )            |   |            | (133,015,000 | )
|                                           |                                                                                                                                                                         |   |             |              |              |   |            |              |  
|Total shareholders equity                 |                                                                                                                                                                         |   | 22,420,000  |              |              |   | 23,354,000 |             
|                                           |                                                                                                                                                                         |   |             |              |              |   |            |             
|Total liabilities and shareholders equity |                                                                                                                                                                         | $ | 34,807,000  |              |              | $ | 37,111,000 |             
|                                           |                                                                                                                                                                         |   |             |              |              |   |            |             

See notes to condensed consolidated financial statements

3



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SCICLONE PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|                                                                               |                            |   |                    |           |      |   |            |           | 
|------------------------------------------------------------------------------ | -------------------------- | - | ------------------ | --------- | ---- | - | ---------- | --------- | 
|                                                                               |                            |   | Three months ended
|                                                                               |                            |   | March 31,         
|                                                                               |                            |   | 2003               |           | 2002
|                                                                               |                            |   |                    |           |     
|Product sales                                                                  |                            | $ | 5,000,000          |           |      | $ | 3,948,000  |          
|Contract revenue                                                               |                            |   | 224,000            |           |      |   |           |          
|                                                                               |                            |   |                    |           |      |   |            |          
|Total revenue                                                                  |                            |   | 5,224,000          |           |      |   | 3,948,000  |          
|Cost of product sales                                                          |                            |   | 1,016,000          |           |      |   | 792,000    |          
|                                                                               |                            |   |                    |           |      |   |            |          
|Gross margin                                                                   |                            |   | 4,208,000          |           |      |   | 3,156,000  |          
|Operating expenses:                                                            |                            |   |                    |           |      |   |            |          
|                                                                               | Research and development   |   |                    | 3,783,000 |      |   |            | 2,526,000 | 
|                                                                               | Sales and marketing        |   |                    | 2,229,000 |      |   |            | 2,008,000 | 
|                                                                               | General and administrative |   |                    | 1,012,000 |      |   |            | 992,000   | 
|                                                                               |                            |   |                    |           |      |   |            |          
|Total operating expenses                                                       |                            |   | 7,024,000          |           |      |   | 5,526,000  |          
|                                                                               |                            |   |                    |           |      |   |            |          
|Loss from operations                                                           |                            |   | (2,816,000         | )         |      |   | (2,370,000 | )        
|Interest and investment income                                                 |                            |   | 53,000             |           |      |   | 76,000     |          
|Interest and investment expense                                                |                            |   | (91,000            | )         |      |   | (90,000    | )        
|Other expense, net                                                             |                            |   | (8,000             | )         |      |   | (19,000    | )        
|                                                                               |                            |   |                    |           |      |   |            |          
|Net loss                                                                       |                            | $ | (2,862,000         | )         |      | $ | (2,403,000 | )        
|                                                                               |                            |   |                    |           |      |   |            |          
|Basic and diluted net loss per share                                           |                            | $ | (0.08              | )         |      | $ | (0.07      | )        
|                                                                               |                            |   |                    |           |      |   |            |          
|Weighted average shares used in
computing basic and diluted net
loss per share |                            |   | 37,320,130         |           |      |   | 32,583,558 |          
|                                                                               |                            |   |                    |           |      |   |            |          

See notes to condensed consolidated financial statements

4



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SCICLONE PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|                                                                            |                                                                |                                             |            |                    |            |      |            |         |           |  
|--------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------- | ---------- | ------------------ | ---------- | ---- | ---------- | ------- | --------- | -
|                                                                            |                                                                |                                             |            | Three months ended
|                                                                            |                                                                |                                             |            | March 31,         
|                                                                            |                                                                |                                             |            | 2003               |            | 2002
|                                                                            |                                                                |                                             |            |                    |            |     
|Operating activities:                                                       |                                                                |                                             |            |                    |            |      |            |        
|Net loss                                                                    |                                                                | $                                           | (2,862,000 | )                  |            | $    | (2,403,000 | )      
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                                                |                                             |            |                    |            |      |            |        
|                                                                            | Depreciation and amortization                                  |                                             |            | 45,000             |            |      |            | 146,000 |          
|                                                                            | Changes in operating assets and liabilities:                   |                                             |            |                    |            |      |            |         |          
|                                                                            |                                                                | Accounts receivable, net                    |            |                    | (1,265,000 | )    |            |         | (544,000  | )
|                                                                            |                                                                | Inventories                                 |            |                    | 46,000     |      |            |         | (251,000  | )
|                                                                            |                                                                | Prepaid expenses and other current assets   |            |                    | (83,000    | )    |            |         | 178,000   |  
|                                                                            |                                                                | Accounts payable and other accrued expenses |            |                    | (476,000   | )    |            |         | 102,000   |  
|                                                                            |                                                                | Accrued compensation and employee benefits  |            |                    | (525,000   | )    |            |         | (422,000  | )
|                                                                            |                                                                | Accrued clinical trials expense             |            |                    | (29,000    | )    |            |         | 145,000   |  
|                                                                            |                                                                | Accrued professional fees                   |            |                    | (117,000   | )    |            |         | (50,000   | )
|                                                                            |                                                                | Deferred revenue                            |            |                    | (224,000   | )    |            |         | 2,685,000 |  
|                                                                            |                                                                |                                             |            |                    |            |      |            |        
|Net cash used in operating activities                                       |                                                                |                                             | (5,490,000 | )                  |            |      | (414,000   | )      
|                                                                            |                                                                |                                             |            |                    |            |      |            |        
|Investing activities:                                                       |                                                                |                                             |            |                    |            |      |            |        
|                                                                            | Purchase of property and equipment                             |                                             |            | (4,000             | )          |      |            | (36,000 | )        
|                                                                            | Payment on purchase of marketable securities                   |                                             |            |                   |            |      |            | (7,000  | )        
|                                                                            |                                                                |                                             |            |                    |            |      |            |        
|Net cash used in investing activities                                       |                                                                |                                             | (4,000     | )                  |            |      | (43,000    | )      
|                                                                            |                                                                |                                             |            |                    |            |      |            |        
|Financing activities:                                                       |                                                                |                                             |            |                    |            |      |            |        
|                                                                            | Proceeds from issuance of common stock, net of
financing costs |                                             |            | 1,948,000          |            |      |            | 471,000 |          
|                                                                            |                                                                |                                             |            |                    |            |      |            |        
|Net cash provided by financing activities                                   |                                                                |                                             | 1,948,000  |                    |            |      | 471,000    |        
|                                                                            |                                                                |                                             |            |                    |            |      |            |        
|Net increase (decrease) in cash and cash equivalents                        |                                                                |                                             | (3,546,000 | )                  |            |      | 14,000     |        
|Cash and cash equivalents, beginning of period                              |                                                                |                                             | 20,233,000 |                    |            |      | 15,518,000 |        
|                                                                            |                                                                |                                             |            |                    |            |      |            |        
|Cash and cash equivalents, end of period                                    |                                                                | $                                           | 16,687,000 |                    |            | $    | 15,532,000 |        
|                                                                            |                                                                |                                             |            |                    |            |      |            |        

See notes to condensed consolidated financial statements

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SCICLONE PHARMACEUTICALS, INC.




