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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 September 30, 2008

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)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3116852                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer Identification no.)
|                                                               | 
|950 Tower Lane, Suite 900, Foster City, 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ̈        Accelerated filer  x        Non-accelerated filer   ̈        Smaller Reporting Company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).

Yes   ̈    No  x

As of November 4, 2008, 46,219,562 shares of the registrants Common Stock, $0.001 par value, were issued and outstanding.









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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 September 30, 2008 and December 31, 2007                                   |  | 3       
|          |  |                                                                                                                       
|          |  | Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2008 and
2007 |  | 4       
|          |  |                                                                                                                       
|          |  | Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2008 and
2007           |  | 5       
|          |  |                                                                                                                       
|          |  | Notes to Condensed Consolidated Financial Statements                                                                   |  | 6       
|          |  |                                                                                                                       
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 16      
|          |  |                                                                                                                       
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                             |  | 34      
|          |  |                                                                                                                       
|Item 4.   |  | Controls and Procedures                                                                                                |  | 34      
|          |  |                                                                                                                       
|PART II.  |  | OTHER INFORMATION                                                                                                      |  |         
|          |  |                                                                                                                       
|Item 1.   |  | Legal Proceedings                                                                                                      |  | 35      
|          |  |                                                                                                                       
|Item 1A.  |  | Risk Factors                                                                                                           |  | 35      
|          |  |                                                                                                                       
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                            |  | 39      
|          |  |                                                                                                                       
|Item 3.   |  | Defaults Upon Senior Securities                                                                                        |  | 39      
|          |  |                                                                                                                       
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                    |  | 39      
|          |  |                                                                                                                       
|Item 5.   |  | Other Information                                                                                                      |  | 39      
|          |  |                                                                                                                       
|Item 6.   |  | Exhibits                                                                                                               |  | 39      
|          |  |                                                                                                                       
|Signature |  |                                                                                                                        |  | 40      



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FINANCIAL INFORMATION

PART I.



|Item 1. | Condensed Consolidated Financial Statements
|------- | -------------------------------------------

SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                |  |                   |              |   |                  |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                                                                |  | September 30,2008 |              |   | December 31,2007 |  
|                                                                                                                                                                                |  | (unaudited)       |              |   |                  |  
|ASSETS                                                                                                                                                                          |  |                   |              |   |                  |   |              |  
|Current assets:                                                                                                                                                                 |  |                   |              |   |                  |   |              |  
|Cash and cash equivalents                                                                                                                                                       |  | $                 | 24,162,000   |   |                  | $ | 31,817,000   |  
|Restricted short-term investment                                                                                                                                                |  |                   | 70,000       |   |                  |   | 72,000       |  
|Other short-term investments                                                                                                                                                    |  |                   | 146,000      |   |                  |   | 3,392,000    |  
|Accounts receivable, net of allowance of $0 at September 30, 2008 and $15,000 at December 31, 2007                                                                              |  |                   | 17,826,000   |   |                  |   | 12,650,000   |  
|Inventories                                                                                                                                                                     |  |                   | 5,961,000    |   |                  |   | 5,579,000    |  
|Prepaid expenses and other current assets                                                                                                                                       |  |                   | 2,648,000    |   |                  |   | 2,949,000    |  
|                                                                                                                                                                                |  |                   |              |   |                  |   |              |  
|Total current assets                                                                                                                                                            |  |                   | 50,813,000   |   |                  |   | 56,459,000   |  
|Property and equipment, net                                                                                                                                                     |  |                   | 684,000      |   |                  |   | 774,000      |  
|Intangible assets, net                                                                                                                                                          |  |                   | 280,000      |   |                  |   | 332,000      |  
|Restricted long-term investment                                                                                                                                                 |  |                   | 405,000      |   |                  |   |             |  
|Long-term investments                                                                                                                                                           |  |                   | 1,629,000    |   |                  |   |             |  
|Other assets                                                                                                                                                                    |  |                   | 462,000      |   |                  |   | 1,094,000    |  
|                                                                                                                                                                                |  |                   |              |   |                  |   |              |  
|Total assets                                                                                                                                                                    |  | $                 | 54,273,000   |   |                  | $ | 58,659,000   |  
|                                                                                                                                                                                |  |                   |              |   |                  |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                            |  |                   |              |   |                  |   |              |  
|Current liabilities:                                                                                                                                                            |  |                   |              |   |                  |   |              |  
|Accounts payable                                                                                                                                                                |  | $                 | 2,738,000    |   |                  | $ | 1,937,000    |  
|Accrued compensation and employee benefits                                                                                                                                      |  |                   | 2,021,000    |   |                  |   | 1,758,000    |  
|Accrued professional fees                                                                                                                                                       |  |                   | 940,000      |   |                  |   | 699,000      |  
|Other accrued expenses                                                                                                                                                          |  |                   | 1,957,000    |   |                  |   | 3,394,000    |  
|Accrued clinical trials expense                                                                                                                                                 |  |                   | 401,000      |   |                  |   | 1,614,000    |  
|Accrued clinical trials expense due to related party                                                                                                                            |  |                   | 1,385,000    |   |                  |   | 1,620,000    |  
|Deferred revenue                                                                                                                                                                |  |                   | 770,000      |   |                  |   | 37,000       |  
|                                                                                                                                                                                |  |                   |              |   |                  |   |              |  
|Total current liabilities                                                                                                                                                       |  |                   | 10,212,000   |   |                  |   | 11,059,000   |  
|Long-term liabilities                                                                                                                                                           |  |                   | 613,000      |   |                  |   | 341,000      |  
|Commitments and contingencies (see Note 13)                                                                                                                                     |  |                   |              |   |                  |   |              |  
|Stockholders equity:                                                                                                                                                           |  |                   |              |   |                  |   |              |  
|Preferred stock; $0.001 par value; 10,000,000 shares authorized; no shares outstanding                                                                                          |  |                   |             |   |                  |   |             |  
|Common stock; $0.001 par value; 75,000,000 shares authorized; 46,219,562 and 46,121,562 shares issued and outstanding at September 30, 2008
and December 31, 2007, respectively |  |                   | 46,000       |   |                  |   | 46,000       |  
|Additional paid-in capital                                                                                                                                                      |  |                   | 217,232,000  |   |                  |   | 215,633,000  |  
|Accumulated other comprehensive (loss) income                                                                                                                                   |  |                   | (123,000     | ) |                  |   | 82,000       |  
|Accumulated deficit                                                                                                                                                             |  |                   | (173,707,000 | ) |                  |   | (168,502,000 | )
|                                                                                                                                                                                |  |                   |              |   |                  |   |              |  
|Total stockholders equity                                                                                                                                                      |  |                   | 43,448,000   |   |                  |   | 47,259,000   |  
|                                                                                                                                                                                |  |                   |              |   |                  |   |              |  
|Total liabilities and stockholders equity                                                                                                                                      |  | $                 | 54,273,000   |   |                  | $ | 58,659,000   |  
|                                                                                                                                                                                |  |                   |              |   |                  |   |              |  

See notes to condensed consolidated financial statements.



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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)



|                                              |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                              |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                              |  | 2008                            |            |   | 2007                           |   |            | 2008 |  |   | 2007       |  
|Product sales                                 |  | $                               | 14,328,000 |   |                                | $ | 9,421,000  |      |  | $ | 38,796,000 |   |  | $ | 27,020,000 |  
|Contract revenue                              |  |                                 |           |   |                                |   | 20,000     |      |  |   |           |   |  |   | 20,000     |  
|                                              |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total revenues                                |  |                                 | 14,328,000 |   |                                |   | 9,441,000  |      |  |   | 38,796,000 |   |  |   | 27,040,000 |  
|Cost of product sales                         |  |                                 | 2,286,000  |   |                                |   | 1,663,000  |      |  |   | 6,764,000  |   |  |   | 4,978,000  |  
|                                              |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Gross margin                                  |  |                                 | 12,042,000 |   |                                |   | 7,778,000  |      |  |   | 32,032,000 |   |  |   | 22,062,000 |  
|                                              |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses:                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Research and development                      |  |                                 | 4,637,000  |   |                                |   | 4,666,000  |      |  |   | 16,525,000 |   |  |   | 11,548,000 |  
|Related party research and development        |  |                                 | 69,000     |   |                                |   | 127,000    |      |  |   | 265,000    |   |  |   | 380,000    |  
|Sales and marketing                           |  |                                 | 4,188,000  |   |                                |   | 3,805,000  |      |  |   | 12,328,000 |   |  |   | 9,968,000  |  
|General and administrative                    |  |                                 | 2,405,000  |   |                                |   | 2,594,000  |      |  |   | 8,286,000  |   |  |   | 7,648,000  |  
|                                              |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                      |  |                                 | 11,299,000 |   |                                |   | 11,192,000 |      |  |   | 37,404,000 |   |  |   | 29,544,000 |  
|                                              |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) from operations                 |  |                                 | 743,000    |   |                                |   | (3,414,000 | )    |  |   | (5,372,000 | ) |  |   | (7,482,000 | )
|Interest and investment income                |  |                                 | 116,000    |   |                                |   | 408,000    |      |  |   | 501,000    |   |  |   | 1,280,000  |  
|Interest and investment expense               |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   | (20,000    | )
|Other (expense) income, net                   |  |                                 | (47,000    | ) |                                |   | (8,000     | )    |  |   | 7,000      |   |  |   | (24,000    | )
|                                              |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before provision for income tax |  |                                 | 812,000    |   |                                |   | (3,014,000 | )    |  |   | (4,864,000 | ) |  |   | (6,246,000 | )
|Provision for income tax                      |  |                                 | 39,000     |   |                                |   | 41,000     |      |  |   | 341,000    |   |  |   | 90,000     |  
|                                              |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                             |  | $                               | 773,000    |   |                                | $ | (3,055,000 | )    |  | $ | (5,205,000 | ) |  | $ | (6,336,000 | )
|                                              |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net income (loss) per share |  | $                               | 0.02       |   |                                | $ | (0.07      | )    |  | $ | (0.11      | ) |  | $ | (0.14      | )
|Weighted average shares used in computing:    |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic net income (loss) per share             |  |                                 | 46,219,562 |   |                                |   | 46,114,562 |      |  |   | 46,209,759 |   |  |   | 46,094,152 |  
|Diluted net income (loss) per share           |  |                                 | 46,232,364 |   |                                |   | 46,114,562 |      |  |   | 46,209,759 |   |  |   | 46,094,152 |  

See notes to condensed consolidated financial statements.



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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                            |  |                                |            |   |      |   |            |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                            |  | Nine Months EndedSeptember 30, |           
|                                                                            |  | 2008                           |            |   | 2007 |  
|Operating activities:                                                       |  |                                |            |   |      |   |            |  
|Net loss                                                                    |  | $                              | (5,205,000 | ) |      | $ | (6,336,000 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |            |   |      |   |            |  
|Non-cash expense related to employee stock options                          |  |                                | 1,414,000  |   |      |   | 1,712,000  |  
|Amortization of interest on investments held to maturity                    |  |                                |           |   |      |   | 48,000     |  
|Depreciation and amortization                                               |  |                                | 243,000    |   |      |   | 176,000    |  
|Changes in operating assets and liabilities:                                |  |                                |            |   |      |   |            |  
|Accounts receivable, net                                                    |  |                                | (5,176,000 | ) |      |   | (442,000   | )
|Inventories                                                                 |  |                                | (346,000   | ) |      |   | (883,000   | )
|Prepaid expenses and other assets                                           |  |                                | 933,000    |   |      |   | (50,000    | )
|Accounts payable and other accrued expenses                                 |  |                                | (636,000   | ) |      |   | 1,005,000  |  
|Accrued compensation and employee benefits                                  |  |                                | 263,000    |   |      |   | (327,000   | )
|Accrued clinical trials expenses                                            |  |                                | (1,213,000 | ) |      |   | 463,000    |  
|Accrued clinical trials expense due to related party                        |  |                                | (235,000   | ) |      |   | (106,000   | )
|Accrued professional fees                                                   |  |                                | 241,000    |   |      |   | 217,000    |  
|Deferred revenue                                                            |  |                                | 733,000    |   |      |   | (62,000    | )
|Long-term liabilities                                                       |  |                                | 272,000    |   |      |   | 96,000     |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net cash used in operating activities                                       |  |                                | (8,712,000 | ) |      |   | (4,489,000 | )
|                                                                            |  |                                |            |   |      |   |            |  
|Investing activities:                                                       |  |                                |            |   |      |   |            |  
|Purchases of property and equipment                                         |  |                                | (103,000   | ) |      |   | (391,000   | )
|Proceeds from sales and maturities of short-term investments                |  |                                | 2,293,000  |   |      |   | 18,810,000 |  
|Purchases of short-term investments                                         |  |                                | (900,000   | ) |      |   | (8,881,000 | )
|Purchase of restricted long-term investment                                 |  |                                | (448,000   | ) |      |   |           |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net cash provided by investing activities                                   |  |                                | 842,000    |   |      |   | 9,538,000  |  
|                                                                            |  |                                |            |   |      |   |            |  
|Financing activities:                                                       |  |                                |            |   |      |   |            |  
|Proceeds from issuances of common stock, net                                |  |                                | 149,000    |   |      |   | 225,000    |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net cash provided by financing activities                                   |  |                                | 149,000    |   |      |   | 225,000    |  
|                                                                            |  |                                |            |   |      |   |            |  
|Effect of exchange rate changes on cash and cash equivalents                |  |                                | 66,000     |   |      |   | 17,000     |  
|                                                                            |  |                                |            |   |      |   |            |  
|Net (decrease) increase in cash and cash equivalents                        |  |                                | (7,655,000 | ) |      |   | 5,291,000  |  
|Cash and cash equivalents, beginning of period                              |  |                                | 31,817,000 |   |      |   | 25,615,000 |  
|                                                                            |  |                                |            |   |      |   |            |  
|Cash and cash equivalents, end of period                                    |  | $                              | 24,162,000 |   |      | $ | 30,906,000 |  
|                                                                            |  |                                |            |   |      |   |            |  
|Supplemental disclosures of cash flow information:                          |  |                                |            |   |      |   |            |  
|Income taxes paid related to foreign operations                             |  | $                              | 380,000    |   |      | $ | 51,000     |  

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 of SciClone Pharmaceuticals, Inc. (SciClone or the Company) have been prepared in conformity with generally accepted accounting principles in the United States
(GAAP) consistent with those applied in, and should be read in conjunction with, the audited financial statements for the year ended December 31, 2007 included in the Companys Form 10-K as filed with the Securities and
Exchange Commission. The interim financial information reflects all adjustments, consisting only of 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, 2007 is derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. Material intercompany accounts and transactions have been eliminated.

Reclassification

The Company
reclassified $400,000 from net cash used in investing activities related to the purchase of restricted long-term investment to cash and cash equivalents, end of period in its condensed consolidated statement of cash flows for the nine months ended
September 30, 2007 to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts
reported in our Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ materially from those estimates.

Significant Accounting Policies

Revenue Recognition

The Company recognizes revenue from product sales at the time of delivery. There are no significant customer acceptance requirements or post shipment
obligations on the part of the Company, except for sales to a new market where acceptance requirements have to be met. 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 is expected to replace products that have expired or are deemed to be damaged or defective when delivered. The Company estimates
expected returns primarily on historical patterns. Historically, the Company has had no product returns of damaged, defective or expired product. As such, no amount was accrued for product returns as of September 30, 2008 or December 31,
2007 in the condensed consolidated balance sheets. Payments by the importing agents and distributors are not contingent upon sale to the end user by the importing agents or distributors.

Amounts invoiced relating to arrangements where revenue cannot be recognized are reflected on the Companys balance sheet as deferred revenue and
recognized as the applicable revenue recognition criteria are satisfied.

The Company has recorded $770,000 in deferred revenue and $128,000
in associated costs of sales in prepaid expenses and other current assets in the accompanying September 30, 2008 balance sheet related to initial sales into a new market. The Company will recognize the deferred revenue and costs of sales
related to the sales upon receipt of full payment from the customer.