Notes to Condensed Consolidated Financial Statements
(unaudited)



|1. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited condensed 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, 2002
included in the Companys Form 10-K as filed with the Securities and
Exchange Commission. 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
and are not necessarily indicative of results for subsequent interim
periods or for the full year. The condensed consolidated balance sheet
data at December 31, 2002 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. Certain prior year amounts have been reclassified to conform to
the current period presentation.
|  
|2. |  | Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | The Company recognizes revenue from product sales at the time of shipment.
There are no significant customer acceptance requirements or post shipment
obligations on the part of the Company. Sales to importing agents or
distributors are recognized at time of shipment when title to the product
is transferred to them, and they do not have contractual rights of return
except under limited terms regarding product quality. However, the Company
will replace products that have expired or are deemed to be damaged or
defective when delivered. Payments by the importing agents and distributors
are not contingent upon sale to the end user by the importing agents or
distributors.                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Contract revenue for research and development is recorded as earned based
on the performance requirements of the contract. Nonrefundable contract
fees for which no further performance obligations exist, and there is no
continuing involvement by the Company, are recognized on the earlier of
when the payments are received or when collection is assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Revenue associated with substantive performance milestones is recognized
based on the achievement of the milestones, as defined in the respective
agreements and provided that (i) the milestone event is substantive and its
achievement is not reasonably assured at the inception of the agreement,
and (ii) there are no future performance obligations associated with the
milestone payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Net Loss Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Potentially dilutive common shares from
convertible debt, stock options and warrants are excluded, as their effect
is antidilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |  | Accounting For Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company accounts for its stock option and employee stock purchase plans
under the provisions of Accounting Principles Board Opinion 25 (APB 25)
and related Interpretations. Accordingly, the Company does not recognize
compensation expense in accounting for its stock option and employee stock
purchase plans for awards to employees and directors granted at fair market
value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Pro forma information regarding net loss and net loss per share is required
by Statement of Financial Accounting Standards No. 123 Accounting for
Stock-Based Compensation (SFAS 123) and has been determined as if the
Company had accounted for its stock awards under the fair value method of
that Statement. The fair value for the options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the three month period ended March 31,
2003 and the corresponding period in 2002: risk-free interest rates of
2.00% and 2.00%, respectively; dividend yield of 0%; volatility factors of
the expected market price of the Companys common stock of 0.95 and 0.96,
respectively, and a weighted average expected life of the option of 4.00
years and 4.00 years, respectively.
|
| |  | The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Companys employee stock
awards have characteristics significantly different from those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimate, in the Companys opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options and stock purchases.                                                                                                                                                 
|
| |  | Had compensation expense for the Companys option and employee purchase
plans been determined based on the fair value at the grant date for awards
in 2003 and 2002 consistent with the provisions of SFAS 123, the Companys
net loss and net loss per share would have been the pro forma amounts
indicated below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                                                                                            |  |                    |            |      |  |   |            |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ---- |  | - | ---------- | -
|                                                                                                            |  | Three Months Ended
|                                                                                                            |  | March 31,         
|                                                                                                            |  | 2003               |            | 2002
|                                                                                                            |  |                    |            |     
|Net
loss  as reported                                                                                      |  | $                  | (2,862,000 | )    |  | $ | (2,403,000 | )
|Total stock-based employee compensation expense
determined under the fair value based method for
all awards |  |                    | (552,000   | )    |  |   | (525,000   | )
|                                                                                                            |  |                    |            |      |  |   |            |  
|Net
loss  pro forma                                                                                        |  | $                  | (3,414,000 | )    |  | $ | (2,928,000 | )
|                                                                                                            |  |                    |            |      |  |   |            |  
|Basic
and diluted net loss per share  as reported                                                          |  | $                  | (0.08      | )    |  | $ | (0.07      | )
|                                                                                                            |  |                    |            |      |  |   |            |  
|Basic
and diluted net loss per share  pro forma                                                            |  | $                  | (0.09      | )    |  | $ | (0.09      | )
|                                                                                                            |  |                    |            |      |  |   |            |  



| |  | The effects of applying SFAS 123 for pro forma disclosures are not likely
to be representative of the effects on reported net loss for future years
due to the different number of options granted each year.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|3. |  | Comprehensive Loss                                                                                                                                        
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | For the three-month periods ended March 31, 2003 and 2002, the Companys
total comprehensive loss amounted to $(2,883,000) and $(2,365,000),
respectively.
|  
|4. |  | Available-For-Sale Securities                                                                                                                             
|  
|   |  | The following is a summary of available-for sale securities at March 31,
2003 and December 31, 2002:                                                      

|                   |                             |   |            |            |            |   |        |        |           |   |            |            | 
|------------------ | --------------------------- | - | ---------- | ---------- | ---------- | - | ------ | ------ | --------- | - | ---------- | ---------- | 
|                   |                             |   |            |            |            |   | Gross  |        | Estimated
|                   |                             |   | Amortized  |            | Unrealized |   | Fair  
|                   |                             |   | Cost       |            | Gains      |   | Value 
|                   |                             |   |            |            |            |   |       
|March 31, 2003:    |                             |   |            |            |            |   |        |        |           |   |            |           
|                   | Certificate of deposit      |   | $          | 787,000    |            |   | $      |       |           |   | $          | 787,000    | 
|                   | U.S. government obligations |   |            | 13,108,000 |            |   |        |       |           |   |            | 13,108,000 | 
|                   | Corporate equity securities |   |            | 51,000     |            |   |        | 60,000 |           |   |            | 111,000    | 
|                   |                             |   |            |            |            |   |        |        |           |   |            |           
|                   |                             | $ | 13,946,000 |            |            | $ | 60,000 |        |           | $ | 14,006,000 |           
|                   |                             |   |            |            |            |   |        |        |           |   |            |            | 
|December 31, 2002: |                             |   |            |            |            |   |        |        |           |   |            |           
|                   | Certificate of deposit      |   | $          | 787,000    |            |   | $      |       |           |   | $          | 787,000    | 
|                   | U.S. government obligations |   |            | 13,723,000 |            |   |        |       |           |   |            | 13,723,000 | 
|                   | Corporate equity securities |   |            | 51,000     |            |   |        | 79,000 |           |   |            | 130,000    | 
|                   |                             |   |            |            |            |   |        |        |           |   |            |           
|                   |                             | $ | 14,561,000 |            |            | $ | 79,000 |        |           | $ | 14,640,000 |           
|                   |                             |   |            |            |            |   |        |        |           |   |            |            | 



|   |  | As of March 31, 2003, the available-for-sale securities are included as
follows: $13,108,000 in cash and cash equivalents; $685,000 in restricted
short-term investments and $213,000 in other short-term investments. As of
December 31, 2002, the available-for-sale securities are included as
follows: $13,723,000 in cash and cash equivalents; $685,000 in restricted
short-term investments and $232,000 in other short-term investments.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | The following is a summary of inventories at March 31, 2003 and
December 31, 2002:                                                                                                                                                                                                                                                                                                                                                              

|                 |  |           |           |              |  |   |           | 
|---------------- |  | --------- | --------- | ------------ |  | - | --------- | 
|                 |  | March 31, |           | December 31,
|                 |  | 2003      |           | 2002        
|                 |  |           |           |             
|Raw materials    |  | $         | 2,709,000 |              |  | $ | 2,190,000 | 
|Work in progress |  |           | 164,000   |              |  |   | 159,000   | 
|Finished goods   |  |           | 512,000   |              |  |   | 1,082,000 | 
|                 |  |           |           |              |  |   |           | 
|                 |  | $         | 3,385,000 |              |  | $ | 3,431,000 | 
|                 |  |           |           |              |  |   |           | 