Net Income (Loss) Per Share

Basic net income (loss) per share has been computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding for
the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common equivalent shares outstanding for the period. Diluted net income (loss) per share includes any dilutive impact from
stock options outstanding using the treasury stock method.



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The following is a reconciliation of the numerator and denominators of the basic and diluted net income
(loss) per share computations:



|                                                                                                                   |  |                                 |            |      |                                |   |      |             |   |      |             |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ---------- | ---- | ------------------------------ | - | ---- | ----------- | - | ---- | ----------- | -
|                                                                                                                   |  | Three Months EndedSeptember 30, |            |      | Nine Months EndedSeptember 30, |  
|                                                                                                                   |  | 2008                            |            | 2007 |                                |   | 2008 |             |   | 2007 |            
|Numerator:                                                                                                         |  |                                 |            |      |                                |   |      |             |   |      |             |  
|Net income (loss)                                                                                                  |  | $                               | 773,000    |      | ($3,055,000                    | ) |      | ($5,205,000 | ) |      | ($6,336,000 | )
|Denominator:                                                                                                       |  |                                 |            |      |                                |   |      |             |   |      |             |  
|Weighted-average shares outstanding used to compute basic income (loss) per share                                  |  |                                 | 46,219,562 |      | 46,114,562                     |   |      | 46,209,759  |   |      | 46,094,152  |  
|Effect of dilutive stock options                                                                                   |  |                                 | 12,802     |      |                               |   |      |            |   |      |            |  
|                                                                                                                   |  |                                 |            |      |                                |   |      |             |   |      |             |  
|Weighted-average shares outstanding and dilutive stock options used to compute diluted net income (loss) per share |  |                                 | 46,232,364 |      | 46,114,562                     |   |      | 46,209,759  |   |      | 46,094,152  |  
|Basic and diluted net income (loss) per share                                                                      |  | $                               | 0.02       |      | ($0.07                         | ) |      | ($0.11      | ) |      | ($0.14      | )

For the three months ended September 30, 2008 and 2007, 8,178,605 and 7,402,281 shares,
respectively, attributable to outstanding stock options were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive. For the nine months ended September 30, 2008 and 2007,
7,880,302 and 7,339,532 shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted net loss per share because their inclusion would have been anti-dilutive.

Recent Accounting Pronouncements

Adopted January 1, 2008

Effective January 1, 2008, the Company adopted Emerging Issues Task Force
(EITF) Issue No. 07-3 Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development activities (EITF 07-3). EITF 07-3 requires that nonrefundable
advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. The
adoption did not have a material impact on the Companys consolidated results of operations or financial condition.

The Company
adopted the provisions of the Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements (SFAS No. 157), effective January 1, 2008. In February 2008, the FASB issued FASB
Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually. Therefore, the Company deferred adoption of SFAS 157 as it relates to its non financial assets and liabilities. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must
maximize the use of observable inputs and minimize the use of unobservable inputs.

The standard describes a fair value hierarchy based on
three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The Companys assessment of the significance of a particular input to the fair value measurements
requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. The three levels of input are:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.



7



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Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on the Companys
consolidated results of operations and financial condition.

Effective January 1, 2008, the Company adopted SFAS No. 159 The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and
liabilities on a contract-by-contract basis. The Company did not elect to adopt the fair value option for any financial assets or liabilities under this Statement.

Not Yet Adopted

In December 2007, EITF Issue No. 07-1 Accounting for Collaborative
Arrangements (EITF 07-1) was issued. EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement within the scope of this Issue; how costs incurred and revenue generated on
sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement.
EITF 07-1 is effective as of the beginning of an entitys fiscal year that begins after December 15, 2008, which will be the Companys fiscal year beginning January 1, 2009. The Company is in the process of evaluating the impact,
if any, of adopting EITF 07-1 on its financial statements.



|2. | Cash, Cash Equivalents and Investments
|-- | --------------------------------------

The
following is a summary of cash, cash equivalents, and available-for-sale securities at September 30, 2008 and December 31, 2007:



|                                               |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|---------------------------------------------- |  | ------------------ | ---------- | --------------- | - | ---------------- |  | - | ------------------- | - |  | - | ----------
|                                               |  | September 30, 2008
|                                               |  | AmortizedCost      |            | UnrealizedGains |   | UnrealizedLosses |  |   | EstimatedFair Value
|Cash and cash equivalents:                     |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|Cash                                           |  | $                  | 4,283,000  |                 | $ |                 |  | $ |                    |   |  | $ | 4,283,000 
|Money market funds                             |  |                    | 2,719,000  |                 |   |                 |  |   |                    |   |  |   | 2,719,000 
|U.S. term deposits                             |  |                    | 17,160,000 |                 |   |                 |  |   |                    |   |  |   | 17,160,000
|                                               |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|Total cash and cash equivalents                |  | $                  | 24,162,000 |                 | $ |                 |  | $ |                    |   |  | $ | 24,162,000
|                                               |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|Available-for-sale investments:                |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|Certificates of deposit maturing within 1 year |  | $                  | 120,000    |                 | $ |                 |  | $ |                    |   |  | $ | 120,000   
|Corporate equity securities                    |  |                    | 51,000     |                 |   | 45,000           |  |   |                    |   |  |   | 96,000    
|Restricted long-term Italian state bonds       |  |                    | 448,000    |                 |   |                 |  |   | (43,000             | ) |  |   | 405,000   
|Long-term auction rate securities              |  |                    | 1,800,000  |                 |   |                 |  |   | (171,000            | ) |  |   | 1,629,000 
|                                               |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|Total available-for-sale investments           |  | $                  | 2,419,000  |                 | $ | 45,000           |  | $ | (214,000            | ) |  | $ | 2,250,000 
|                                               |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|                                               | 
|                                               |  | December 31, 2007 
|                                               |  | AmortizedCost      |            | UnrealizedGains |   | UnrealizedLosses |  |   | EstimatedFair Value
|Cash and cash equivalents:                     |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|Cash                                           |  | $                  | 10,814,000 |                 | $ |                 |  | $ |                    |   |  | $ | 10,814,000
|Money market funds                             |  |                    | 1,574,000  |                 |   |                 |  |   |                    |   |  |   | 1,574,000 
|U.S. term deposits                             |  |                    | 19,429,000 |                 |   |                 |  |   |                    |   |  |   | 19,429,000
|                                               |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|Total cash and cash equivalents                |  | $                  | 31,817,000 |                 | $ |                 |  | $ |                    |   |  | $ | 31,817,000
|                                               |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|Available-for-sale investments:                |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|Certificates of deposit maturing within 1 year |  | $                  | 488,000    |                 | $ |                 |  | $ |                    |   |  | $ | 488,000   
|Corporate equity securities                    |  |                    | 51,000     |                 |   | 100,000          |  |   |                    |   |  |   | 151,000   
|Short-term auction rate securities             |  |                    | 2,825,000  |                 |   |                 |  |   |                    |   |  |   | 2,825,000 
|                                               |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           
|Total available-for-sale investments           |  | $                  | 3,364,000  |                 | $ | 100,000          |  | $ |                    |   |  | $ | 3,464,000 
|                                               |  |                    |            |                 |   |                  |  |   |                     |   |  |   |           



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As of September 30, 2008, there was $70,000 in restricted short-term investment, $146,000 in other
short-term investments, $405,000 in restricted long-term investment, and $1,629,000 in long-term investments held in available-for-sale securities. As of December 31, 2007, there was $72,000 in restricted short-term investment and $3,392,000 in
other short-term investments held in available-for-sale securities.

As of September 30, 2008, we held approximately $1,629,000 of
auction rate securities (ARS). The ARS are investments with contractual maturities generally between 0 and 34 years whose underlying assets are student loans which are substantially backed by the federal government with interest rates
resetting approximately every 30 days through an auction process. At the end of each reset period, investors may sell or continue to hold the securities at par. All of the Companys ARS are rated by one or more of the major independent rating
agencies as either AAA or Aaa.

Historically, the Companys ARS were highly liquid, using a Dutch auction process that
reset the applicable interest rate at predetermined intervals, typically every 30 days, which in turn provided liquidity at par value. However, as a result of liquidity issues in the global credit and capital markets, the auctions for all of the
Companys ARS failed beginning in February 2008 when sell orders exceeded buy orders. The failures of these auctions do not affect the value of the collateral underlying the ARS, and the Company continues to earn interest on its ARS. Because of
the failure of auctions, the Company will not be able to liquidate its ARS until the issuer calls the security, a successful auction occurs, a buyer is found outside of the auction process or the security matures. Based on this, the Company
classified the ARS as long term assets on its condensed consolidated balance sheet as of September 30, 2008.

The ARS were recorded at
fair value as of September 30, 2008 of $1,629,000 which reflects a temporary impairment on these investments of $171,000 recorded as an unrealized loss. The Company estimates the fair value of these investments to be $1,629,000 based on a
discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, estimates for discount rates using yields of comparable traded instruments adjusted for illiquidity and other risk
factors, amount of cash flows and expected holding periods of the ARS. These inputs reflect the Companys own assumptions about the assumptions market participants would use in pricing the ARS, including assumptions about risk, developed based
on the best information available in the circumstances.

In October 2008, the Company received an Auction Rate Securities Rights Offer from
UBS AG under which, in return for a general release of claims and the grant of a right to UBS AG to purchase the Companys ARS at any time for full par value, the Company would have the right to require UBS AG to purchase at par value the
Companys ARS beginning in 2010. Refer to Note 14 Subsequent Events for further details.



|3. | Fair Value Measurements
|-- | -----------------------

In accordance with
SFAS 157, the following table represents the Companys fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2008:



|                                         |  |                                                            |            |                                           |   |                                        |  |                                 |           |  |   |           
|---------------------------------------- |  | ---------------------------------------------------------- | ---------- | ----------------------------------------- | - | -------------------------------------- |  | ------------------------------- | --------- |  | - | ----------
|                                         |  | Fair Value Measurements at September 30, 2008 Using       
|Description                              |  | Quoted Prices inActive MarketsforIdentical Assets(Level 1) |            | SignificantOtherObservableInputs(Level 2) |   | SignificantUnobservableInputs(Level 3) |  | Balance as ofSeptember 30, 2008
|Money market funds                       |  | $                                                          | 2,719,000  |                                           | $ |                                       |  | $                               |          |  | $ | 2,719,000 
|U.S. term deposits                       |  |                                                            | 17,160,000 |                                           |   |                                       |  |                                 |          |  |   | 17,160,000
|Certificates of deposit                  |  |                                                            |           |                                           |   | 120,000                                |  |                                 |          |  |   | 120,000   
|Corporate equity securities              |  |                                                            | 96,000     |                                           |   |                                       |  |                                 |          |  |   | 96,000    
|Restricted long-term Italian state bonds |  |                                                            | 405,000    |                                           |   |                                       |  |                                 |          |  |   | 405,000   
|Long-term auction rate securities        |  |                                                            |           |                                           |   |                                       |  |                                 | 1,629,000 |  |   | 1,629,000 
|                                         |  |                                                            |            |                                           |   |                                        |  |                                 |           |  |   |           
|Total                                    |  | $                                                          | 20,380,000 |                                           | $ | 120,000                                |  | $                               | 1,629,000 |  | $ | 22,129,000
|                                         |  |                                                            |            |                                           |   |                                        |  |                                 |           |  |   |           



9



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The following table provides a summary of changes in fair value of the Companys Level 3 financial
assets as of September 30, 2008:



|                                                                       |  |                        |            |  
|---------------------------------------------------------------------- |  | ---------------------- | ---------- | -
|                                                                       |  | Auction RateSecurities |           
|Balance at December 31, 2007 reflected as other short-term investments |  | $                      | 2,825,000  |  
|Total unrealized loss included in other comprehensive loss             |  |                        | (171,000   | )
|Sales, net of purchases                                                |  |                        | (1,025,000 | )
|                                                                       |  |                        |            |  
|Balance at September 30, 2008 reflected as long-term investments       |  | $                      | 1,629,000  |  
|                                                                       |  |                        |            |  

As a result of the decline in fair value for the Companys ARS, the Company recorded an
unrealized loss of $171,000, which is included in the accumulated other comprehensive loss included as part of stockholders equity as of September 30, 2008. At September 30, 2008, based on the Companys belief that the
market for the student loan collateralized instruments which underlie all of the Companys ARS would take in excess of twelve months to fully recover, the Company classified these investments as long-term on its unaudited condensed consolidated
balance sheet. Any other fluctuation in fair value related to these instruments through September 30, 2008, the Company deemed to be not other-than-temporary, including any recoveries of previous write-downs, and were recorded to
accumulated other comprehensive loss. The Company had no realized losses for the quarter or nine months ended September 30, 2008 relating to those assets for which the Company utilized Level 3 inputs to determine fair value that were still
held by the Company at September 30, 2008. Refer also to Note 14 Subsequent Events for further information regarding the Companys ARS.



|4. | Inventories
|-- | -----------

Inventories consisted of the
following:



|                 |  |                   |           |                 |   |          
|---------------- |  | ----------------- | --------- | --------------- | - | ---------
|                 |  | September 30,2008 |           | December 312007
|Raw materials    |  | $                 | 1,915,000 |                 | $ | 1,319,000
|Work in progress |  |                   | 848,000   |                 |   | 259,000  
|Finished goods   |  |                   | 3,198,000 |                 |   | 4,001,000
|                 |  |                   |           |                 |   |          
|                 |  | $                 | 5,961,000 |                 | $ | 5,579,000
|                 |  |                   |           |                 |   |          



|5. | Prepaid Expenses and Other Current Assets
|-- | -----------------------------------------

The following is a summary of prepaid expenses and other current assets:



|                               |  |                   |           |                  |   |          
|------------------------------ |  | ----------------- | --------- | ---------------- | - | ---------
|                               |  | September 30,2008 |           | December 31,2007
|Prepaid clinical expenses      |  | $                 | 948,000   |                  | $ | 1,265,000
|Lease allowance receivable     |  |                   | 482,000   |                  |   |         
|Value added tax receivable     |  |                   | 432,000   |                  |   | 381,000  
|Prepaid insurance              |  |                   | 122,000   |                  |   | 600,000  
|Drug substance manufacturing   |  |                   | 45,000    |                  |   |         
|Prepaid rent                   |  |                   | 44,000    |                  |   | 42,000   
|Prepaid interest and dividends |  |                   | 44,000    |                  |   | 218,000  
|Prepaid royalties              |  |                   |          |                  |   | 253,000  
|Other prepaid expenses         |  |                   | 531,000   |                  |   | 190,000  
|                               |  |                   |           |                  |   |          
|                               |  | $                 | 2,648,000 |                  | $ | 2,949,000
|                               |  |                   |           |                  |   |          



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|6. | Other Assets
|-- | ------------

The following is a summary of
other assets:



|                          |  |                   |         |                  |   |          
|------------------------- |  | ----------------- | ------- | ---------------- | - | ---------
|                          |  | September 30,2008 |         | December 31,2007
|Prepaid clinical expenses |  | $                 | 232,000 |                  | $ | 232,000  
|Lease deposits            |  |                   | 186,000 |                  |   | 166,000  
|Prepaid royalties         |  |                   |        |                  |   | 655,000  
|Other assets              |  |                   | 44,000  |                  |   | 41,000   
|                          |  |                   |         |                  |   |          
|                          |  | $                 | 462,000 |                  | $ | 1,094,000
|                          |  |                   |         |                  |   |          



|7. | Accrued Expenses
|-- | ----------------

The following is a summary
of other accrued expenses:



|                                     |  |                   |           |                  |   |          
|------------------------------------ |  | ----------------- | --------- | ---------------- | - | ---------
|                                     |  | September 30,2008 |           | December 31,2007
|Accrued sales and marketing expenses |  | $                 | 1,003,000 |                  | $ | 921,000  
|Accrued tax expense                  |  |                   | 271,000   |                  |   | 306,000  
|Accrued royalties                    |  |                   | 163,000   |                  |   | 681,000  
|Accrued annual reports expense       |  |                   | 90,000    |                  |   | 100,000  
|Accrued manufacturing costs          |  |                   | 75,000    |                  |   | 1,117,000
|Accrued pre-clinical trial expenses  |  |                   | 25,000    |                  |   | 112,000  
|Other                                |  |                   | 330,000   |                  |   | 157,000  
|                                     |  |                   |           |                  |   |          
|                                     |  | $                 | 1,957,000 |                  | $ | 3,394,000
|                                     |  |                   |           |                  |   |          



|8. | Long-term Liabilities
|-- | ---------------------

The following is a
summary of long-term liabilities:



|                                           |  |                   |         |                  |   |        
|------------------------------------------ |  | ----------------- | ------- | ---------------- | - | -------
|                                           |  | September 30,2008 |         | December 31,2007
|Deferred rent                              |  | $                 | 613,000 |                  | $ | 194,000
|Accrued compensation and employee benefits |  |                   |        |                  |   | 147,000
|                                           |  |                   |         |                  |   |        
|                                           |  | $                 | 613,000 |                  | $ | 341,000
|                                           |  |                   |         |                  |   |        

Deferred rent relates to the Companys non-cancelable office lease agreements. Refer to Note
13 Commitments for further information on this matter.



|9. | Shareholders Equity
|-- | --------------------

Stock Award
Plans

The Company has several stock-based compensation plans (the Plans) that are described in the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2007. The Company, under the various equity plans, grants stock options for shares of common stock to employees and directors. In accordance with the Plans, the options expire ten years
from the date of grant. Options are generally granted at fair market value on the date of grant and vest over time, generally four years. Certain options granted under the Plans vest over shorter periods.