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|6. |  | Intangible Assets                               
|-- |  | ------------------------------------------------
|  
|   |  | The following is a summary of intangible assets:

|                          |  |           |            |              |  |   |            |  
|------------------------- |  | --------- | ---------- | ------------ |  | - | ---------- | -
|                          |  | March 31, |            | December 31,
|                          |  | 2003      |            | 2002        
|                          |  |           |            |             
|Intangible product rights |  | $         | 2,456,000  |              |  | $ | 2,456,000  |  
|Accumulated amortization  |  |           | (1,791,000 | )            |  |   | (1,774,000 | )
|                          |  |           |            |              |  |   |            |  
|                          |  | $         | 665,000    |              |  | $ | 682,000    |  
|                          |  |           |            |              |  |   |            |  



|   |  | Acquired ZADAXIN product rights are being amortized on a straight-line
basis beginning in September 1998. Amortization expense for the
three-month periods ended March 31, 2003 and 2002 was $17,000 and $101,000,
respectively. Amortization expense in 2002 was based on an estimated useful
life of six years. For the years ending December 31, 2003 through 2012,
annual amortization expense is expected to be $70,000. The Company
reassessed the estimated useful life of the assets to be an additional
eight years as of December 31, 2002. The Company reassessed the useful life
to be eight years as the European patent for the use of ZADAXIN in the
treatment of hepatitis C expires in 2012 and the Company, based upon the
progress in the ZADAXIN clinical trials and the Companys actual experience
of product sales, has assessed that the acquired product rights will be
useful to the Company through 2012. The Companys policy is to identify
and record 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 reassesses the useful life of these assets in accordance with
current facts and circumstances.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|7. |  | Minimum Purchase Requirements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company does not have any minimum purchase requirements under its
contract manufacturing supply agreements for ZADAXIN and CPX.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|8. |  | Deferred Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In January 2002, the Company received $2,685,000 from its European partner,
Sigma-Tau under the terms of our collaborative agreement announced in late
December 2001. This receipt has been recorded as deferred revenue and is
being recognized as contract revenue over the course of the ZADAXIN
hepatitis C U.S. clinical program beginning in April 2002 and the period of
sharing the clinical data from this program with Sigma-Tau, the substantive
performance requirements under the contract. For the three-month period
ended March 31, 2003, the Company recognized $224,000 as contract revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|9. |  | Shareholders Equity                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In January 2003, the Company completed a $1,800,000 direct placement to
affiliates of Sigma-Tau less $13,000 in financing-related costs. The
affiliates purchased 504,938 shares of the Companys common stock at
$3.5648 per share. The shares issued were restricted securities, and
Sigma-Tau and its affiliates are not permitted to sell any of the shares
purchased in this private placement until January 24, 2004.

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

Special Note Regarding Forward-Looking Statements

This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are based on our current expectations, estimates and projections about our
industry, managements beliefs and certain assumptions made by us. Words such
as anticipates, expects, intends, plans, believes or similar
expressions are intended to identify forward-looking statements including those
statements we make regarding sales and demand for ZADAXIN, working capital,
cash flow, our future financial results, the timing and outcome of clinical
trials, anticipated sales and cost of product sales, allocation of financial
resources to certain trials and programs, research and development expense
levels, sales and marketing expense levels, future commercialization and
marketing efforts and general and administrative and other operating expense
levels. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, our actual results could differ materially and adversely
from those expressed in any forward-looking statements as a result of various
factors including, but not limited to, those described under the caption Risk
Factors in this Form 10-Q. We undertake no obligation to revise or update
publicly any forward-looking statements for any reason.

Overview

SciClone Pharmaceuticals, Inc. (SciClone or the Company) is a
biopharmaceutical company engaged in the development and commercialization of
therapeutics to treat life-threatening diseases. Our lead product ZADAXIN is
in several late-stage clinical trials, including two phase 3 hepatitis C
clinical trials in the U.S., a recently completed phase 3 hepatitis B clinical
trial in Japan, a phase 2 malignant melanoma clinical trial in Europe, and two
phase 2 liver cancer trials in the U.S. In addition to ZADAXIN, our other drug
development opportunities include SCV-07, a potentially orally available
therapeutic to treat viral and infectious diseases, and products to address the
protein-based disorder that causes cystic fibrosis.

ZADAXIN has been approved for sale by the ministries of health in over 30
countries including in the first quarter of 2003 the approval for use as a
vaccine adjuvant.in Hong Kong. ZADAXIN is marketed in China and selected other
countries outside the U.S, and the cash flow generated by these operations
contributes significant support to our ZADAXIN late-stage clinical trials.
ZADAXIN has been administered to over 10,000 patients to date in both clinical
and commercial use, alone and in combination with antiviral and anticancer
drugs, without producing any known ZADAXIN related significant side effects or
toxicities. ZADAXIN is manufactured by third party manufacturers in the U.S.
and Europe in compliance with U.S. Food and Drug Administration (FDA) current
Good Manufacturing Practices (cGMP), or the foreign equivalent of such
standards.

Our business strategy focuses on developing late-stage products to treat
life-threatening diseases that offer significant market opportunities. ZADAXIN
is currently in multiple phase 3 and phase 2 clinical trials for the treatment
of viral diseases and cancer. These therapeutic categories currently represent
multi-billion dollar markets in the U.S., Europe, and Japan. We design our
clinical trials with the input of leading physicians and selected major
pharmaceutical
11Table of Contents

companies, and we structure trials to support regulatory
approval for ZADAXIN in the U.S., Europe, and Japan.

Results of Operations

Total Revenue

Product sales were $5,000,000 for the three-month period ended March 31,
2003, as compared to $3,948,000 for the corresponding period in 2002. The
growth was largely due to increased sales volume of ZADAXIN to our importers in
China.

For the three-month period ended March 31, 2003, all of our product sales
were derived from sales of ZADAXIN, and China accounted for approximately 87%
of this revenue.

Contract revenue was $224,000 for the three-month period ended March 31,
2003, as compared to none for the corresponding period in 2002. The contract
revenue we recognized was in connection with funds we received from Sigma-Tau
in January 2002 which will be recognized as contract revenue over the course of
the ZADAXIN hepatitis C U.S. clinical program and the period of sharing the
clinical data from this program with Sigma-Tau, the substantive performance
requirements under the contract.