11



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Stock-Based Compensation

The fair value of each stock option granted under our Plans is estimated on the date of grant using the Black-Scholes option valuation model and the
single option approach with the weighted average assumptions:



|                                                                   |      |                                 |   |      |                                |   |      |       |   |      |       |  
|------------------------------------------------------------------ | ---- | ------------------------------- | - | ---- | ------------------------------ | - | ---- | ----- | - | ---- | ----- | -
|Stock Option Plan                                                  |      | Three Months EndedSeptember 30, |   |      | Nine Months EndedSeptember 30, |  
|                                                                   | 2008 |                                 |   | 2007 |                                |   | 2008 |       |   | 2007 |      
|Risk-free interest rate                                            |      | 3.07                            | % |      | 4.49                           | % |      | 2.81  | % |      | 4.63  | %
|Dividend yield                                                     |      |                                |   |      |                               |   |      |      |   |      |      |  
|Volatility factor of the expected market price of our common stock |      | 67.14                           | % |      | 67.96                          | % |      | 66.39 | % |      | 70.08 | %
|Weighted-average expected life of option (years)                   |      | 4.83                            |   |      | 4.64                           |   |      | 4.83  |   |      | 4.64  |  

The expected life of options is derived from historical data on employee exercises and
terminations. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility of the Companys stock. The expected dividend assumption is based on
the Companys history and expectations of no dividend payouts.

The Company amortizes the compensation cost over the vesting period,
which is generally four years, using the straight line attribution method. Stock-based compensation expense recognized in the Consolidated Statement of Operations for the three and nine months ended September 30, 2008 and 2007 is based on
awards expected to ultimately vest. FASB Statement No. 123(R) Share-Based Payment (FAS 123R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation only for those awards that are expected to vest.

The Company granted to its Chief Executive Officer, Dr. Blobel, an option to purchase 300,000 shares of the Companys common stock at an
exercise price per share equal to the closing price of a share of the Companys common stock on March 18, 2008. This option has a term of 10 years and will vest upon the Companys common stock trading after March 18, 2008 for at
least 30 consecutive calendar days at or greater than a target closing stock price as reported on the NASDAQ Stock Market, of (a) $4.50 on or before June 2, 2009 for 50,000 shares, (b) $6.00 on or before June 2, 2010 for 50,000
shares, (c) $8.00 on or before June 2, 2011 for 50,000 shares, (d) $10.00 on or before June 2, 2012 for 50,000 shares, (e) $12.00 on or before June 2, 2013 for 50,000 shares, and (f) $14.00 on or before
June 2, 2014 for 50,000 shares, each price as adjusted for stock dividends, stock splits or similar changes in the Companys capital structure. These vesting conditions are considered market conditions under FAS 123R.

This grant is considered an award with market and service conditions. Compensation expense is recognized for an option with market
conditions as long as service requirements are met, even if the market conditions are not reached. Because the probability of satisfying the market conditions had to be considered in the estimate of grant-date fair value for this award, the Monte
Carlo simulation option pricing model was used to calculate the grant date fair value per share of $0.88 related to each of the six vesting portions of this award with the assumptions of a risk-free interest rate of 3.875%, a dividend yield of 0%, a
volatility factor of 89.14%, and an expected life of 10 years. The related compensation costs are being expensed over the service periods for each of the six vesting portions of the award. For the three and nine months ended September 30, 2008,
the Company recorded approximately $40,000 and $86,000 respectively, of compensation expense related to this award.

The Company granted to
its Vice President of Business Development a performance-based option to purchase 50,000 shares of the Companys common stock at an exercise price per share equal to the closing price of a share of the Companys common stock on
August 11, 2008. This option will fully vest upon the employee meeting a performance goal on or before December 31, 2009. If the performance goal is met, the option has a ten year term measured from the date of grant. If the performance
goal is not met on or before December 31, 2009, the option expires in its entirety. The grant date fair value per share of the award is $0.99 and has been calculated using the Black-Scholes option pricing model with the following assumptions,
risk-free interest rate of 3.066%; dividend yield of 0%; volatility factor of 67.14% and expected term of 4.83 years. Since the date of grant and through September 30, 2008, the Company has not recorded option expense related to this award. The
Company will only recognize such option expense in the event that the Company determines that it is probable that the performance goal will be achieved.

The Company has not recognized, and does not expect to recognize in the near future, any tax benefit related to employee stock-based compensation cost as a result of the full valuation allowance on its net deferred
tax assets including its net operating loss carryforwards.

As of September 30, 2008, unamortized compensation expense related to
unvested options was approximately $3,162,000. The weighted average period over which compensation expense related to these options will be recognized is 3.80 years. The weighted-average fair value per share of options granted during the three
months ended September 30, 2008 and 2007 was $0.93 and $1.32, respectively. The weighted-average fair value per share of options granted



12



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##### Table of Contents

during the nine months ended September 30, 2008 and 2007 was $1.02 and $1.59, respectively. The total fair value of the shares that vested during
the three months ended September 30, 2008 and 2007 was $262,000 and $347,000, respectively. The total fair value of the shares that vested during the nine months ended September 30, 2008 and 2007 was $1,426,000 and $1,391,000,
respectively.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan (ESPP) under which substantially all employees may purchase common stock through payroll deductions. Employees may choose to have up to 15% of their salary
withheld to purchase the Companys common stock at a purchase price of the stock equal to 95% of the fair market value of a share of the Companys Common Stock on the Purchase Date (or such other amount as may be established by the Board).
The ESPP is treated as a non-compensatory plan under FAS 123R. As of September 30, 2008, 282,519 shares were reserved for future issuance under the ESPP.



|10. | Comprehensive Income/Loss
|--- | -------------------------

The following
table summarizes components of total comprehensive income (loss):



|                                                                                                                                 |  |                                 |         |   |                                |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                 |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                                                                                 |  | 2008                            |         |   | 2007                           |   |            | 2008 |  |   | 2007       |  
|Net income (loss)                                                                                                                |  | $                               | 773,000 |   |                                | $ | (3,055,000 | )    |  | $ | (5,205,000 | ) |  | $ | (6,336,000 | )
|Other comprehensive income (loss):                                                                                               |  |                                 |         |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net change in unrealized gains/losses and foreign currency translation gain on foreign-denominated available-for-sale
securities |  |                                 | (43,000 | ) |                                |   | 14,000     |      |  |   | (43,000    | ) |  |   | 14,000     |  
|Net change in unrealized gains/losses on available-for-sale securities                                                           |  |                                 | (46,000 | ) |                                |   | 11,000     |      |  |   | (226,000   | ) |  |   | 10,000     |  
|Foreign currency translation                                                                                                     |  |                                 | 12,000  |   |                                |   | 17,000     |      |  |   | 64,000     |   |  |   | 17,000     |  
|                                                                                                                                 |  |                                 |         |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total comprehensive income (loss)                                                                                                |  | $                               | 696,000 |   |                                | $ | (3,013,000 | )    |  | $ | (5,410,000 | ) |  | $ | (6,295,000 | )
|                                                                                                                                 |  |                                 |         |   |                                |   |            |      |  |   |            |   |  |   |            |  

The following table summarizes the components of accumulated other comprehensive (loss) income:



|                                                                                                               |  |                   |          |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | ------- | -
|                                                                                                               |  | September 30,2008 |          |   | December 31,2007 |  
|Net unrealized losses/gains on available-for-sale securities                                                   |  | $                 | (126,000 | ) |                  | $ | 100,000 |  
|Net unrealized loss and foreign currency translation loss on foreign-denominated available-for-sale securities |  |                   | (43,000  | ) |                  |   |        |  
|Cumulative foreign currency translation adjustment                                                             |  |                   | 46,000   |   |                  |   | (18,000 | )
|                                                                                                               |  |                   |          |   |                  |   |         |  
|Accumulated other comprehensive (loss) income                                                                  |  | $                 | (123,000 | ) |                  | $ | 82,000  |  
|                                                                                                               |  |                   |          |   |                  |   |         |  



|11. | Income Taxes
|--- | ------------

Provision for income tax of
$39,000 and $41,000 for the three months ended September 30, 2008 and 2007, respectively, and $341,000 and $90,000 for the nine months ended September 30, 2008 and 2007, respectively, related to the Companys operations in the
Peoples Republic of China. The Companys statutory tax rate in the Peoples Republic of China is 18%.



|12. | Related Party Transactions
|--- | --------------------------

The Company has
licensed to Sigma-Tau exclusive ZADAXIN development and marketing rights that cover all countries in the European Union as defined on January 1, 1995, in addition to Iceland, Norway and Switzerland. Sigma-Tau and affiliated persons were
stockholders of the Company at the time this transaction was entered into, and are currently the Companys largest shareholder. Under the agreement with Sigma-Tau, Sigma-Tau conducted a multi-center phase 3 hepatitis C triple therapy clinical
trial in Europe with 553 patients. The objective of the European trial was to provide data on ZADAXINs use as part of a triple therapy in treating HCV patients. The Company paid Sigma-Tau approximately $2,509,000 through September 30,
2008 of funding support during the course of patient enrollment and trial period. The Company will also pay a $1,500,000 milestone payment upon completion of the final report. Based



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on the level of activity in this trial, the Company has recorded approximately $69,000 and $127,000 of research and development expense related to this
agreement in the three-month periods ended September 30, 2008 and 2007, respectively, and has recorded $265,000 and $380,000 of research and development expense related to this agreement in the nine-month periods ended September 30, 2008
and 2007, respectively. As of September 30, 2008 and December 31, 2007, the Company had accrued clinical trial expenses of $1,385,000 and $1,620,000, respectively, due to Sigma-Tau.



|13. | Commitments
|--- | -----------

In April 2007, the Company
acquired the exclusive rights in the United States and Canada to develop and commercialize RP101, a clinical-stage compound for the treatment of cancer. Under the terms of the agreements with Resistys, Inc., a wholly-owned subsidiary of Avantogen
Oncology, Inc., and with RESprotect GmbH (RESprotect), the Company may be obligated to pay post phase 3 success-based regulatory and commercial milestone payments of up to $22,000,000, and royalties on future sales. The Company has
entered into an agreement with Pharmaceuticals Research Associates, Inc. (PRA) for clinical trials management services, for a randomized, double blind, placebo controlled, phase 2 study evaluating the efficacy and safety of RP101 for the
treatment of pancreatic cancer. The estimated cost of PRAs management services and pass-through costs is $8,000,000 and $4,000,000, respectively, of which $4,893,000 had been paid to PRA by the Company and another $577,000 was due and payable
as of September 30, 2008. The Company has also entered into a supply agreement with RESprotect to purchase RP101 from RESprotect for clinical trials and for commercial purposes following regulatory approval. Under the terms of the supply
agreement, the Company and RESprotect will share the scale-up costs required to manufacture RP101 prior to and after FDA approval. The Companys share of the scale-up costs is estimated to be 1,448,000 through June 2010, of which
1,204,000 ($1,845,000) was paid by the Company to RESprotect through September 30, 2008, leaving a balance of approximately 244,000 ($343,000 based upon September 30, 2008 conversion rates).

In May 2007, the Company entered into a non-cancelable operating lease agreement for its main office facility (the Lease) effective from
July 1, 2007 through June 30, 2014. In September 2008, the Company entered into an amendment to the Lease for additional office space (the Expansion Agreement). The Expansion Agreement expires on June 30, 2014 and contains
rent escalation clauses. Under the terms of the Lease and the Expansion Agreement, the Company was provided allowances in the amounts of approximately $206,000 and $482,000, respectively, towards the cost of its leasehold improvements and as an
incentive to rent, respectively. To date, the Company has received all of the $206,000 tenant allowance. The allowance of $482,000 was recorded in prepaid and other current assets and deferred rent in the Companys condensed consolidated
balance sheet as of September 30, 2008, as the amount was receivable to the Company at September 30, 2008. In accordance with FASB Technical Bulletin 88-1, the Company has recorded these allowances as deferred rent which is being amortized
over the lease terms as a reduction of rent expense. The leases require the Company to pay insurance and taxes and its pro-rata share of operating expenses. The Company also leases various office facilities abroad and equipment under non-cancelable
lease agreements. Minimum future rental payments under facility and equipment operating lease agreements as of September 30, 2008 amount to a total of $7,684,000 which consists of $244,000 remaining in 2008, $1,322,000 in 2009, $1,253,000 in
2010, $1,316,000 in 2011, $1,373,000 in 2012, $1,432,000 in 2013, and $744,000 thereafter.

On April 4, 2008, the Companys former
Executive Vice President and Chief Financial Officer resigned from the Company and his resignation became effective April 30, 2008. In connection with this resignation, the Company entered into an agreement in which the former Executive Vice
President and Chief Financial Officer will be available to consult with the Company on a limited capacity until April 30, 2008. He has retained the right to exercise any vested options during this one-year consulting period and is entitled to
payments in the aggregate amount of $345,000, payable over approximately a one-year period, in addition to payments of salary and bonus deemed earned through the date of termination of employment. As of September 30, 2008, $202,000 remains in
accrued compensation and employee benefits included in the Companys condensed consolidated balance sheet related to this agreement.



|14. | Subsequent Events
|--- | -----------------

Auction Rate
Securities Rights Offer

In October 2008, the Company received an Auction Rate Securities Rights Offer from UBS AG under which, in
return for a general release of claims and the grant of a right to UBS AG to purchase the Companys ARS at any time for full par value, the Company would receive the right to require UBS AG to purchase at par value the Companys ARS
beginning in 2010. The Auction Rate Securities Rights Offer is non-transferable and expires on November 14, 2008. Should the Company accept the UBS Rights Offer, the Company will grant UBS AG the sole discretion and right to sell or dispose of,
and/or enter orders in the auction process with respect to the eligible ARS on the Companys behalf without prior notification to the Company from UBS AG, as long as the Company receives a payment at par upon any sale or disposition. The
Company is in the process of evaluating the Auction Rate Securities Rights Offer and its potential financial statement impact.



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Amendment to License Agreement

On October 31, 2008, the Company entered into an agreement (the Letter Agreement) with Wayne State University (WSU) to amend
the terms of the license agreement entered into with WSU in 1994, as amended in 2003, and to resolve questions with regard to royalties owed for prior periods. As a result of the Letter Agreement, the Company has adjusted its royalties payable down
to $150,000 which is recorded in other accrued expenses to reflect a payment to be made by the Company in November 2008. In addition, certain minimum royalty payments following sales of ZADAXIN in certain territories have been reset to zero until
such time as the Company achieves major market approval of ZADAXIN in the U.S, Japan, or Europe, and the Company has reduced prepaid royalties to their estimated realizable amount in its balance sheet as of September 30, 2008. The impact to the
Companys condensed consolidated statement of operations was not significant. The parties also agreed in the Letter Agreement that no other amounts were owed by either party for past periods.

Phase 3 Hepatitis C Trial Results

On
November 5, 2008, the Company announced the top-line results from a large, randomized, phase 3 clinical trial evaluating thymalfasin in combination with pegylated interferon alpha-2a (peg-IFN-2a) and ribavirin (RBV) as a treatment for patients
with hepatitis C virus (HCV) who have not responded to prior therapy consisting of peg-IFN and RBV alone (current standard of care). The thymalfasin treated group did not achieve statistical significance for the primary end point of sustained
virological response (SVR) as assessed in the primary analysis population, i.e. the intent-to-treat population. In the prospectively defined secondary population of patients who completed the full course of 48 weeks of treatment with thymalfasin in
addition to peg-IFN-2a and RBV (Completer Population), the primary endpoint was achieved with statistical significance.



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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 Quarterly Report on Form 10-Q 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 business, industry, managements beliefs and certain assumptions made by us. Words such as anticipate, expect, intend, plan, believe
or similar expressions are intended to identify forward-looking statements including those statements we make regarding our future financial results; anticipated product sales; the sufficiency of our resources to complete clinical trials and other
new product development initiatives; the timing and outcome of clinical trials; the timing of completion of therapy and observation for our clinical trials; ZADAXINs ability to complement existing therapies; prospects for ZADAXIN and our plans
for its enhancement and commercialization; future size of the worldwide hepatitis C virus and other markets; research and development and other expense levels; cash and other asset levels; and the allocation of financial resources to certain trials
and programs. 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 Quarterly Report on Form 10-Q. We undertake no obligation to revise or
update publicly any forward-looking statements for any reason.

Overview

SciClone Pharmaceuticals, Inc. is a biopharmaceutical company engaged in the development and
commercialization of novel therapeutics to treat life-threatening diseases. Our strategy is to in-license products in the areas of cancer and viral infectious diseases, and to develop them for commercialization in the major pharmaceutical markets
with a particular focus on the Peoples Republic of China (China), one of the worlds fastest growing pharmaceutical markets. ZADAXIN®, our brand of thymalfasin, is
one of the largest imported drugs, as measured by revenue, in China today, and currently is in late-stage clinical development for the treatment of hepatitis C virus (HCV) in Europe. Our proprietary in-licensed compound RP101 entered phase 2
clinical development for the treatment of pancreatic cancer in combination with gemcitabine in January 2008. Our proprietary in-licensed compound SCV-07 entered phase 2 clinical development for viral infectious disease in June 2007. We also
submitted a regulatory application to the Chinese State Food and Drug Administration (SFDA) in December 2006 related to DC BeadTM, a product for the
treatment of liver cancer, or hepatocellular carcinoma (HCC), for which we obtained Chinese marketing rights in June 2006 from Biocompatibles UK Ltd., a UK-based company.

In addition to our current product portfolio, we believe we are well-positioned to in-license additional therapeutics for both China and the significantly larger U.S. and European markets, in part because of our
opportunity to develop and commercialize such products in China. Also, we intend to use our clinical work in China to support and accelerate regulatory applications in the United States and Europe.

Our European partner, Sigma-Tau, recently completed a triple therapy combination (ZADAXIN plus pegylated interferon alpha and ribavirin) hepatitis C
clinical trial in Europe. On November 5, 2008, we announced the top-line results from this large, randomized, phase 3 clinical trial evaluating thymalfasin in combination with pegylated interferon alpha-2a (peg-IFN-2a) and ribavirin (RBV) as a
treatment for patients with hepatitis C virus (HCV) who have not responded to prior therapy consisting of peg-IFN and RBV alone (current standard of care). The thymalfasin treated group did not achieve statistical significance for the primary end
point of sustained virological response (SVR) as assessed in the primary analysis population, i.e. the intent-to-treat population. In the prospectively defined secondary population of patients who completed the full course of 48 weeks of treatment
with thymalfasin in addition to peg-IFN-2a and RBV (Completer Population), the primary endpoint was achieved with statistical significance. We plan to further analyze the data in coming weeks and to present a full report at an upcoming clinical
conference.

In September 2008, we reported what we believe are promising results from our proof-of-concept phase 2A clinical trial using
SCV-07 as a sole agent administered to patients chronically infected with HCV. The trial was designed to evaluate the effect of SCV-07 on hepatitis C viral load, as well as on other measures of immune response. SCV-07 demonstrated activity in some
treated patients in the higher dosage groups, and the decrease in viral load in these patients was accompanied by an increase in an immunological biomarker which is usually correlated with response against HCV. Additionally, SCV-07 was shown to be
generally safe and well-tolerated with no dose limiting toxicities or serious adverse events reported. During the fourth quarter of our fiscal 2008, we plan to discuss with the FDA the initiation of a follow-up SCV-07 phase 2B trial.

In June 2007, we reported positive data from a phase 2 trial, also conducted by Sigma-Tau, treating patients with stage IV melanoma indicating that
thymalfasin in combination with dacarbazine (DTIC) chemotherapy and low dose interferon alpha met its primary endpoint by reaching the tumor response rate required to reject the null hypothesis. In fact, two of the thymalfasin treated groups had a
tripled overall response rate compared to stage IV melanoma patients treated with DTIC, the current standard of care, and low dose interferon alpha. In addition, survival, a key secondary endpoint, was



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extended by nearly 3 months. We and Sigma-Tau are planning the design of a phase 3 melanoma trial and our regulatory strategy including a Special Protocol
Assessment (SPA) to be filed with the FDA. Thymalfasin phase 3 clinical development and commercialization plans for HCV and melanoma have potentially significantly different timelines, costs, and sales potential, and the markets for these two
products differ in terms of competitive products and other factors. Consequently, before proceeding with a further melanoma trial, we expect that we and Sigma-Tau will review the recently announced results for the HCV clinical trial in order to
determine the next steps for an optimal thymalfasin development program.

We manufacture ZADAXIN for sale and for our clinical trials
through third party contract manufacturers, and we conduct our research and development efforts principally through arrangements with clinical research sites, contract research organizations and universities.

For the three months ended September 30, 2008 and 2007, product sales were $14,328,000 and $9,421,000, respectively. For the nine months ended
September 30, 2008 and 2007, product sales were $38,796,000 and $27,020,000, respectively. Our revenue growth was attributable to further market penetration in China related to ZADAXIN. For the three months ended September 30, 2008 and
2007, product sales in China were $13,637,000 and $8,624,000, respectively. For the nine months ended September 30, 2008 and 2007 product sales in China were $36,696,000 and $24,867,000, respectively.

For the overall consolidated Company, primarily due to the level of research and development activities, we expect a net loss and a reduction in cash,
cash equivalents and short-term investments for 2008. However, we believe our cash on hand and ongoing business operations will be sufficient to fund current business activities for the foreseeable future. During this period, we may report quarterly
losses. Our ability to sustain operating profitability will be impacted by numerous factors including expansion of sales of ZADAXIN, the regulatory approval process including the timing of FDA or international regulatory approvals, the number,
timing, costs and results of pre-clinical and clinical trials of our products, market acceptance of ZADAXIN, and potentially of SCV-07, DC Bead, and RP101, the timing of orders for ZADAXIN from international markets, particularly China, and the
acquisition of additional product rights and the funding, if any, provided as a result of corporate partnering arrangements. Although we believe our cash on hand and ongoing business operations will be sufficient to fund current business activities
for the foreseeable future, we are considering raising additional funding in the fourth quarter of 2008 and 2009 to provide additional flexibility in financing our operations, including anticipated clinical trials. We are exploring various
alternatives for financing in addition to sales of equity of SciClone, including a line of credit, debt financing and financing of our operations in the Peoples Republic of China, either through debt, equity or joint venture transactions, but
we have not determined the timing or structure of any transaction.

Recent Accounting Pronouncements

Adopted January 1, 2008

Effective
January 1, 2008, we adopted Emerging Issues Task Force (EITF) Issue No. 07-3 Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development activities
(EITF 07-3). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods
are delivered or the related services are performed. The adoption did not have a material impact on our consolidated results of operations or financial condition.

We adopted the provisions of the Financial Accounting Standards Board (FASB) Statement No. 157 Fair Value Measurements (SFAS No. 157), effective January 1, 2008. In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities,
except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we deferred adoption of SFAS 157 as it relates to our non financial assets and liabilities. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair
value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value. Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their
placement within the fair value hierarchy. The three levels of input are:

Level 1 - Quoted prices in active markets for identical assets
or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.



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Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on our consolidated results
of operations and financial condition.

Effective January 1, 2008, we adopted SFAS No. 159 The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a
contract-by-contract basis. We did not elect to adopt the fair value option for any financial assets or liabilities under this Statement.

Not Yet
Adopted

In December 2007, EITF Issue No. 07-1, Accounting for Collaborative Arrangements (EITF 07-1) was
issued. EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement within the scope of this Issue; how costs incurred and revenue generated on sales to third parties should be reported in the
income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. EITF 07-1 is effective as of the beginning of an
entitys fiscal year that begins after December 15, 2008, which will be our fiscal year beginning January 1, 2009. We are in the process of evaluating the impact, if any, of adopting EITF 07-1 on our financial statements.

Critical Accounting Policies

The preparation of
financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. We believe there have been no significant changes in our critical accounting policies as discussed in our Annual Report on Form 10-K for the year ended December 31, 2007 other than the adoption of SFAS
No. 157.

Results of Operations

Total Revenues

Product sales were $14,328,000 and $38,796,000 for the three and nine-month periods ended September 30,
2008, respectively, as compared to $9,421,000 and $27,020,000 for the corresponding period in 2007. All product sales in each period were derived from sales of ZADAXIN. The increase was attributable to a higher volume of product sold primarily due
to continued expansion of our sales and marketing efforts and a slight increase in prices between the 2008 and 2007 periods. Sales to customers in China are denominated in U.S. dollars and accounted for approximately 95% of product sales for both
the three and nine-month periods ended September 30, 2008, as compared to approximately 92% of product sales for both the three and nine-month periods ended September 30, 2007.

For the three-month period ended September 30, 2008, sales to two importing agents in China accounted for approximately 69% and 26% of our product
sales. For the three-month period ended September 30, 2007, sales to two importing agents in China accounted for approximately 70% and 22% of our product sales. For the nine-month period ended September 30, 2008, sales to two importing
agents in China accounted for approximately 68% and 22% of our product sales. For the nine-month period ended September 30, 2007, sales to three importing agents in China accounted for approximately 61%, 21% and 10% of our product sales. The
two largest customers were the same importing agents in each of these periods.

Cost of Product Sales and Gross Margin on Product Sales

Gross margin on product sales was 84% and 83% for the three and nine-month periods ended September 30, 2008, as compared to 82%
for both the corresponding periods in 2007. We expect cost of product sales, and hence gross margin on product sales, to vary slightly from period to period, depending upon the level of ZADAXIN sales, the absorption of product-related fixed costs,
and any charges associated with excess or expiring finished product inventory. During the three months ended June 30, 2008, we recorded a charge of $630,000 associated with our finished goods inventory related to vials made obsolete due to
labeling requirements arising from our new import license. No other charges were recorded by us associated with product inventory during the nine months ended September 30, 2008. No charges were recorded by us associated with product inventory
during the three or nine month periods ended September 30, 2007.

Research and Development

Research and development expenses were $4,706,000 for the three-month period ended September 30, 2008, as compared to $4,793,000 for the
corresponding period in 2007. The decrease in research and development expenses of approximately $87,000 was mainly due to lower rent expense related to our new main office facility in 2008 as compared with our former facility which we exited in
July 2007.



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Research and development expenses were $16,790,000 for the nine-month period ended September 30,
2008, as compared to $11,928,000 for the corresponding period in 2007. The increase in research and development expenses of $4,862,000 is related to our phase 2 clinical trials for RP101 and SCV-07, and to the development planning for a phase 3
clinical trial for melanoma. These increases included approximately $1,951,000 for clinical trial management, statistician services and investigator expenses; an increase of approximately $1,789,000 for drug development and manufacturing costs
related to the scale up of RP101 and purchase of gemcitabine for the RP101 clinical trial, and manufacturing of SCV-07 for the SCV-07 clinical trial; a $1,320,000 milestone payment upon first patient dosing in the RP101 phase 2 clinical trial; an
increase in compensation and benefits expense and recruiting fees due to increases in the number of research and development personnel; and an increase in consulting and travel expenses. These increases were partially offset by a decrease of
approximately $2,200,000 of acquisition and legal costs related to the acquisition of exclusive rights for the United States and Canada to develop and commercialize RP101 recorded during the nine months ended September 30, 2007. We expect that
our research and development expenses for the fourth quarter of 2008 will increase compared to the third quarter of 2008 related to our clinical trials for RP101 and SCV-07. In general, we expect research and development expenses to vary
substantially from quarter to quarter as we pursue our strategy of initiating additional preclinical and clinical trials, acquiring product rights, and expanding regulatory activities.

Sales and Marketing

Sales and
marketing expenses were $4,188,000 and $12,328,000 for the three and nine-month periods ended September 30, 2008, respectively, as compared to $3,805,000 and $9,968,000, respectively, for the corresponding period in 2007. The higher level of
sales and marketing expenses was primarily due to increases in the number of sales and marketing personnel, and increases in promotional activities, conferences and seminars related to our expanding sales and marketing efforts. We expect that our
sales and marketing expenses will increase for the fourth quarter of 2008 compared to the third quarter of 2008 and may increase in future years if we are successful in expanding our commercialization and marketing efforts.

General and Administrative

General
and administrative expenses were $2,405,000 for the three months ended September 30, 2008, as compared to $2,594,000 for the three months ended September 30, 2007. The lower levels of general and administrative expenses were primarily due
to a reduction in stock-based compensation expense of approximately $94,000 and lower rent expense of approximately $83,000 related to our new main office facility in 2008 as compared with our former facility which we exited in July 2007.

General and administrative expenses were $8,286,000 for the nine months ended September 30, 2008, as compared to $7,648,000 for the
nine months ended September 30, 2007. The higher levels of general and administrative expenses were primarily due to increases in severance costs of approximately $322,000, accounting and professional fees of approximately $391,000, and
employment recruiting costs of approximately $203,000 recorded during the nine month period ended September 30, 2008, offset partially by a decrease in rent expense of approximately $234,000. We believe that general and administrative expenses
for the fourth quarter of fiscal 2008 will increase compared to the third quarter of fiscal 2008 due to the expansion of our office facility and continuing business development efforts.

Interest and Investment Income

Interest and investment income was approximately $116,000 and $501,000, respectively, for the three and nine-month periods ended September 30, 2008, as compared to $408,000 and $1,280,000, respectively, for the corresponding period in
2007. The decrease was primarily due to lower cash and investment balances and lower interest rates in the 2008 period.

Provision for
Income Tax

Provision for income tax was approximately $39,000 and $341,000, respectively, for the three and nine-month periods ended
September 30, 2008, as compared to $41,000 and $90,000, respectively, for the corresponding period in 2007. The increase in provision for income tax for the nine month period ended September 30, 2008, compared to the corresponding period
in 2007, was due to increased net operating income in the Peoples Republic of China. The Companys statutory tax rate in the Peoples Republic of China is 18%.



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Liquidity and Capital Resources

Days sales outstanding in accounts receivable, using the average receivables method, were 115 and 145 days as of September 30, 2008 and 2007,
respectively. The majority of our sales are to customers in China, where our accounts receivable collections have standard credit terms of 180 days. For the nine-month periods ended September 30, 2008 and 2007, such receivables were collected
within this period of time. Days sales outstanding decreased from 2007 to 2008, due to normal fluctuations in the timing of customer payments received.

On September 30, 2008 and December 31, 2007, we had $24,377,000 and $35,281,000, respectively, in cash, cash equivalents, and short-term investments.

Our short-term investments consist of highly liquid marketable securities. Our restricted short-term investment of $70,000 relates to a letter of credit
secured by a certificate of deposit to facilitate our value added tax filings in Europe.