Cost of Product Sales

Cost of product sales were $1,016,000 for the three-month period ended
March 31, 2003 as compared to $792,000 for the corresponding period in 2002
with the increase being primarily due to higher product sales. We expect cost
of product sales to vary from quarter to quarter, depending upon the level of
ZADAXIN sales, the absorption of fixed product-related costs, and any charges
associated with excess or expiring finished product inventory.

Research and Development

Research and development expenses were $3,783,000 for the three-month
period ended March 31, 2003, as compared to $2,526,000 for the corresponding
period in 2002. The increase in the three-month period ended March 31, 2003
was primarily to support our ZADAXIN phase 3 clinical trials in the U.S. and
Japan. The initiation and continuation of ZADAXIN clinical trials have had,
and will continue to have, the largest and most significant effect on our
research and development expenses. In general, we expect product research and
development expenses to increase 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.

Sales and Marketing

Sales and marketing expenses were $2,229,000 for the three-month period
ended March 31, 2003, as compared to $2,008,000 for the corresponding period in
2002. The increase was related to the expansion of our markets for ZADAXIN. We
expect our sales and marketing expenses to vary quarter to quarter and to
increase in the next several years as we expect to expand our commercialization
and marketing efforts.

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General and Administrative

General and administrative expenses were $1,012,000 for the three-month
period ended March 31, 2003, as compared to $992,000 for the corresponding
period in 2002. In the near term, we expect general and administrative
expenses to vary quarter to quarter as we increase 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.

Interest and Investment Income

Interest and investment income was $53,000 for the three-month period
ended March 31, 2003, as compared to $76,000 for the corresponding period in
2002. The decrease was primarily due to lower average invested cash balances
and lower interest rates.

Interest and Investment Expense

Interest and investment expense was $91,000 for the three-month period
ended March 31, 2003, as compared to $90,000 for the corresponding period in
2002.

Liquidity and Capital Resources

At March 31, 2003 and December 31, 2002, we had $17,585,000 and
$21,151,000, respectively, in cash, cash equivalents and short-term
investments, $685,000 of which was restricted cash at each date. Our
short-term investments consist primarily of highly liquid marketable
securities.

Net cash used by us in operating activities amounted to $5,490,000 for the
three-month period ended March 31, 2003 compared with $414,000 for the
corresponding period in 2002. The change was primarily due to increases in
accounts receivable and decreases in accounts payable and accrued compensation
and employee benefits during the three month period ended March 31, 2003
compared to an increase of $2,685,000 in deferred revenue during the 2002
period.

Net cash used by us in investing activities amounted to $4,000 for the
three-month period ended March 31, 2003 and related to the purchase of property
and equipment.

Net cash provided by financing activities amounted to $1,948,000 for the
three-month period ended March 31, 2003. Net cash provided by financing
activities consisted of $114,000 related to exercises of outstanding options
under our employee stock option plans, $47,000 for the issuance of common stock
under our employee stock purchase plan and gross proceeds of $1,800,000 from a
direct placement to affiliates of Sigma-Tau in January 2003, less $13,000 in
financing-related costs.

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Our contractual obligations and other commitments as of March 31, 2003
were as follows:

|                                   |  |                        |            |      |  |             |           |           |  |               |           |  |  |   |           |  |  |   |   | 
|---------------------------------- |  | ---------------------- | ---------- | ---- |  | ----------- | --------- | --------- |  | ------------- | --------- |  |  | - | --------- |  |  | - | - | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual                        |  |                        |            |      |  | Less than 1 |           |           |  |               |           |  |  |   |           |  |  |  
|Obligations                        |  | Total                  |            | year |  | 1-3 years   |           | 4-5 years |  | After 5 years
|                                   |  |                        |            |      |  |             |           |           |  |              
|Convertible notes payable          |  | $                      | 5,600,000  |      |  | $           |          |           |  | $             | 5,600,000 |  |  | $ |          |  |  | $ |  | 
|Operating leases                   |  |                        | 5,938,000  |      |  |             | 978,000   |           |  |               | 4,029,000 |  |  |   | 931,000   |  |  |   |  | 
|Minimum annual royalty obligations |  |                        | 390,000    |      |  |             | 65,000    |           |  |               | 195,000   |  |  |   | 130,000   |  |  |   |  | 
|                                   |  |                        |            |      |  |             |           |           |  |               |           |  |  |   |           |  |  |   |   | 
|Total contractual cash obligations |  | $                      | 11,928,000 |      |  | $           | 1,043,000 |           |  | $             | 9,824,000 |  |  | $ | 1,061,000 |  |  | $ |  | 

|                  |  |               |         |             |  |                                            |         |           |  |               |   |  |  |  |   |  |  |  |   | 
|----------------- |  | ------------- | ------- | ----------- |  | ------------------------------------------ | ------- | --------- |  | ------------- | - |  |  |  | - |  |  |  | - | 
|                  |  |               |         |             |  | Amount of Commitment Expiration Per Period
|                  |  |               |         |             |  |                                           
|Other Commercial  |  | Total Amounts |         | Less than 1 |  |                                            |         |           |  |               |   |  |  |  |   | 
|Commitments       |  | Committed     |         | year        |  | 1-3 years                                  |         | 4-5 years |  | After 5 years
|                  |  |               |         |             |  |                                            |         |           |  |              
|Letters of Credit |  | $             | 685,000 |             |  | $                                          | 685,000 |           |  |               |  |  |  |  |  |  |  |  |  | 

None of our officers or directors were involved in any related party
transactions with the Company in the three-month periods ended March 31, 2003
and 2002.

Management intends to give priority use of the Companys financial
resources to ZADAXIN clinical programs in the United States. Management
believes our existing capital resources and interest on funds available are
adequate to maintain our current and planned operations through at least the
next twelve months. We will need to obtain additional capital to support our
long-term product development. Assuming approval of ZADAXIN by the U.S. FDA and
other regulatory authorities, we may also require additional capital for our
commercialization programs. 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, 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 inopportune timing of any financing could
prevent or delay our long-term product development and commercialization
programs, either of which would severely hurt our business.

Recent Developments

On April 24, 2003, the Company announced that beginning early in its
second quarter there was a significant and unanticipated increase in local
sales of ZADAXIN to hospitals in China which was believed to be related to the
use of immune system enhancers in connection with severe acute respiratory
syndrome (SARS). On May 6, 2003, the Company announced that SARS related
export sales to China were expected to increase sales of ZADAXIN to more than
$15 million for the second quarter of 2003. In China, the growing awareness of
the SARS virus and the intense search for methods to treat this disease have
created an unanticipated additional demand for ZADAXIN and many other products.
During the quarter, the Company and its production and other partners have
worked to address this new SARS related demand for ZADAXIN.

We believe it is still too early to predict the magnitude and
sustainability of SARS related ZADAXIN sales on our revenues and cash flow into
the third quarter 2003 and beyond. SARS has emerged very recently and no
conclusive data has yet been reported regarding the effectiveness of any drug
therapy in either its treatment or its prevention, and no data is available

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regarding the use of ZADAXIN in connection with SARS. In China, immune system
enhancers have been recommended by the Chinese Department of Health for use in
the treatment of SARS.

If the impact of these increased sales meets our expectations, we believe
that our current cash position and projected funds from international sales
operations will be sufficient to fund our existing clinical development
programs and currently planned operations through the first quarter of 2006.

Risk Factors

You should carefully consider the risks described below, in addition to
the other information in this report on Form 10-Q, before making an investment
decision. Each of these risk factors could adversely affect our business,
financial condition, and operating results as well as adversely affect the
value of an investment in our common stock.

Our phase 3 clinical trials in the U.S. for the approval of ZADAXIN in
combination with pegylated interferon alpha for the treatment of hepatitis C
may fail, which will harm our business.

Currently, there is no U.S. FDA approved therapy for hepatitis C patients
who have failed to respond to prior therapy with interferon alpha plus
ribavirin or with interferon alpha alone. We designed our phase 3 clinical
trials based on the use of ZADAXIN in combination with pegylated interferon
alpha to address this medical need. There can be no assurances that the results
from our previous hepatitis C studies with ZADAXIN and non-pegylated interferon
alpha which enabled us to produce this design will carryover to the trials
involving a combination of ZADAXIN and pegylated interferon alpha and any
resulting data may be insufficient or inadequate to demonstrate appropriate
efficacy under FDA guidelines. In addition, insufficient data resulting from
the clinical trials would also adversely affect our ability to market and sell
ZADAXIN in markets where it is approved for sale. In 2002 we began enrolling
patients in both of the phase 3 trials in our hepatitis C clinical program in
the U.S.; however, there are trials being conducted by competitors seeking to
enroll similar patients and competition for appropriate patients for these
clinical trials is significant. We may not be able to enroll patients quickly
enough to meet our timing expectations for completing the trial which would
delay the preparation of a new drug application (NDA); or we may not be able to
fully enroll the studies or patient drop out rates could be higher than
anticipated, either of which could weaken the quality of an NDA. Our hepatitis
C clinical trials have been designed to show that the combination of ZADAXIN
and pegylated interferon alpha adds a significant clinical benefit when
compared to the use of pegylated interferon alpha alone in the re-treatment of
hepatitis C patients who have not responded to prior therapy. However, the
independent use of the pegylated form of interferon alpha may perform better
than anticipated which could weaken the quality of an NDA. ZADAXIN has been
used both clinically and commercially in thousands of patients without
producing any reported ZADAXIN related significant side effects or toxicities,
and the pegylated interferon alpha used in the clinical trials has been
approved by the FDA and has documented adverse side effects. Should the
combination therapy of ZADAXIN and pegylated interferon alpha cause significant
new or to a greater degree the same adverse side effects, our clinical trials
could be delayed, patients may drop out at a greater than anticipated rate, we
may be forced to halt the trials, or the FDA may reject an NDA due to safety
issues. If any of the foregoing occurs, our efforts to market and sell ZADAXIN
will be impaired, our business will suffer and the price of our stock may
decline.

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##### Table of Contents



Our expectations regarding an increase in revenue as a result of SARS related
increased demand may not be realized.

While we have already experienced an increase in orders for ZADAXIN as a
result of the increased demand we reported during the second quarter of fiscal
2003, there can be no assurance that revenue will meet our expectations.
Actual revenue, operating profit and cash flow could fall below our
expectations due to a variety of factors, including changes in treatment in
China, changes in the rate of infection, the emergence of evidence as to the
effectiveness or ineffectiveness of ZADAXIN or of other potential treatments
for SARS, inability to meet demand, cancellation of orders or other factors,
including the factors sited elsewhere in these Risk Factors.

Our phase 3 clinical trials in Japan for the approval of ZADAXIN for the
treatment of hepatitis B may fail, which will harm our business.

There is a need for better hepatitis B therapies that improve efficacy and
do not cause side effects. Our phase 3 clinical trial was designed based on
the use of ZADAXIN to address this medical need. There can be no assurances
that the results from our previous hepatitis B studies that enabled this design
will carryover to the trials involving ZADAXIN and any resulting data may be
insufficient or inadequate to demonstrate appropriate efficacy under Japanese
Ministry of Health guidelines. In addition, insufficient data resulting from
the clinical trial would also adversely affect our ability to market and sell
ZADAXIN in markets where it is approved for sale. We may not be able to
compile and analyze trial data quickly enough to meet our timing expectations,
which would delay the preparation of a Japanese new drug application (JNDA).
Our hepatitis B clinical trial was designed to show that ZADAXIN adds a
significant clinical benefit in the treatment of hepatitis B patients.
Although ZADAXIN has been used safely by over 10,000 patients to date, should
ZADAXIN cause significant adverse side effects, our JNDA could be delayed or
the Japanese Ministry of Health may reject our JNDA on safety issues. If any
of the foregoing occurs, our efforts to market and sell ZADAXIN will be
impaired, and our business will suffer and the price of our stock may decline.

We rely on third parties to manufacture our clinical trial product.
Deficiencies in their work could delay or harm our sales or our trials or the
approval process and harm our business.

We manufacture the ZADAXIN used in our phase 3 trials under cGMP
guidelines and under our direct manufacturing and quality control supervision,
using third party cGMP manufacturers and suppliers. If unanticipated
deficiencies in these manufacturers or suppliers occur, this could create a
delay in the assembling of a timely and acceptable NDA. If sales of ZADAXIN
were to increase dramatically, our third party manufacturers may not be able to
manufacture ZADAXIN quickly enough to satisfy demand, which could limit our
ability to satisfy increased demand or could adversely affect the ability of
these manufacturers to manufacture products for our clinical trials. Not all of
the ZADAXIN planned to be used in our hepatitis C clinical trials has been
manufactured and received. Pegylated interferon alpha is being supplied to us
by Roche on an as needed basis. Any delay in receiving or recall of pegylated
interferon alpha or ZADAXIN could delay the clinical trials or detract from the
integrity of the trial data. If any of the foregoing occurs, our efforts to
market and sell ZADAXIN in combination with pegylated interferon alpha will be
impaired, our business will suffer and the price of our stock may decline. We
have been in the process of qualifying new additional
16Table of Contents

manufacturers of ZADAXIN
and if we encounter problems with this process of validation, our sales or our
clinical trials could be adversely affected.

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 cannot 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. We have limited experience in conducting and managing
clinical trials and we rely, in part, on third parties, particularly clinical
research organizations and our development partners, to assist us in managing
and monitoring clinical trials. Our reliance on these third parties may result
in delays in completing, or failure to complete, these clinical trials if third
parties fail to fulfill their obligations to us. 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 in the U.S., Europe and Japan. 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; however, until we obtain
additional resources, substantially all of our resources are focused on the
development of ZADAXIN. Market acceptance of our products will depend on many
factors, including our ability to convince prospective customers and
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. Failure to do so
will hurt our operations.

If we fail to satisfy and comply with governmental regulations or if government
regulations change, our business may 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 govern, among other things, the development,
testing, manufacturing, labeling, storage, pre-market approval, importation,
advertising, promotion, sale and distribution of our products. These
regulations change from time to time and new regulations may be adopted. For
example, in prior years, legislation has been 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
adopted by the FDA, and comparable agencies in state and local jurisdictions
and in foreign countries, may delay or stop approval of our drugs. In
particular, such failure 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. Furthermore, additional government
regulation may be established or imposed by legislation or otherwise, which
could prevent or delay regulatory approval of ZADAXIN or any
17Table of Contents

of our other
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. There is no assurance that ZADAXIN, or any of our other
products, will demonstrate efficacy sufficient to obtain approval by the FDA or
its counterpart regulatory agencies in other indications or countries.