Our restricted long-term investment of $405,000
consists of Italian state bonds purchased to facilitate our value added tax filings in Europe.

As of September 30, 2008, we held
approximately $1,629,000 of auction rate securities (ARS). The ARS are investments with contractual maturities generally between 0 and 34 years whose underlying assets are student loans which are substantially backed by the federal
government with interest rates resetting approximately every 30 days through an auction process. At the end of each reset period, investors may sell or continue to hold the securities at par. In addition, all of our ARS are rated by one or more of
the major independent rating agencies as either AAA or Aaa.

Historically, our ARS were highly liquid, using a Dutch auction
process that reset the applicable interest rate at predetermined intervals, typically every 30 days, which in turn provided liquidity at par value. However, as a result of liquidity issues in the global credit and capital markets, the auctions for
all of our ARS failed beginning in February 2008 when sell orders exceeded buy orders. The failures of these auctions do not affect the value of the collateral underlying the ARS, and we continue to earn interest on our ARS at contractually set
rates. Because of the failure of auctions, we will not be able to liquidate our ARS until the issuer calls the security, a successful auction occurs, a buyer is found outside of the auction process or the security matures. Based on this, we have
classified the ARS as long term assets on our condensed consolidated balance sheet as of September 30, 2008.

In October 2008, we
received an Auction Rate Securities Rights Offer from UBS AG under which, in return for a general release of claims and the grant of a right to UBS AG to purchase our ARS at any time for full par value, we would have the right to require UBS AG to
purchase at par value our ARS beginning in 2010. We are in the process of evaluating the Auction Rate Securities Rights Offer and its potential financial statement impact.

We will continue to classify the ARS investments as long-term on our condensed consolidated balance sheet until such time the investments become
short-term. We believe that even with the possible requirement to hold all such securities until June 30, 2010 in the event we accept the Rights Offer or for an indefinite period of time in the event we decline the Rights Offer, our remaining
cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for the foreseeable future.

Net
cash used in operating activities amounted to $8,712,000 for the nine-month period ended September 30, 2008 as compared to net cash used in operating activities in the amount of $4,489,000 in the corresponding period in 2007. The $8,712,000 of
net cash used in operating activities for the nine-month period ended September 30, 2008 was comprised primarily of net loss of $5,205,000 which was adjusted for non-cash items such as stock-based compensation expense of $1,414,000,
depreciation and amortization of $243,000, and $5,164,000 of net cash outflow related to changes in operating assets and liabilities. Such changes included an increase of $5,176,000 in our accounts receivable due to an increase in sales and
fluctuations in the timing of customer payments received and a decrease in our accrued clinical trials expenses of $1,448,000 primarily as a result of payments made to vendors during the nine months ended September 30, 2008 related to the phase
2 RP101 and SCV-07 clinical trials, and to the development planning for a phase 3 melanoma clinical trial. In addition, deferred revenue increased $733,000 and the increase related to initial sales into a new market. Prepaid expenses and other
assets decreased $933,000 and accounts payable and other accrued expenses decreased $636,000 mainly related to our amended license agreement with Wayne State University that resulted in a decrease in our accrued and prepaid royalties.

Net cash used in operating activities of $4,489,000 for the nine-month period ended September 30, 2007 was comprised primarily of net loss of
$6,336,000 which was adjusted for non-cash items such as stock-based compensation expense of $1,712,000, depreciation and amortization of $224,000, and $89,000 of net cash outflow related to changes in operating assets and liabilities. Such changes
included an increase in our accounts receivable of $442,000 related to an increase in sales and an increase in inventory levels of $883,000 as our supplier of bulk Active Pharmaceutical Ingredient (API) product for the manufacture of ZADAXIN was
able to produce higher yields on production runs, enabling us to increase our inventory levels, compared to the lower than expected inventory levels in the prior year period. These outflows were partially offset by an increase in accounts payable
and accrued expenses and accrued clinical trials expenses of $1,362,000 mainly related to our phase 2 RP101 clinical trial.



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Net cash provided by investing activities amounted to $842,000 for the nine-month period ended
September 30, 2008, compared to cash provided by investing activities of $9,538,000 for the nine-month period ended September 30, 2007. The change in the 2008 period was primarily due to a decrease in net proceeds from the sales,
maturities and purchases of marketable securities as compared to the prior year period, the $448,000 purchase of our long-term investment in Italian state bonds purchased to facilitate our value added tax filings in Europe, and the purchase of
$103,000 in property and equipment.

Net cash provided by financing activities amounted to $149,000 and $225,000 for the nine-month periods
ended September 30, 2008 and 2007, respectively, and consisted mainly of proceeds from issuance of common stock under our employee stock option plan.

We believe our cash on hand and ongoing business operations will be sufficient to fund current business activities for the foreseeable future. However, we are exploring various alternatives for financing to provide us
additional flexibility in managing our operations and funding our clinical trials, including a line of credit, debt financing, sales of equity of SciClone, and financing of our Chinese operations either through debt, equity or joint venture
transactions, but we have not determined the timing or structure of any transaction.

Contractual Obligations

In September 2008, we entered into an amendment to the non-cancelable operating lease agreement for our main office facility to lease additional office
space through June 30, 2014. The amendment requires us to pay insurance and taxes and our pro-rata share of operating expenses. We also lease various office facilities abroad and equipment under non-cancelable lease agreements. Minimum future
rental payments under facility and equipment operating lease agreements as of September 30, 2008 amount to a total of $7,684,000 which consists of $244,000 remaining in 2008, $1,322,000 in 2009, $1,253,000 in 2010, $1,316,000 in 2011,
$1,373,000 in 2012, $1,432,000 in 2013, and $744,000 thereafter.

On October 31, 2008, we entered into an agreement (the Letter
Agreement) with Wayne State University (WSU) to amend the terms of the license agreement entered into with WSU in 1994, as amended in 2003, and to resolve questions with regard to royalties owed for prior periods. As a result of
the Letter Agreement, we adjusted royalties payable down to $150,000 which is recorded in other accrued expenses to reflect a payment to be made by us in November 2008. In addition, certain minimum royalty payments following sales of ZADAXIN in
certain territories have been reset to zero until such time we achieve major market approval of ZADAXIN in the U.S, Japan, or Europe, and we have reduced prepaid royalties to their estimated realizable amount in our balance sheet as of
September 30, 2008. The impact to our condensed consolidated statement of operations was not significant. The parties also agreed in the Letter Agreement that no other amounts were owed by either party for past periods.

There were no other material changes in the nine-month period ended September 30, 2008 to our contractual obligations as disclosed in our Form 10-K
for the year ended December 31, 2007.

Related Party Transactions

There are no officers or directors that were involved in related party transactions in the nine-month period ended September 30, 2008.

We have licensed to Sigma-Tau exclusive ZADAXIN development and marketing rights that cover all countries in the European Union as defined on
January 1, 1995, in addition to Iceland, Norway and Switzerland. Sigma-Tau and affiliated persons were stockholders of the Company at the time this transaction was entered into, and are currently our largest shareholder. Under the agreement
with Sigma-Tau, Sigma-Tau conducted a multi-center phase 3 hepatitis C triple therapy clinical trial in Europe with 553 patients. The objective of the European trial was to provide data on thymalfasins use as part of a triple therapy in
treating HCV patients. We paid Sigma-Tau approximately $2,509,000 of funding support during the course of patient enrollment and trial period through September 30, 2008. We will also pay a $1,500,000 milestone payment upon completion of the
final report. Based on the level of activity in this trial, we have recorded approximately $69,000 and $127,000 of research and development expense related to this trial for the three months ended September 30, 2008 and 2007, respectively, and
have recorded $265,000 and $380,000 of research and development expense related to this trial for the nine months ended September 30, 2008 and 2007, respectively. As of September 30, 2008 and December 31, 2007, we had accrued clinical
trial expenses of $1,385,000 and $1,620,000, respectively, due to Sigma-Tau.

Off-Balance Sheet Arrangements

There were no off-balance sheet arrangements in the three and nine-month periods ended September 30, 2008.



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Risk Factors

You should carefully consider the risks described below, in addition to the other information in this report on Form 10-Q and our report on Form 10-K for the year ended December 31, 2007, 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 revenue is dependent on the sale of ZADAXIN in foreign countries, particularly China, and if we experience difficulties in our foreign sales efforts, our operating results and financial condition will be
harmed.

Our product revenue 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 operating results and financial condition will be harmed. For each of the nine-month periods ended September 30, 2008 and 2007, approximately 95% and 92%, respectively, of our ZADAXIN
sales were to customers in China. Sales of ZADAXIN in China may be limited due to the low average personal income, lack of patient cost reimbursement, poorly developed infrastructure and existing and potential competition from other products,
including generics. ZADAXIN sales growth in recent years has benefited from the rapidly growing Chinese economy and growing personal disposable income. Sales of ZADAXIN in China could be adversely affected by a slowing or downturn of the Chinese
economy. In China, ZADAXIN is approved only for the treatment of hepatitis B virus (HBV) and as a vaccine adjuvant. We face competition from certain large, global pharmaceutical companies who are aggressively marketing competing products for the
treatment of HBV and other indications where ZADAXIN is used on an off-label basis. In addition, several local companies are selling lower priced locally manufactured generic thymosin, which is a competitive product and is selling in substantial and
increasing quantities. While generic products outsell ZADAXIN in unit volumes, we have been able to maintain an advantage through the reputation of our imported, branded product. We expect such competition to continue and there could be a negative
impact on the price and the volume of ZADAXIN sold in China, which would harm our business. Our efforts to in-license other pharmaceutical products for marketing in China and other markets may be unsuccessful or may not have a meaningful effect on
our dependence on ZADAXIN sales in those markets.

We do not have product sales in the United States, Europe or Japan with which to offset
any decrease in our revenue from ZADAXIN sales in Asia, Latin America and the Middle East, and sales outside of China have not been substantial to date. 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. We believe that the Chinese government is increasing its efforts to reduce overall health care costs, including through pricing controls. Individual provinces
in China and, in some cases, individual hospitals can and have established pricing requirements for a product to be included on formulary lists. These prices may be lower than our distributors have been selling ZADAXIN in which case we have been
removed from formulary lists, which consequently has reduced sales to certain hospitals and could adversely affect our future sales.

We
have received regulatory approvals to market ZADAXIN in China and to manufacture ZADAXIN and export the product from Italy. In order to continue our sales to China, we need to maintain these approvals. Our license to import ZADAXIN into China needs
to be renewed every five years and the next renewal is required in 2013. Although we have been successful in obtaining renewal earlier this year, there is no assurance that we will receive renewals in the future when applied for or that the renewals
will not be conditioned or limited in ways that limit our ability to conduct business in China. Further, our licenses to manufacture and export ZADAXIN from Italy are dependent upon our continuing compliance with regulations in Italy. Our business
would be adversely affected if we are not able to maintain these approvals.

Our ZADAXIN sales and operations in other parts of the world
are subject to a number of risks, including difficulties and delays in obtaining registrations, renewals of registrations, permits, pricing approvals and reimbursement, unexpected changes in regulatory requirements and political instability.

We are also subject to the laws and regulations of other countries regarding the marketing, sale and distribution of our products in those
countries where approvals have been obtained. We experience other issues with managing foreign sales operations including long payment cycles, potential difficulties in accounts receivable collection and, especially from significant customers,
fluctuations in the timing and amount of orders. Operations in foreign countries also expose us to risks relating to difficulties in enforcing our proprietary rights, currency fluctuations and adverse or deteriorating economic conditions. If we
experience problems with obtaining registrations, complying with reimbursement rules or compliance with foreign country or applicable U.S. laws, adverse or mixed outcome of clinical studies anywhere in the world, or if we experience difficulties in
payments or intellectual property matters in foreign jurisdictions, or if significant political, economic or regulatory changes occur, our results could be adversely affected. Moreover, many of these operations, which are carried out in various
parts of the world including in particular across China and thus cover a vast geography, are potentially subject to the laws and regulations of the United States including through the Foreign Corrupt Practices Act, in addition to the laws and
regulations of the local countries, and in particular China. Regulation in China of the activities in the pharmaceutical industry has recently increased and may continue to undergo significant and unanticipated changes. If we fail to comply with
regulations or to carry out controls on our Chinese or other foreign operations in a manner that satisfy all applicable laws, our business would be harmed.



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

We believe our cash on hand and ongoing business operations will be sufficient to fund current business activities for the foreseeable
future. However, our ability to achieve and sustain operating profitability is dependent on numerous factors including expansion of sales of ZADAXIN and securing regulatory approval for DC Bead in China, the execution and successful completion of
ZADAXIN, SCV-07, and RP101 clinical trials and securing regulatory approvals for these products in the major pharmaceutical markets of the United States and Europe. We cannot assure you that such funds from operating activities will be sufficient,
or that we will attain profitable operations in future periods. In addition, we intend to develop other products and we may need additional funds in the future to support such development and to support future growth and achieve profitability. We
are exploring various alternatives for financing to provide us additional flexibility in managing our operations including a line of credit, debt financing, sales of equity of SciClone, and financing of our Chinese operations either through debt,
equity or joint venture transactions, but we have not determined the timing or structure of any transaction. If we need to raise additional funds in the future and such funds are not available on reasonable terms, if at all, our commercialization
efforts may be impeded, our revenues may be limited and our operating results may suffer.

Final results from our ongoing clinical trials for
thymalfasin, SCV-07, and RP101 may differ materially from interim or pre-clinical trial results. These clinical trials could be affected by the future actions of our partners, unexpected delays, unanticipated patient drop out rates or adverse side
effects, future actions by the United States Food and Drug Administration (FDA) or equivalent regulatory authorities in Europe or other countries or additional expenses.

Clinical trials are inherently risky and may reveal that our product candidates are ineffective or have unanticipated drug interactions that may
significantly decrease the likelihood of regulatory approval. On November 5, 2008, we announced the top-line results from a large, randomized, phase 3 clinical trial evaluating thymalfasin in combination with pegylated interferon alpha-2a
(peg-IFN-2a) and ribavirin (RBV) as a treatment for patients with hepatitis C virus (HCV) who have not responded to prior therapy consisting of peg-IFN and RBV alone (current standard of care). The thymalfasin treated group did not achieve
statistical significance for the primary end point of sustained virological response (SVR) as assessed in the primary analysis population, i.e. the intent-to-treat population. In the secondary, prospectively defined population of patients who
completed the full course of 48 weeks of treatment with thymalfasin in addition to peg-IFN-2a and RBV (Completer Population), the primary endpoint was achieved with statistical significance. These results did not meet our expectations based upon
prior clinical trials. Similarly, the results of our thymalfasin phase 2 melanoma clinical trial do not necessarily predict future clinical or commercial success. Finally, the results of studies in SCV-07, including a phase 2A for HCV, and RP101
pre-clinical and phase 1 trial results also do not predict clinical or commercial success.

We may face numerous unforeseen events during,
or as a result of, clinical trials that could delay or prevent commercialization of our product candidates including: our product candidate clinical trials may not prove statistical significance; negative or inconclusive clinical trial results may
require us to conduct further testing or we may choose to abandon projects that we had been expecting to complete; clinical trials may be halted due to safety reasons; patient drop out rates in our clinical trial may be higher than anticipated; the
FDA, its European equivalent EMEA or the Chinese State Food and Drug Administration (SFDA) may not approve our products for commercialization or may require additional clinical trial data prior to approving our products.

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 or promote our drugs, and if they are not successful in their efforts or fail to do so, our business will suffer. For example, Sigma-Tau is responsible for the development and marketing of ZADAXIN (thymalfasin) in most
of Europe. Biocompatibles is primarily responsible for the efforts to obtain regulatory approval in China for the DC Bead, and RESprotect is primarily responsible for the scale-up of production for RP101. We generally do not have control over the
amount and timing of resources that our business partners devote to our collaborative efforts, and some 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 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 with our collaborators, including disputes over ownership rights to intellectual property, know-how or technologies developed with our collaborators. 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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We rely on third parties to supply our clinical trial and commercial products. Deficiencies in their work could delay
or harm one or more important areas of our business including our sales, clinical trials or the regulatory approval process.