Satisfaction of government regulations may take 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.

If we fail to obtain regulatory approvals for our products in countries where
we have targeted regulatory approval, 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 and our other drug candidates are subject to
extensive regulation by governmental authorities. ZADAXIN and any other
products we may sell in countries outside the U.S. must be approved by the
foreign counterparts of the FDA 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 is uncertain, and
this may delay or prevent the grant of regulatory approvals for ZADAXIN. In
addition, to secure these regulatory approvals, we will need, among other
things, to demonstrate favorable results from additional clinical trials of
ZADAXIN. Even if we are able to complete the clinical trials we have sponsored
or are planning in a timely or cost effective manner, these trials may not
fulfill the applicable regulatory approval criteria, in which case we will not
be able to obtain regulatory approval in these countries. 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. 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 will
limit our revenues.

In addition, adverse results that occur in our clinical trials could
result in restrictions on the use of ZADAXIN, which may also hurt our business.

We will need to obtain additional capital to support our long-term product
development and commercialization programs.

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 and other drug
candidates, particularly in the U.S., Europe and Japan, increase ZADAXIN sales
in existing markets, and launch ZADAXIN in new markets. We cannot assure that
we will ever achieve more significant levels of sales or that we will receive
additional ZADAXIN market approvals.

Our current sales levels of ZADAXIN are not expected to generate all the
funds we anticipate will be needed to support our current plans for product
development including our U.S.

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phase 3 clinical trials for ZADAXIN. We will
need to obtain additional financing to support our 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, curtail or delay our phase 3
clinical trials, 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, any of which may harm our business and
cause our stock price to fall.

The amount of capital we will need will depend on many factors, including:
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; the timing and cost involved in applying for and
obtaining FDA and international regulatory approvals; whether we elect to
establish additional partnering arrangements for development, sales,
manufacturing, and marketing of our products; the level of future ZADAXIN
sales; expense levels for our international sales and marketing efforts; our
ability to establish and maintain strategic arrangements for development,
sales, manufacturing and marketing of our products; competing technological and
market developments; the costs involved in filing, prosecuting and enforcing
patent claims; whether any or all of our outstanding convertible notes are
converted to common stock; and whether any or all of our outstanding common
stock warrants are exercised and the timing and amount of these exercises.

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 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 March 31, 2003, we had an accumulated deficit of approximately
$136,000,000. 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., and we may never achieve profitability. Our failure to achieve
profitability may cause our stock price to decline.

Our revenue is 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 product revenue 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. Substantially all of our ZADAXIN sales are to customers in China. Sales
of ZADAXIN in China may be limited due to its low average personal income, lack
of patient cost reimbursement, poorly developed infrastructure, and existing
and potential competition from other products, including generics. In China
ZADAXIN is sold as an imported finished product. The attractiveness of the
ZADAXIN market has encouraged local companies to introduce lower priced locally
manufactured generic competitive products. As this

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occurs, there could be a
negative impact on the price and the volume of ZADAXIN sold to this country and
this would harm our business.

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, product health registrations and importation permits; unexpected
changes in regulatory requirements; difficulties in staffing and managing
foreign operations; long payment cycles; difficulties in accounts receivable
collection; difficulties in enforcing our proprietary rights; 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, including China, 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, limit the volume of product which may be
imported and sold, or place high import duties on the product, any of which may
limit the growth of our revenues or cause them to decline.

Because of Chinas tiered method of importing and distributing finished
pharmaceutical products, our quarterly results may vary substantially from one
period to the next.

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 typically place relatively few orders within 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 has in the past and may in the
future cause our quarterly results to fluctuate. Because we use a small number
of importing agents in China, our account receivable from any one importing
agent is material and if we were unable to collect receivables from any
importer, our business and cash-flow would be adversely affected, at least in
the short term.

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 for 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. In addition, if we are able to
further expand our sales, marketing and distribution capabilities, we will
begin competing with other companies that have experienced and well funded
operations. If we cannot successfully compete with these larger companies, 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.

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To be successful, our products must be manufactured in commercial
quantities, in compliance with regulatory requirements and at an acceptable
cost. If sales of ZADAXIN increase dramatically, our third party manufacturers
may not be able to manufacture ZADAXIN quickly enough to satisfy demand, which
would harm our ability to capitalize on revenue generating opportunities.
Manufacturing interruptions 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 manufacturing change may require additional
regulatory approvals. If we do not obtain the required regulatory approvals for
a 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 would harm our business.

In addition, 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, either of which could cause delays or pose a
threat to the ultimate commercialization of our products and harm our business.

If we do not obtain rights to additional products from third parties, our
prospects for future revenue may decline.

The clinical development of ZADAXIN is our primary product development
objective; however, if we do not advance the products we have in-licensed 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. Specifically, Sigma-Tau is our
European partner responsible for the development and marketing of ZADAXIN in
Europe. 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, particularly obligations regarding clinical trials, our development
expenses would increase and the development and/or sale of our products could
be limited or delayed, which could hurt our business and cause 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 or other products.

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If we fail to protect our products, technologies and trade secrets, we may not
be able to successfully use, manufacture, market or 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 patents or patent applications may not have priority
over others applications. Our existing patents and additional patents, if any,
that may be issued 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, market or sell our products or maintain our
competitive position with respect to our products. Although many of our patents
relating to ZADAXIN have expired, 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 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 operations 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 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
22Table of Contents

plans. Moreover, we may never realize the anticipated benefits of
any acquisition. Future acquisitions could result in in-process research and
development expenses, potentially dilutive issuances of equity securities, the
incurrence of debt, contingent liabilities and/or amortization or impairment of
goodwill or 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, manufacturing quality assurance,
and patents 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 hepatitis C, hepatitis B, and cancer. Competitors are
currently marketing drugs for hepatitis C, hepatitis B and cancer, 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 in
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. Where comparable products
are marketed by other companies, price is 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 outside of the U.S. as a treatment
for hepatitis C and hepatitis B and certain cancers as our primary source of
product revenue. Several large biopharmaceutical companies have substantial
commitments to interferon alpha, an approved drug for treating hepatitis B and
hepatitis C, and to lamivudine and adefovir, approved drugs 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, cancer, and other
diseases that will be superior to ours.

In the U.S., our product ZADAXIN is being evaluated in combination with
pegylated interferon alpha for the treatment of hepatitis C patients who have
failed to respond to prior therapy with interferon alpha plus ribavirin or with
interferon alpha alone. Other companies are researching, developing, or
marketing other products for use alone or in combination with interferon alphas
or pegylated interferon alphas for clinical indications including HCV and HBV.
Such competitive products include ribavirin, allegedly improved ribavirin
molecules and other products not yet in late stage clinical trials such as
therapeutic vaccines and reverse transcriptase inhibitors. Our clinical trials
may not show ZADAXIN to have advantages over such existing or future
competitive products nor to have clinically significant synergistic value.