We rely on
third parties, who are subject to regulatory oversight, to supply our clinical and commercial products. The manufacturing of the raw material and the processing to finished product of ZADAXIN is done in few batches in any given three-month period.
Manufacturing interruptions or failure or delay of product to meet quality assurance specifications could adversely affect shipments and recognition of sales of ZADAXIN in any period and impair our relationships with customers and our competitive
position. During 2006, we experienced failures and lower yields on production runs from our sole supplier of bulk API product for the manufacture of ZADAXIN for our current markets including China and our current ZADAXIN clinical trials. We have
taken and are taking various actions to ensure that our sales are not interrupted; through September 30, 2008, our planned inventory levels of finished product have been met by additional production runs and our sales of ZADAXIN and supply of
clinical trial product have been unaffected. However, the production run failures and the related costs incurred in additional production runs are circumstances that have not been economical for our supplier. Our supplier is working to remedy the
production problems, but has not been able to produce our product at targeted yields and costs. Until the production problems are remedied, we may suffer production problems that may cause future interruptions in product supply that may harm our
business. In addition, if sales of ZADAXIN were to increase dramatically, our third-party suppliers may not be able to supply ZADAXIN quickly enough, which could limit our ability to satisfy increased demand or could adversely affect the ability of
these suppliers to provide products for our clinical trials. In addition, Biocompatibles is the sole supplier of the DC Bead. If unanticipated deficiencies in these suppliers occur, we could experience delays in our ability to fulfill regulatory
requirements which may adversely affect our sales or prospects for regulatory marketing approvals. We have an exclusive supplier of pegylated interferon alpha and ribavirin for our European phase 3 HCV clinical trial, who also supplied all of the
pegylated interferon used in our U.S. phase 3 HCV clinical trials, and RESprotect is the exclusive supplier of RP101 for our phase 2 study evaluating the safety and efficacy of RP101. In addition, we have an exclusive supplier of SCV-07 for our
anticipated phase 2 HCV and mucositis SCV-07 clinical trials. Any unanticipated deficiencies in these suppliers, recall of the manufacturing lots or similar action regarding the pegylated interferon alpha, ribavirin or RP101 used in our clinical
trials could delay the trials or detract from the integrity of the trial data and its potential use in future regulatory filings.

We rely on third
parties and corporate collaborators to conduct clinical trials and these third parties may not perform satisfactorily.

We rely on third
parties including Sigma Tau, as well as contract research organizations, medical institutions, clinical investigators, contract laboratories, and collaborative partners in the conduct of clinical trials for our product candidates. If these parties,
whom we do not control, do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines or choose not to continue their relationship with us, if the third parties need to be replaced, or if the quality or
accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical or clinical activities may be extended, delayed, suspended or terminated, and we
may not be able to obtain regulatory approval for, or successfully commercialize our product candidates. We are in discussions with Sigma-Tau regarding the sharing of expenditures for future thymalfasin trials and have not determined
responsibilities for the various trials. The outcome of these negotiations will affect our future operating results including the timing of proceeding with such trials.

If third-party reimbursement is not available or patients cannot otherwise pay for ZADAXIN, the DC Bead, SCV-07 or RP101, we may not be able to successfully market them.

Significant uncertainty exists as to the reimbursement status of new therapeutic products, such as ZADAXIN, the DC Bead, SCV-07 and RP101. We cannot
assure you that third-party insurance coverage and reimbursement will be available for therapeutic products we might develop. We cannot assure you that we will be able to maintain or increase third-party payments for ZADAXIN or obtain third-party
payments for the DC Bead in China. The failure to obtain or maintain third-party reimbursement for our products would harm our business. Further, we cannot assure you that additional limitations will not be imposed in the future in the United States
or elsewhere on drug coverage and reimbursement due to proposed health care reforms. Our commercial rights to RP101 are limited to the United States and Canada. In many emerging markets where we have marketing rights to ZADAXIN, but where government
resources and per capita income may be so low that our products will be prohibitively expensive, we may not be able to market our products on economically favorable terms, if at all.

Efforts by governmental and third-party payers to contain or reduce health care costs or the announcement of legislative proposals or reforms to
implement government controls could cause us to reduce the prices at which we market our drugs, which would reduce our gross margins and may harm our business.



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Additional clinical trials will be required for the successful U.S. and European commercialization of ZADAXIN and for
the continued success of our commercialization efforts in China and other markets. If the results of clinical trials are not favorable, we will be unable to obtain regulatory approval for the intended indications we are evaluating and our sales
efforts in China and other markets where ZADAXIN is approved will be harmed.

Our ability to achieve and sustain operating profitability
depends in large part on our ability to commence, execute and complete clinical programs and obtain additional regulatory approvals for ZADAXIN and other drug candidates, particularly in the United States and Europe. We are also dependent on our
ability to increase ZADAXIN sales in China and other markets. In particular, our ability to achieve and sustain profitability will depend in large part on our ability to commercialize ZADAXIN for the treatment of HCV or malignant melanoma in the
United States and Europe and RP101 in the United States and Canada.

To obtain regulatory approvals, we must, among other requirements,
complete carefully controlled and well-designed clinical trials demonstrating that a particular drug is safe and effective for the applicable disease. We cannot depend on data from prior trial results to predict or demonstrate that our potential
drug products are safe and efficacious under regulatory guidelines to qualify for commercial sale. On November 5, 2008, we announced the top-line results from a large, randomized, phase 3 clinical trial evaluating thymalfasin in combination
with pegylated interferon alpha-2a (peg-IFN-2a) and ribavirin (RBV) as a treatment for patients with hepatitis C virus (HCV) who have not responded to prior therapy consisting of peg-IFN and RBV alone (current standard of care). The thymalfasin
treated group did not achieve statistical significance for the primary end point of SVR as assessed in the primary analysis population, i.e. the intent-to-treat population. In the prospectively defined secondary population of patients who completed
the full course of 48 weeks of treatment with thymalfasin in addition to peg-IFN-2a and RBV (Completer Population), the primary endpoint was achieved with statistical significance. These results did not meet our expectations based upon prior
clinical trials. Given the overall profile and prior clinical results for ZADAXIN, we do not expect that these results will have a significant effect on our sales of ZADAXIN, however, we cannot assure you that the announcement of these results will
not adversely affect our sales.

In June 2007, we reported positive data from a phase 2 trial, also conducted by Sigma-Tau, treating
patients with stage IV melanoma indicating that thymalfasin in combination with dacarbazine (DTIC) chemotherapy and low dose interferon alpha met its primary endpoint by reaching the tumor response rate required to reject the null hypothesis. In
fact, two of the thymalfasin treated groups had a tripled overall response rate compared to stage IV melanoma patients treated with DTIC, the current standard of care, and low dose interferon alpha. In addition, survival, a key secondary endpoint,
was extended by nearly 3 months.

We and Sigma-Tau are planning the design of a phase 3 melanoma trial and our regulatory strategy
including a Special Protocol Assessment (SPA) to be filed with the FDA. Thymalfasin phase 3 clinical development and commercialization plans for HCV and melanoma have potentially significantly different timelines, costs, and sales potential, and the
markets for these two products differ in terms of competitive products and other factors. Consequently, before proceeding with a further melanoma trial, we expect that we and Sigma-Tau will review the recently announced results of the HCV clinical
trial in order to determine the next steps for an optimal thymalfasin development program.

We cannot assure you that the final design of
any trial that is approved will meet our expectations, that we or Sigma-Tau will receive approval for the indication or that we will achieve significant levels of sales. Further, we have not reached agreement on expense sharing for the trial, and
our future expenses and ability to proceed with the trial are dependent in part on the conclusion of such discussions. If we cannot proceed with the trial for any reason or the trial is unsuccessful, or even if successful, if we do not achieve
commercially meaningful results, our business will be harmed.

Higher than anticipated patient drop out rates in our clinical trials could adversely
affect trial results and make it more difficult to obtain regulatory approval.

In December 2005 and June 2006, we announced results
from our two U.S. phase 3 HCV clinical trials. These clinical trials did not demonstrate that the combination of ZADAXIN and pegylated interferon alpha provides a statistically significant clinical benefit when compared to the use of pegylated
interferon alpha alone in non-responder patients. These results made Sigma-Taus efforts to fully recruit patients for the currently ongoing ZADAXIN phase 3 HCV triple therapy combination trial more difficult and enrollment took longer than
planned. Enrollment of the 553 patients in this trial was completed in December 2006. In addition, HCV clinical trials are lengthy. The trials require patient treatment for 48 weeks and a follow-up observation period for an additional 24 weeks.
Patient dropouts are expected and each of our two phase 3 HCV clinical trials in the United States enrolled more than the planned number of 500 patients, but even then dropouts were higher than anticipated. A patient who drops out at any point in
the 72 weeks of the trial is considered a failure to respond in results of the clinical trial. In general, the fewer patients who complete each trial, the higher the positive response rate for the group of remaining thymalfasin treated
patients in such trial needs to be in order to demonstrate statistical significance. Therefore, a higher than anticipated dropout rate lowers the chances of proving statistical significance which could adversely affect clinical trial results.
Dropouts may have affected the final results of the European phase 3 HCV triple therapy combination trial and may affect the pancreatic cancer phase 2 clinical trial for RP101, our anticipated phase 2 trials for HCV and mucositis for SCV-07 and
other trials we conduct.



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We cannot predict the safety profile of the use of thymalfasin, RP101 or SCV-07 when used in combination with other
drugs.

Many of our trials involve the use of thymalfasin in combination with other drugs and our pancreatic cancer clinical trial
involves RP101 in combination with gemcitabine. SCV-07 may be developed to be used in combination with other drugs. Some of these drugs, particularly pegylated interferon alpha, ribavirin, non-pegylated interferon alpha, dacarbazine and gemcitabine
are known to cause adverse patient reactions. We cannot predict how ZADAXIN, RP101 or SCV-07 will work with other drugs, including causing possible adverse side effects not directly attributable to the other drugs that could compromise the safety
profile of thymalfasin, RP101 or SCV-07 when used in certain combination therapies.

If we do not obtain regulatory approval for thymalfasin, RP101 or
SCV-07 for the intended indications that we are evaluating, our revenues will be limited and we may never become profitable.

Our
ability to execute on our business strategy is largely dependent on our ability to obtain regulatory approval for the use of thymalfasin, particularly in the United States and Europe, for the use of RP101 in the United States, and for the use of
SCV-07 in major markets, excluding Russia. The regulatory approval processes in the United States and Europe are demanding and typically require 12 months or more in the United States and 18 months or more in Europe from the date of submission of an
NDA. We have committed significant resources, including capital and time, to develop these products, and intend to continue to do so, including the initiation and execution of additional clinical trials, with the goal of obtaining such approvals. If
we do not obtain these approvals, we will be unable to achieve any revenue from these products in these major markets and our thymalfasin sales in other jurisdictions could decline.

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 may change from time to time and new regulations may be adopted.

Obtaining
regulatory approval in developing countries also is time-consuming and expensive. In some countries where we are contemplating marketing and selling thymalfasin, the regulatory approval process often relies on prior approvals obtained in the United
States or in Europe. Without such prior approvals, our ability to obtain regulatory approvals for thymalfasin in these countries may be delayed or prevented. In addition, to secure these regulatory approvals, we will need, among other things, to
demonstrate favorable results from additional clinical trials of thymalfasin. 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, and we have experienced such difficulties and have been unable to meet such regulatory filing requirements. We cannot assure you that
we will ultimately obtain regulatory approvals in our targeted countries in a timely and cost-effective manner or at all. If we fail to obtain the required regulatory approvals to develop, market and sell thymalfasin in countries where we currently
do not have such rights, our revenues will be limited, and our future prospects will be dependent upon our ability to in-license or to bring earlier stage products to market, any of which will require substantial financial expenditures.

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 impose costly procedures
upon our activities. Even if we obtain regulatory approval for our products, such approval may impose limitations on the indicated uses for which our products may be marketed. Unsatisfactory data resulting from clinical trials may also adversely
affect our ability to market and sell thymalfasin in markets where it is approved for sale.

Regulatory approval is necessary to permit us to market the
DC Bead in China. If we are unable to secure regulatory approval in China, we will be unable to market the DC Bead in China and our future sales potential in this market could be harmed.

In June 2006, we announced our agreement with Biocompatibles International plc. (Biocompatibles) to become the exclusive distributor in China of the DC
Bead, a chemotherapeutic drug delivery embolic agent designed to be used in the treatment of liver cancer. While the DC Bead is approved in Europe for the use in the treatment of malignant hypervascularized tumors, it has not yet received regulatory
approval in China. Biocompatibles is responsible, with our assistance and financial support of 50% of all costs, for seeking and obtaining the regulatory approval for marketing the product in China. We, on behalf of Biocompatibles, filed a
regulatory submission in China in December 2006; however, we cannot give assurance that such submission will be approved by the regulatory authorities. If clinical trials in China are required as part of the regulatory process, the regulatory
submission for marketing approval could be delayed for a considerable period of time, and there can be no assurance that the results of clinical trials would support a regulatory submission or that the regulatory authorities would approve the
product to be commercialized and sold in China. To the extent that additional information or clinical trials are required by the regulatory authorities, or we do not receive regulatory approval in China, our future sales potential in China could be
harmed.



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If we are not able to establish and maintain adequate manufacturing relationships, the development and sale of our
products could be impaired.

To be successful, our products must be manufactured in commercial quantities, in compliance with stringent
regulatory requirements and at an acceptable cost. Typically we have at any time only one supplier for each phase of manufacturing of our product and the failure to manage, retain, or timely replace our suppliers would harm our business. The
manufacturing facilities of our suppliers are subject to inspection by regulatory authorities to ensure their compliance with regulatory requirements and standards. Manufacturing interruptions or failure to comply with regulatory requirements could
significantly delay clinical development of potential products and reduce third-party or clinical researcher interest and support of proposed trials. These interruptions or failures could also impede commercialization of our products, including
sales of thymalfasin in approved markets, and impair our competitive position. Any of these developments would harm our business.

We are
in the process of registering new suppliers for ZADAXIN with regulatory agencies in markets where thymalfasin is approved for sale. This process, quality assurance and other steps could cause delays or interruptions of supply in certain other
markets. In some countries, a manufacturing change may require additional regulatory approvals that may delay thymalfasin marketing approvals in new markets. 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.

Our business strategy is dependent on our ability to in-license or otherwise acquire the
rights to develop and commercialize products. If we fail to acquire such rights or are unsuccessful in our efforts to develop such products and obtain regulatory approval to market and successfully commercialize them, our business will suffer.

All of our products, including thymalfasin, the only one for which we have sales revenue, have been in-licensed by us. We do not conduct
product discovery and typically have in-licensed our products from third parties who have discovered the products and conducted at least some pre-clinical research on them. The competition for attractive products to in-license is intense, and we
cannot assure you that we will be able to in-license products in the future on acceptable terms, if at all. In addition, we face the risks of developing the in-licensed products and the risks and uncertainties of conducting clinical trials and
seeking regulatory approval to market the in-licensed products, all of which require years of effort and the commitment of significant financial resources. Our ability to grow our business requires the development and commercialization of additional
products. If we are unable to in-license products on acceptable terms and successfully develop and commercialize them, our business could be harmed.

If
we lose key personnel or are unable to attract and retain additional, highly skilled and experienced 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 worldwide nature of our
business. There is intense competition for qualified management, scientific, clinical, regulatory, and sales and marketing 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 particular, our efforts to in-license or acquire, develop and commercialize product candidates for China require the addition of clinical and regulatory personnel and the capabilities to expand our sales and
marketing operation. In addition, we assign numerous key responsibilities to a limited number of individuals, and we would experience difficulty in finding immediate replacements for any of them. In April 2008, our former Executive Vice President
and Chief Financial Officer departed the Company and we are currently searching for a replacement. 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 for any of our personnel.

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 large, and therefore relatively few, orders within any nine month period. 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. We rely on three to nine importers, in any given quarter, to supply substantially all of our product in China. Because we use a small number of
importing agents in China, our receivables from any one importing agent are material, and if we were unable to collect receivables from any importer, our business and cash-flow would be adversely affected.

Changes in Chinas political, social and economic environment may affect our financial performance.

Our financial performance may be affected by changes in Chinas political, social and economic environment. The role of the Chinese central and local
governments in the Chinese economy is significant. Chinese policies toward economic liberalization, and laws and policies affecting foreign companies, currency exchange rates and other matters could change, resulting in greater restrictions on our
ability to do business in China. Any imposition of surcharges or any increase in Chinese tax rates could hurt our operating results. The Chinese government could revoke, terminate or suspend our license for national security and similar reasons
without compensation to us. If the government of China were to take any of these actions, we would be prevented from conducting all or part of our business. Any failure on our part to comply with governmental regulations could result in the loss of
our ability to market our products in China.



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Our sales of thymalfasin may fluctuate due to seasonality of product orders and sales in any quarter may not be
indicative of future sales.

Our sales for the quarter ended June 30, 2003 were greatly affected by the demand in China for
thymalfasin in connection with the treatment of SARS. To date, SARS has not re-emerged, like influenza, as a seasonal public health problem. However, if SARS or a similar epidemic were to emerge, it is not possible to predict what effect, if any,
this would have on future sales of thymalfasin. Although we do not market thymalfasin for use in treating such epidemic diseases, if thymalfasin is purchased in connection with future outbreaks of seasonal viral contagions, product sales could
become more concentrated in certain quarters of the calendar year, quarterly sales levels could fluctuate and sales in any quarter may not be indicative of sales in future periods.

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,
and we have limited intellectual property protection in China.

Our success depends significantly on our ability to obtain and maintain
meaningful patent protection for our products and technologies and to preserve our trade secrets. 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 that may be issued, if any, 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 thymalfasin have expired, including composition of matter patents, we have rights to other patents and patent applications relating to thymalfasin and thymalfasin analogues, including method
of use patents with respect to the use of thymalfasin for certain indications. Additionally, thymosin alpha 1 (thymalfasin), the chemical composition of thymalfasin, has received Orphan Drug designation in the United States for the treatment of
stage IIb through stage IV malignant melanoma. If other parties develop generic forms of thymalfasin for other indications, including conducting clinical trials for such indications, our patents and other rights might not be sufficient to prohibit
them from marketing and selling such generic forms of thymalfasin. If other parties develop analogues or derivatives of thymalfasin, our patents and other rights might not be sufficient to prohibit them from marketing these analogues or derivatives.

Pharmaceutical products are either not patentable or have only recently become patentable in some of the countries in which we market or
may market thymalfasin. We do not have patent protection for thymalfasin in China, our largest market. Other companies market generic thymosin alpha 1 in China, sometimes in violation of our trademark or other rights which we defend by informing
physicians and hospitals of the practice as well as through the limited legal recourse. Past enforcement of intellectual property rights in many of these countries, including China in particular, 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 are involved in
intellectual property claims and litigation, the proceedings may divert our resources and subject us to significant liability for damages, substantial litigation expense and the loss of our proprietary rights.

Our commercial success 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 a third-party patent that may relate to our products and may cover a method of action used by thymalfasin. We cannot assure you that our mechanism of action does not infringe
on their claim. In addition, we may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our potential products. For example, U.S. patent applications may be kept confidential for 12 or more
months while pending in the Patent and Trademark Office, and patent applications filed in foreign countries are often first published nine months or more after filing. 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, regardless of merit, 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. Any
conflicts resulting from the patent rights of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection.



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If other companies obtain patents with conflicting claims, we may be required to obtain licenses to those
patents or develop or obtain alternative technology to manufacture or market the affected products and processes. We may not be able to obtain any such licenses on acceptable terms or at all. Any failure to obtain such licenses could delay or
prevent us from pursuing the development or commercialization of our potential products. Our efforts to defend against any of these claims would require us to devote resources and attention that could have been directed to our operations and growth
plans.

We may need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine
the scope and validity of others rights. If litigation results, a court may find our patents or those of our licensors invalid or may find that we have infringed on a competitors rights. If any of our competitors have filed patent
applications in the United States which claim technology we also have invented, the Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology. 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.

We may not be able to successfully develop or commercialize our products. We may consider strategic alliances with other companies in efforts to broaden our
product development pipeline.

While we have limited sales of thymalfasin in certain markets, we do not yet have regulatory approval for
thymalfasin for the key markets of the United States, Europe and Japan and, in this respect, thymalfasin is still being developed. In 2006 we acquired the rights to distribute the DC Bead in China, but we must receive regulatory approval before we
can commercialize this product. Our only other potential products presently are SCV-07 and RP101, and each of them is in an earlier stage of development than thymalfasin. We may consider and undertake various strategies to expand our portfolio of
potential products, including acquiring product candidate rights through licenses or other relationships, or through other strategic relationships including acquisitions of other companies that may have proprietary rights to other development
candidates or the capability to discover new drug candidates. Such transactions could require a substantial amount of our financial resources, or, if equity is involved, may result in substantial dilution to current stockholders. Strategic
transactions also require substantial management time and effort and are subject to various risks that could adversely affect us or our financial results.

To fully develop our products, we will need to commit substantial resources to extensive research, development, pre-clinical testing, clinical trials, manufacturing scale-up and regulatory approval prior to the
potential products being ready for sale. We cannot assure that our efforts will produce commercially viable products. 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. For the DC Bead, we are obligated to pay half of the costs in our efforts to obtain regulatory approval in China. For RP101, we are obligated to make milestone payments if a phase 3 trial is
successful. 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 thymalfasin and our sales have been primarily in a single country, China. Our future revenue growth depends
to a great extent on increased market acceptance and commercialization of thymalfasin in additional countries, particularly in the United States and Europe. If we fail to successfully market thymalfasin, or if we cannot commercialize this drug in
the United States and other additional markets, our revenue and operating results will be limited. If unexpected and serious adverse events are reported, or if expected efficacy results are not achieved, it would have a material adverse effect on
our business. Our future revenue will also depend in part on our ability to develop other commercially viable and accepted products, such as the DC Bead and RP101. Market acceptance of our products will depend on many factors, including our ability
to convince prospective customers to use our products as an alternative to other treatments and therapies and to convince prospective strategic partners to market our products effectively and to manufacture our products in sufficient quantities with
acceptable quality and at an acceptable cost. In addition, doctors must opt to use treatments involving our products. If doctors elect to use a different course of treatment, demand for our drug products would be reduced. Failure to do any of the
above will lead to an unfavorable outcome on the results of our operations.

We have a history of operating losses and an accumulated deficit. We expect
to incur losses in the near term and may not be profitable in the future.

Although we reported operating net income for the three
months ended September 30, 2008, we reported net loss of $5,205,000 for the nine months ended September 30, 2008. In addition, we have experienced significant operating losses in the past, and as of September 30, 2008, we had an
accumulated deficit of approximately $174 million. 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,
and these losses may increase if we cannot increase or sustain revenue. As a result, we may not achieve profitability in the future.



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We have limited sales, marketing and distribution capabilities outside of China, which may adversely affect our
ability to successfully commercialize our products.

Outside of our current principal market of China, we have limited sales, marketing
and distribution capabilities, and we anticipate that we may be relying on third-party collaborators to sell, market and distribute our products for the foreseeable future particularly in the major pharmaceutical markets of the United States, Europe
and Japan should we receive regulatory approval to market our products in those territories. 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. We may receive approvals permitting us to sell in additional markets but not have the financial resources to fund sales and marketing efforts. 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 future operating results. Moreover, 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.

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, if at all, 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.

We depend on international sales, and global conditions could negatively affect our
operating results.

A large majority of our sales are in the Peoples Republic of China. Heightened tensions resulting from the
current geopolitical conditions in the Middle East, North Korea and elsewhere could worsen, causing disruptions in foreign trade, which would harm our sales. In particular, 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 geopolitical conditions could decrease our sales and harm our operating results.

Any reoccurrence of Severe Acute Respiratory Syndrome (SARS) or the outbreak of a different contagious disease such as the Avian Flu may adversely impact our operations and some of our key customers.

The 2003 SARS outbreak was most notable in China and a small number of cases were reported in 2004. There was no significant impact to
our ability to fill customer orders. However, if there were to be another outbreak of SARS or a different contagious disease, such as Avian Flu, and if our employees contracted the disease or were restricted from performing routine sales activities,
our business could be materially harmed. Finally, if one of our key customers is required to close for an extended period, we might not be able to ship product to them, our revenue would decline and our financial performance would suffer.

If we are unable to comply with environmental and other laws and regulations, our business may be harmed.

We are subject to various federal, state and local laws, regulations and recommendations relating to the use, manufacture, storage, handling and disposal
of hazardous materials and waste products (including radioactive compounds and infectious disease agents), as well as safe working conditions, laboratory and manufacturing practices and the experimental use of animals. The extent of government
regulation that might result from future legislation or administrative action in these areas cannot be accurately predicted.

We do not
currently maintain hazardous materials at our facilities. 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 environmental laws and regulations. Further, in the event of an accident, we would be liable for any damages that result, and the liability could exceed our resources.

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 will increase. Our success depends on our ability to compete in
this industry, but we cannot assure you that we will be able to successfully compete with our competitors. Increased competitive pressure could lead to intensified price-based competition resulting in lower prices and margins, which would hurt our
operating results. 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 our targeted indications that will be superior to
ours.

Our stock price may be volatile, and an investment in our stock could suffer a decline in value.

The market price of our common stock has experienced, and may continue to experience, substantial volatility due to many factors, some of which we have no
control over, including:



| |  |  | progress and results of clinical trials involving thymalfasin, RP101 and SCV-07;
| | - |  | --------------------------------------------------------------------------------



| |  |  | progress of thymalfasin through the regulatory process, especially regulatory actions and the adequacy of clinical data and documentation for regulatory purposes in
the United States, Europe and Japan;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | progress of the DC Bead through the regulatory process, especially regulatory actions and the adequacy of clinical data and documentation for regulatory purposes in
China;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | timing and achievement of milestones;
| | - |  | -------------------------------------



| |  |  | changes in our agreements or relationships with collaborative partners;
| | - |  | -----------------------------------------------------------------------



| |  |  | announcements of technological innovations or new products by us or our competitors;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | announcement and completion of corporate acquisition, merger, licensing or marketing arrangements, or sales of assets;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | government regulatory action affecting our drug products or our competitors drug products in both the United States and foreign countries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | developments or disputes concerning patent or proprietary rights;
| | - |  | -----------------------------------------------------------------



| |  |  | changes in the composition of our management team or board of directors;
| | - |  | ------------------------------------------------------------------------



| |  |  | changes in company assessments or financial estimates by securities analysts;
| | - |  | -----------------------------------------------------------------------------



| |  |  | actual or anticipated fluctuations in our quarterly operating results;
| | - |  | ----------------------------------------------------------------------



| |  |  | changes in assessments of our internal controls over financial reporting;
| | - |  | -------------------------------------------------------------------------



| |  |  | general stock market conditions and fluctuations for the emerging growth and biopharmaceutical market sectors;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | economic conditions in the United States or abroad; and
| | - |  | -------------------------------------------------------



| |  |  | broad financial market fluctuations in the United States, Europe or Asia.
| | - |  | -------------------------------------------------------------------------

In the past, following periods of large price declines in the public market price of a companys securities, securities class action litigation has
often been initiated against that company. Litigation of this type could result in substantial costs and diversion of our attention and resources, which would hurt our business. Any adverse determination in litigation could also subject us to
significant liabilities.

Substantial sales of equity in our subsidiaries or our stock or the exercise or conversion of options or convertible
securities may impact the market price of our common stock.

Our collaborative partner Sigma-Tau and affiliates hold a substantial
amount of our stock. The stock is freely tradeable and Sigma-Tau is not under any obligation to SciClone which would prevent it from selling some or all of the stock it holds except for applicable U.S. insider trading regulations with respect to
possession of material non-public information by Sigma-Tau or its officers and directors.

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 or sell equity in a subsidiary, the
percentage ownership of our present stockholders of the respective entities will be reduced and the price of our common stock may fall.

Sales of our
common stock by officers and directors could affect our stock price.

Our board of directors has approved an amendment to our trading
policy that permits officers and directors to enter into trading plans that comply with the requirements of Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. Rule 10b5-1 allows corporate officers and directors to adopt written,
pre-arranged stock trading plans when they do not have material, non-public information. Using these plans, officers and directors can gradually diversify their investment portfolios, can spread stock trades out over an extended period of time to
reduce any market impact and can avoid concerns about initiating stock transactions at a time when they might be in possession of material, non-public information. As of September 30, 2008, no director or officer has such a plan however an
officer or director may do so in the future. We expect future sales by officers and directors either under 10b5-1 plans or otherwise as a result of their personal financial planning. We do not believe the volume of such sales would affect our
trading price; however, the market could react negatively to sales by our officers and directors, which could affect the trading price of our stock.

Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us, which may be beneficial to our stockholders, more difficult.

Certain anti-takeover provisions of Delaware law and our charter documents as currently in effect may make a change in control of our company more
difficult, even if a change in control would be beneficial to our stockholders. Our charter documents contain certain anti-takeover provisions, including provisions in our certificate of incorporation providing that stockholders may not cumulate
votes, stockholders meetings may be called by stockholders only if they hold 25% or more of



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our common stock and provisions in our bylaws providing that the stockholders may not take action by written consent. Additionally, our board of directors
has the authority to issue 10 million shares of preferred stock and to determine the terms of those shares of stock without any further action by the stockholders. The rights of holders of our common stock are subject to the rights of the
holders of any preferred stock that may be issued. The issuance of preferred stock could make it more difficult for a third-party to acquire a majority of our outstanding voting stock. Delaware law also prohibits corporations from engaging in a
business combination with any holders of 15% or more of their capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction. Our board of directors may use these
provisions to prevent changes in the management and control of our company. Also, on December 18, 2006, our Board of Directors declared a dividend distribution of one Preferred Stock Purchase Right (collectively, the Rights) for
each outstanding share of our Common Stock, each Right which entitles the registered holder to purchase from the Company one one-thousandth of a share of the Companys Series D Preferred Stock, $0.001 par value, at a price of $25.00 pursuant to
a Rights Agreement dated as of December 19, 2006, between the Company and Mellon Investor Services LLC. The Rights have certain anti-takeover effects. Under certain circumstances the Rights could cause substantial dilution to a person or group
who attempts to acquire the Company on terms not approved by our Board of Directors. Although the Rights should not interfere with an acquisition of the Company approved by the Board, the Rights may have the effect of delaying and perhaps improving
the terms of an acquisition for our stockholders, or deterring an acquisition of the Company. Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future.

Our investments are subject to certain risks which could materially adversely affect our overall financial position.

We invest our cash in accordance with an established internal policy and customarily in instruments which historically have been highly liquid and
carried relatively low risk. However, with recent turmoil in the credit markets, similar types of investments have experienced losses in value or liquidity issues which differ from their historical pattern. For example, we routinely have
invested in money market funds with large financial institutions. One or more of these funds could experience losses or liquidity problems and, although to date some of the largest financial institutions who sponsor such funds have offset
similar losses, there is no assurance that our financial institutions would either not incur losses or would offset any losses were they to occur. Further, we hold auction rate securities (ARS) which are collateralized by student
loans with most of such collateral in the aggregate being guaranteed by the U.S. government. These ARS are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar
intervals, usually every month. As of September 30, 2008, we held $1,629,000 of auction rate security investments and all of these had experienced failed auctions since February 2008. An auction failure means that the parties wishing
to sell securities could not. When an auction fails, the interest rate on such securities resets to a default rate which is usually higher and would require payment by the issuer, affecting its creditworthiness and therefore
potentially its ability to redeem such obligations and therefore avoid the higher interest payments.

In October 2008, the Company received,
from UBS AG, its broker-dealer, the offer of a nontransferable right to sell all of its ARS holdings at par to its broker-dealer at any time during the period of June 30, 2010 through July 2, 2012. The Company is currently evaluating the
Offer which is must accept no later than November 14, 2008, or the Offer will expire.