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
23Table of Contents

enhancer therapy to fight
cancer and infectious diseases and that this development may create new
competitors. We cannot assure you that we will be able to successfully compete
with any such competitors.

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 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 harm 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
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 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 essentially 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 and cash flows and likely cause our stock price to decline.

The current geopolitical situation in the Middle East and other countries may
cause our business to suffer.

If the current geopolitical conditions in the Middle East and North Korea
worsen resulting global developments would likely result in a decrease of sales
of ZADAXIN. Any decrease in
24Table of Contents

sales of ZADAXIN would harm our operating results,
delay our efforts to achieve profitability, and likely cause our stock price to
decline.

If the current war on terrorism causes economic slowdowns in the economies of
or business disruptions in certain countries our business will suffer.

The United States and its allied nations are aggressively attacking
terrorism with military and economic actions. If these actions lead to economic
slowdowns in the economies of developing countries in Asia, Latin America and
the Middle East from which we currently derive essentially all of our product
revenue, then our sales could decrease. In addition, our commercial product is
manufactured in Europe and distributed by us from our operations in Hong Kong.
Any disruption of our supply and distribution activities due to war or acts of
terrorism could decrease our sales. Any decrease in sales would harm our
operating results, delay our efforts to achieve profitability, and likely cause
our stock price to decline.

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 were 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 be adversely 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 operations and cash flows could be adversely affected.

Future changes in financial accounting standards may cause adverse unexpected
revenue or expense fluctuations, affect our reported or future results of
operations or impact our reported or future financial position.

A change in accounting policies can have a significant effect on our
reported results and may affect our reporting of transactions completed before
the change is effective. New pronouncements and varying interpretations of
pronouncements have occurred with frequency and may occur in the future.
Changes to existing rules or the questioning of current practices may adversely
affect our reported financial results or financial position or the way we
conduct our business. Specifically, legislative and other proposals could
result in changes to accounting rules requiring us to account for employee
stock options issued at market value as an expense. These

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and other potential
changes could materially increase the expenses we report under generally
accepted accounting principles, and adversely affect our operating results.

Compliance with legislative actions and changing regulations related to
corporate governance and public disclosure may result in additional expenses
including higher insurance costs.

Changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC
regulations and Nasdaq Stock Market rules, are creating increased requirements
for companies such as ours and there may be additional regulatory rulings and
changes. We are committed to maintaining high standards of corporate governance
and public disclosure. As a result, we intend to invest all reasonably
necessary resources to comply with evolving standards, and this investment may
result in increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities to compliance
activities. In addition, insurers have increased rates as a result of higher
claims rates over the past year and may increase rates in future years. Our
rates for our various insurance policies have increased significantly and may
increase further in future years.

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.

The price of our common stock has experienced substantial volatility and may
fluctuate due to factors beyond our control.

U.S. and global economies have weakened due to the effects and
uncertainties caused by the events of September 2001 which may result in a
decrease in our revenues and cause our stock price to decline. Further, high
profile corporate governance and accounting problems and resulting corporate
failures have eroded investor confidence. In the wake of these events, U.S. and
global capital markets have experienced a period of extreme volatility, and
this may continue for some time.

In addition, 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
26Table of Contents

policies for our products;
and fluctuations in our operating results. We cannot assure you that the price
of our common stock will remain at or exceed current levels.

Our indebtedness may result in future liquidity problems.

As of March 31, 2003, we had $5,600,000 in convertible notes payable,
$4,000,000 of which were issued in the quarter ended December 31, 2000 and
$1,600,000 in the quarter ended March 31, 2001. This indebtedness, or
additional debt we may incur to fund our operations, may make it more difficult
for us to obtain additional financing. The outstanding 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 March 31, 2003 we had cash, cash equivalents and
short-term investments of $17,585,000.

Substantial sales of our stock or convertible securities may impact the market
price of our common stock.

As of March 31, 2003, stock options for 5,036,760 shares of common stock
were outstanding, of which options for 3,752,793 shares were exercisable. Also
outstanding as of the same date were warrants exercisable for 1,570,500 shares
of common stock at prices ranging from $2.25 to $7.00 per share and two issues
of notes convertible into a total of 684,140 shares of common stock. In
addition, the note holder has 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 684,140
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.

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
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
of a liquidation  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.

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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 U.S. government and agency obligations. Our investments in U.S.
government and agency obligations are subject to interest rate risk. To
minimize the exposure due to an adverse shift in 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 $92,518 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 position at March 31, 2003. Actual results may
differ materially.




Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to management,
including the Chief Executive Officer and the Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.

Our Chief Executive Officer and the Chief Financial Officer, with the
assistance of other members of our management, have evaluated our disclosure
controls and procedures as defined in Rule 13a-14(c) under the Securities
Exchange Act of 1934, within 90 days of the filing date of this report, and
have concluded based on that evaluation that those disclosure controls and
procedures are effective. Since the date of that evaluation, there have been
no significant changes (including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls or in other
factors that could significantly affect those controls.

28



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##### Table of Contents






PART II. OTHER INFORMATION




Item 2. Changes in Securities and Use of Proceeds

(c) Recent Sales of Equity Securities

On January 21, 2003, the Company completed a direct placement to Defiante
Farmaceutica L.d.A. and Aptafin S.p.A., affiliates of Sigma-Tau, in reliance
upon Regulation D of the Securities Act of 1933, as amended. The affiliates
purchased 504,938 shares of SciClones common stock at $3.5648 per share for an
aggregate purchase price of $1,800,000. The shares issued were restricted
securities and Sigma-Tau and its affiliates are not permitted to sell any of
the shares purchased in this private placement until January 24, 2004. Prior
to this transaction, 400,000 warrants held by Sigma-Tau to purchase shares of
SciClones common stock were cancelled.




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

|               |  |                                                                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                   
|               |  |                                                                                                                                               
|3(i).1(1)      |  | Restated Articles of Incorporation.                                                                                                           
|               |  |                                                                                                                                               
|3(i).2(2)      |  | Certificate of Amendment of Restated Articles of Incorporation.                                                                               
|               |  |                                                                                                                                               
|3(i).3(3)      |  | Certificate of Determination.                                                                                                                 
|               |  |                                                                                                                                               
|3(i).4(4)      |  | Certificate of Determination Regarding the terms of the Series C
Preferred Stock.                                                             
|               |  |                                                                                                                                               
|3(ii).1(1)     |  | Bylaws.                                                                                                                                       
|               |  |                                                                                                                                               
|3(ii).2(2)     |  | Certificate of Amendment of Bylaws.                                                                                                           
|               |  |                                                                                                                                               
|4.1(3)         |  | Rights Agreement dated as of July 25, 1997 between the Registrant and
Chase Mellon Shareholder Services, L.L.C.                               
|               |  |                                                                                                                                               
|4.2(5)*        |  | 6% Convertible Note dated as of December 7, 2000 by the Registrant in
favor of UBS AG, London Branch.                                         
|               |  |                                                                                                                                               
|4.3(5)*        |  | Option Agreement dated as of October 26, 2000 by and between the
Registrant and UBS AG, London Branch.                                        
|               |  |                                                                                                                                               
|4.4(5)*        |  | Amendment No. 1 to Option Agreement dated as of December 19, 2000 by
and between the Registrant and UBS AG, London Branch.                    
|               |  |                                                                                                                                               
|4.5(6)*        |  | 6% Convertible Note dated as of March 21, 2001 by the Company in favor
of UBS AG, London Branch.                                              
|               |  |                                                                                                                                               
|4.6(6)*        |  | Option Agreement dated as of February 16, 2001 by and between the
Company and UBS AG, London Branch.                                          
|               |  |                                                                                                                                               
|4.7(6)*        |  | Amendment No. 1 to Option Agreement dated as of March 21, 2001 by and
between the Company and UBS AG, London Branch.                          
|               |  |                                                                                                                                               
|10.1(7)        |  | Common Stock Purchase Agreement between the Company and each of
Defiante Farmaceutica L.d.A. and Aptafin S.p.A., dated as of Janaury 21,
2003.

29



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##### Table of Contents



|               |  |                                          
|-------------- |  | -----------------------------------------
|Exhibit Number |  | Description                              
|               |  |                                          
|99.1(8)        |  | Certification of Chief Executive Officer.
|              
|99.2(8)        |  | Certification of Chief Financial Officer.

*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(b)(4), 200.83 and 230.46.



|(1) |  | Incorporated by reference from the Companys Registration Statement on
Form S-l (No. 33-45446), declared effective by the Commission on March 17,
1992.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | 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) |  | Incorporated by reference from the Companys current Report on Form 8-K
filed on October 14, 1997.                                                     
|   
|(4) |  | Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 1997.                                          
|   
|(5) |  | Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 2000.                                          
|   
|(6) |  | Incorporated by reference from the Companys Quarterly Report on Form
10-Q on May 15, 2001.                                                            
|   
|(7) |  | Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 2002.                                          
|   
|(8) |  | Filed herewith.                                                                                                                                        
|   
|(b) |  | Reports on Form 8-K                                                                                                                                    
|   
|    |  | None.                                                                                                                                                  

30



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##### Table of Contents






SIGNATURES

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

SCICLONE
PHARMACEUTICALS, INC.(Registrant)


|      |  |             |  |                                           
|----- |  | ----------- |  | ------------------------------------------
|Date: |  | May 9, 2003 |  | /s/ Richard A. Waldron                    
|      |  |             |  |                                           
|      |  |             |  | Richard A. Waldron                        
|      |  |             |  | Chief Financial Officer                   
|      |  |             |  | (Principal Financial & Accounting Officer)

31



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##### Table of Contents






|                                        
|----------------------------------------
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Donald R. Sellers, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of SciClone
Pharmaceuticals, Inc. (the registrant);

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |             |  |                        
|----- |  | ----------- |  | -----------------------
|Date: |  | May 9, 2003 |  | /s/ Donald R. Sellers  
|      |  |             |  |                        
|      |  |             |  | Donald R. Sellers      
|      |  |             |  | Chief Executive Officer

32



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##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Richard A. Waldron, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of SciClone
Pharmaceuticals, Inc. (the registrant);

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |             |  |                                           
|----- |  | ----------- |  | ------------------------------------------
|Date: |  | May 9, 2003 |  | /s/ Richard A. Waldron                    
|      |  |             |  |                                           
|      |  |             |  | Richard A. Waldron                        
|      |  |             |  | Chief Financial Officer                   
|      |  |             |  | (Principal Financial & Accounting Officer)

33



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##### Table of Contents



INDEX TO EXHIBITS

|           |  |                                                                                                                                               |  |              |  | 
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | 
|           |  |                                                                                                                                               |  | Sequentially
|Exhibit    |  |                                                                                                                                               |  | Numbered    
|Number     |  | Exhibit                                                                                                                                       |  | Page        
|           |  |                                                                                                                                               |  |             
|3(i).1(1)  |  | Restated Articles of Incorporation                                                                                                            | 
|           |  |                                                                                                                                               | 
|3(i).2(2)  |  | Certificate of Amendment of Restated Articles of Incorporation                                                                                | 
|           |  |                                                                                                                                               | 
|3(i).3(3)  |  | Certificate of Determination                                                                                                                  | 
|           |  |                                                                                                                                               | 
|3(i).4(4)  |  | Certificate of Determination Regarding the terms of the
Series C Preferred Stock                                                              | 
|           |  |                                                                                                                                               | 
|3(ii).1(1) |  | Bylaws                                                                                                                                        | 
|           |  |                                                                                                                                               | 
|3(ii).2(2) |  | Certificate of Amendment of Bylaws                                                                                                            | 
|           |  |                                                                                                                                               | 
|4.1(3)     |  | Rights Agreement dated as of July 25, 1997 between the
Registrant and Chase Mellon Shareholder Services, L.L.C.                               | 
|           |  |                                                                                                                                               | 
|4.2(5)*    |  | 6% Convertible Note dated as of December 7, 2000 by the
Registrant in favor of UBS AG, London Branch                                          | 
|           |  |                                                                                                                                               | 
|4.3(5)*    |  | Option Agreement dated as of October 26, 2000 by and between
the Registrant and UBS AG, London Branch                                         | 
|           |  |                                                                                                                                               | 
|4.4(5)*    |  | Amendment No. 1 to Option Agreement dated as of December 19,
2000 by and between the Registrant and UBS AG, London Branch                     | 
|           |  |                                                                                                                                               | 
|4.5(6)*    |  | 6% Convertible Note dated as of March 21, 2001 by the Company
in favor of UBS AG, London Branch                                               | 
|           |  |                                                                                                                                               | 
|4.6(6)*    |  | Option Agreement dated as of February 16, 2001 by and between
the Company and UBS AG, London Branch                                           | 
|           |  |                                                                                                                                               | 
|4.7(6)*    |  | Amendment No. 1 to Option Agreement dated as of March 21,
2001 by and between the Company and UBS AG, London Branch                           | 
|           |  |                                                                                                                                               | 
|10.1(7)    |  | Common Stock Purchase Agreement between the Company and each
of Defiante Farmaceutica Ld.A. and Aptafin S.p.A., dated as
of January 21, 2003. | 
|           |  |                                                                                                                                               | 
|99.1(8)    |  | Certification of Chief Executive Officer                                                                                                      | 
|           |  |                                                                                                                                               | 
|99.2(8)    |  | Certification of Chief Financial Officer                                                                                                      | 

*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(b)(4), 200.83 and 230.46.



|(1) |  | Incorporated by reference from the Companys Registration Statement on
Form S-l (No. 33-45446), declared effective by the Commission on March 17,
1992.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | 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) |  | Incorporated by reference from the Companys current Report on Form 8-K
filed on October 14, 1997.                                                     
|   
|(4) |  | Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 1997.                                          

34



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##### Table of Contents



|(5) |  | Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------
|   
|(6) |  | Incorporated by reference from the Companys Quarterly Report on Form
10-Q on May 15, 2001.                  
|   
|(7) |  | Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 2002.
|   
|(8) |  | Filed herewith.                                                                                              

35