As a result of the aforementioned, our ability
to liquidate these investments and fully recover the carrying value of these investments in the near term is limited or may not exist. We have not written down any of our ARS investments as of September 30, 2008; however, we have reclassified
these holdings to long-term. Should any of our cash investments permanently lose value or have their liquidity impaired, it would have a material and adverse effect on our overall financial position by imperiling our ability to fund our
operations and forcing us to seek additional financing sooner than we would otherwise and such financing may not be available on commercially attractive terms.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial
reporting, which would harm our business and the trading price of our stock.

Effective internal controls are necessary for us to
provide reliable financial reports and to protect from fraudulent, illegal or unauthorized transactions. If we cannot provide effective controls and reliable financial reports, our business and operating results could be harmed. Moreover, as a
United States-based corporation doing business in China, these controls often need to satisfy the requirements of Chinese law as well as the requirements of United States law which frequently differ in certain aspects. We have in the past
discovered, and may in the future discover, areas of our internal controls that need improvement. Any failure to implement and maintain controls over our financial reporting, or difficulties encountered in the implementation of improvements in our
controls, could cause us to fail to meet our reporting obligations. Any failure to improve our internal controls or to address identified weaknesses in the future, if they were to occur, could also cause investors to lose confidence in our reported
financial information, which could have a negative impact on the trading price of our stock.



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New accounting pronouncements may impact our financial position or results of operations.

Future changes in financial accounting standards may cause adverse, unexpected fluctuations in the timing of the recognition of revenues or expenses and
may affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with frequency and may occur in the future and this may lead to changes in our accounting policies in the
future. One such new pronouncement issued in December 2004 by the Financial Accounting Standards Board (FASB) is FASB Statement No. 123 (revised 2004), Share-Based Payment (FAS 123R). FAS 123R requires share-based payments to
employees and directors, including grants of stock options, to be recognized in the statement of operations based on their fair values. We adopted FAS 123R on January 1, 2006. Accordingly, the adoption of FAS 123R had a significant impact on
our results of operations, although it has no impact on our cash or overall financial position. For the nine months ended September 30, 2008 and 2007, we recognized $1,414,000 and $1,712,000, respectively, of stock-based compensation expense in
accordance with FAS 123R.

New legislation may impact our financial position or results of operations.

Compliance with changing regulations concerning corporate governance and public disclosure has resulted in and may continue to result in additional
expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and The NASDAQ Stock Market rules, are creating uncertainty for companies such
as ours and costs are increasing as a result of this uncertainty and other factors. 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 has and may continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

We may be subject to currency exchange rate fluctuations, which could adversely affect our financial performance.

Substantially all of our product sales are denominated in U.S. dollars. Fluctuation in the U.S. dollar exchange rate with local currency directly affects
the customers cost for our product. In particular, a stronger U.S. dollar vis-à-vis the local currency would tend to have an adverse effect on sales and potentially on collection of accounts receivable. In July 2005, China shifted
its currency policy by establishing a 2% revaluation of the renminbi and referenced the renminbi to a basket of currencies, with a daily trading band of +/-0.3%. Depending on market conditions and the state of the Chinese economy, it is possible
that China will make further adjustments, including moving to a managed float system, with opportunistic interventions. This reserve diversification may negatively impact the United States dollar and U.S. interest rates. A trend to a stronger U.S.
dollar would erode margins earned by our Chinese importers and prompt them to ask us to lower our prices. We are subject to currency exchange rate fluctuations as a result of expenses incurred by our foreign operations. In particular, one of our
supply arrangements under which we purchase finished products is denominated in euros and costs of our operations in China are paid in local currency. Consequently, changes in exchange rates could unpredictably and adversely affect our operating
results and could result in exchange losses. To date, we have not hedged against the risks associated with fluctuations in exchange rates and, therefore, exchange rate fluctuations could have a material adverse impact on our future operating results
and stock price.

Our business and operations are especially subject to the risks of earthquakes and other natural catastrophic disasters.

Our corporate headquarters are located in the Silicon Valley area of Northern California, a region known for seismic activity. Although
we maintain a disaster recovery policy that includes storage of important corporate data in a different geographic region of the United States, all of our significant corporate data is stored in our headquarters facility and accordingly, a
significant natural disaster, such as an earthquake, could have a material adverse impact on our business, operating results, and financial condition.

Our stock price may continue to experience volatility and if we do not continue to comply with certain NASDAQ Global Market (NASDAQ) listing requirements, our common stock may be delisted which would make it more difficult to
sell our common stock.

Our common stock is listed on NASDAQ. As of November 4, 2008, the closing bid price of our common stock was
$0.93. On October 16, 2008, the NASDAQ suspended its requirement to maintain a minimum bid price of $1.00 and also suspended the rules requiring a minimum market value of publicly held shares through Friday, January 16, 2009. However,
these rules will be reinstated Monday, January 19, 2009. If we fail to meet NASDAQs listing criteria our common stock may be delisted. Our common stock would thereafter be traded in the non-NASDAQ, over-the-counter market. If our common
stock were delisted, it may be more difficult to dispose of, or get an accurate market value of, our common stock. This could severely limit our common shareholders ability to sell our common stock in the secondary market.

We are at risk of securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology companies have experienced
greater than average stock price volatility in recent years. If we faced such litigation, it could result in substantial costs and a diversion of managements attention and resources, which could harm our business.



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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 money market funds, certificates of deposit,
and U.S. Treasury, or U.S. government agency notes. In the past, we also invested in highly-rated, auction rate securities. The auction rate securities are classified as available-for-sale and consequently are recorded on the balance sheet at fair
value with unrealized gains or losses reported as a separate component of accumulated other comprehensive (loss) income. All of our investments mature within one year from date of purchase except for the auction rate securities whose ultimate
maturities range from 22 to 34 years, and our Italian state bonds that mature in 2013. Our holdings in investments, of any one issue, do not exceed 2% of our cash, cash equivalents and investments. Our investments in our investment securities are
subject to interest rate risk. If interest rates rise, the market value of our investments may decline, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. To minimize the exposure due to an
adverse shift in interest rates, we invest in short-term notes and maintain an average maturity of less than one year. A hypothetical 60 basis point increase in interest rates would result in an approximate $18,000 decrease (0.6%) in fair value of
our available-for-sale securities. This potential change is based on sensitivity analyses performed on our financial position at September 30, 2008. Actual results may differ materially. We do not hold any derivative financial instruments to
manage our interest rate risks.

As of September 30, 2008, we held approximately $1,629,000 in auction rate securities, classified as
long-term assets, with an auction rate feature whose underlying assets are generally student loans which are substantially backed by the federal government. In February 2008, auctions began to fail for these securities and each auction has failed
since February 2008. Effective January 1, 2008, we determined the fair market values of our financial instruments based on the fair value hierarchy established in SFAS 157 which requires an entity to maximize the use of observable inputs (Level
1 and Level 2 inputs) and minimize the use of unobservable inputs (Level 3 inputs) when measuring fair value. Given the current failures in the auction markets to provide quoted market prices of the securities as well as the lack of any correlation
to these instruments to other observable market data, we valued these securities using a pricing model with the most significant inputs categorized as Level 3. Significant inputs that went into the model were the credit quality of the issuer, the
percentage and types of guarantees (such as Federal Family Education Loan Program-FFELP), the probability of the auction succeeding or the security being called, an illiquidity discount factor, and tax status. Changes in the assumptions of the model
based on dynamic market conditions could have a significant impact on the valuation of these securities, which may lead us in the future to take an impairment charge for these securities.

Substantially all our sales and most of our manufacturing costs to date have been in U.S. dollars. However, our purchases from one of our contract
manufacturers are denominated in euros and costs of our marketing efforts in China are paid in local currency. In addition, we have certain cash balances denominated in euros. As a result, we are exposed to foreign currency rate fluctuations, and we
do not hedge against the risk associated with such fluctuations. Consequently, changes in exchange rates could unpredictably, materially and adversely affect our operating results and stock price and could result in exchange losses, although such
losses have been insignificant to date.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief
Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive
Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Controls

There have been no changes in our internal control over financial
reporting that occurred during the third quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the Effectiveness of Internal Controls

A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of inherent limitations in any control systems, no evaluation of controls can provide absolute assurance that all
control issues, if any, within a Company have been detected. We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls. This results in refinements to processes throughout our
organization. Notwithstanding these limitations, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Our Chief Executive Officer and Acting Chief Financial Officer has concluded that our
disclosure controls and procedures are, in fact, effective at the reasonable assurance level.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

None



|Item 1A. | Risk Factors
|-------- | ------------

The only material changes in our risk
factors from those previously disclosed in our Form 10-K for the year ended December 31, 2007, were as follows:



| |  |  | We modified our risk factor regarding revenue being dependent on the sale of ZADAXIN in foreign countries, particularly China, the third paragraph which now reads
in full as follows:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 operating results and financial condition will be harmed.

We have received regulatory
approvals to market ZADAXIN in China and to manufacture ZADAXIN and export the product from Italy. In order to continue our sales to China, we need to maintain these approvals. Our license to import ZADAXIN into China needs to be renewed every five
years and the next renewal is required in 2013. Although we have been successful in obtaining renewal earlier this year, there is no assurance that we will receive renewals in the future when applied for or that the renewals will not be conditioned
or limited in ways that limit our ability to conduct business in China. Further, our licenses to manufacture and export ZADAXIN from Italy are dependent upon our continuing compliance with regulations in Italy. Our business would be adversely
affected if we are not able to maintain these approvals.



| |  |  | We modified our risk factor regarding the potential need to obtain additional funding to support our long-term product development and commercialization which now
reads in full as follows:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

We believe our cash on hand and ongoing business operations will be sufficient to fund current business activities for the
foreseeable future. However, our ability to achieve and sustain operating profitability is dependent on expansion of sales of ZADAXIN and securing regulatory approval for DC Bead in China, the execution and successful completion of ZADAXIN, SCV-07,
and RP101 clinical trials and securing regulatory approvals for these products in the major pharmaceutical markets of the United States and Europe. We cannot assure you that such funds from operating activities will be sufficient, or that we will
attain profitable operations in future periods. In addition, we intend to develop other products and we may need additional funds in the future to support such development and to support future growth and achieve profitability. We are exploring
various alternatives for financing to provide us additional flexibility in managing our operations including a line of credit, debt financing, sales of equity of SciClone, and financing of our Chinese operations either through debt, equity or joint
venture transactions, but we have not determined the timing or structure of any transaction. If we need to raise additional funds in the future and such funds are not available on reasonable terms, if at all, our commercialization efforts may be
impeded, our revenues may be limited and our operating results may suffer.



| |  |  | We modified our risk factor regarding final results from our ongoing clinical trials for thymalfasin, SCV-07, and RP101 potentially being materially different from
interim or pre-clinical trial results, which now reads in full as follows:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Final results from our ongoing clinical trials for
thymalfasin, SCV-07, and RP101 may differ materially from interim or pre-clinical trial results. These clinical trials could be affected by the future actions of our partners, unexpected delays, unanticipated patient drop out rates or adverse side
effects, future actions by the United States Food and Drug Administration (FDA) or equivalent regulatory authorities in Europe or other countries or additional expenses.

Clinical trials are inherently risky and may reveal that our product candidates are ineffective or have unanticipated drug interactions that may
significantly decrease the likelihood of regulatory approval. On November 5, 2008, we announced the top-line results from a large, randomized, phase 3 clinical trial evaluating thymalfasin in combination with pegylated interferon alpha-2a
(peg-IFN-2a) and ribavirin (RBV) as a treatment for patients with hepatitis C virus (HCV) who have not responded to prior therapy consisting of peg-IFN and RBV alone (current standard of care). The thymalfasin treated group did not achieve
statistical significance for the primary end point of sustained viral response (SVR) as assessed in the primary analysis



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##### Table of Contents

population, i.e. the intent-to-treat population. In the prospectively defined secondary population of patients who completed the full course of 48 weeks of
treatment with thymalfasin in addition to peg-IFN-2a and RBV (Completer Population), the primary endpoint was achieved with statistical significance. These results did not meet our expectations based upon prior clinical trials. Similarly, the
results of our thymalfasin phase 2 melanoma clinical trial do not necessarily predict future clinical or commercial success. Finally, the results of studies in SCV-07, including a phase 2A for HCV, and RP101 do not predict clinical or commercial
success.

We may face numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent commercialization
of our product candidates including: our product candidate clinical trials may not prove statistical significance; negative or inconclusive clinical trial results may require us to conduct further testing or we may choose to abandon projects that we
had been expecting to complete; clinical trials may be halted due to safety reasons; patient drop out rates in our clinical trial may be higher than anticipated; the FDA, its European equivalent EMEA or the Chinese State Food and Drug Administration
(SFDA) may not approve our products for commercialization or may require additional clinical trial data prior to approving our products.



| |  |  | We modified our risk factor regarding additional clinical trials being required for the successful U.S. and European commercialization of ZADAXIN and for the
continued success of our commercialization efforts in China and other markets, which now reads in full as follows:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Additional
clinical trials will be required for the successful U.S. and European commercialization of ZADAXIN and for the continued success of our commercialization efforts in China and other markets. If the results of clinical trials are not favorable, we
will be unable to obtain regulatory approval for the intended indications we are evaluating and our sales efforts in China and other markets where ZADAXIN is approved will be harmed.

Our ability to achieve and sustain operating profitability depends in large part on our ability to commence, execute and complete clinical programs and
obtain additional regulatory approvals for ZADAXIN and other drug candidates, particularly in the United States and Europe. We are also dependent on our ability to increase ZADAXIN sales in China and other markets. In particular, our ability to
achieve and sustain profitability will depend in large part on our ability to commercialize ZADAXIN for the treatment of HCV or malignant melanoma in the United States and Europe and RP101 in the United States and Canada.

To obtain regulatory approvals, we must, among other requirements, complete carefully controlled and well-designed clinical trials demonstrating that a
particular drug is safe and effective for the applicable disease. We cannot depend on data from prior trial results to predict or demonstrate that our potential drug products are safe and efficacious under regulatory guidelines to qualify for
commercial sale. On November 5, 2008, we announced the top-line results from a large, randomized, phase 3 clinical trial evaluating thymalfasin in combination with pegylated interferon alpha-2a (peg-IFN-2a) and ribavirin (RBV) as a treatment
for patients with hepatitis C virus (HCV) who have not responded to prior therapy consisting of peg-IFN and RBV alone (current standard of care). The thymalfasin treated group did not achieve statistical significance for the primary end point of SVR
as assessed in the primary analysis population, i.e. the intent-to-treat population. In the prospectively defined secondary population of patients who completed the full course of 48 weeks of treatment with thymalfasin in addition to peg-IFN-2a and
RBV (Completer Population), the primary endpoint was achieved with statistical significance. Given the overall profile and prior clinical results for ZADAXIN, we do not expect that these results will have a significant effect on our sales of
ZADAXIN, however, we cannot assure you that the announcement of these results will not adversely affect our sales.

In June 2007, we
reported positive data from a phase 2 trial, also conducted by Sigma-Tau, treating patients with stage IV melanoma indicating that thymalfasin in combination with dacarbazine (DTIC) chemotherapy and low dose interferon alpha met its primary endpoint
by reaching the tumor response rate required to reject the null hypothesis. In fact, two of the thymalfasin treated groups had a tripled overall response rate compared to stage IV melanoma patients treated with DTIC, the current standard of care,
and low dose interferon alpha. In addition, survival, a key secondary endpoint, was extended by nearly 3 months.

We and Sigma-Tau are
planning the design of a phase 3 melanoma trial and our regulatory strategy including a Special Protocol Assessment (SPA) to be filed with the FDA. Thymalfasin phase 3 clinical development and commercialization plans for HCV and melanoma have
potentially significantly different timelines, costs, and sales potential, and the markets for these two products differ in terms of competitive products and other factors. Consequently, before proceeding with a further melanoma trial, we expect
that we and Sigma-Tau will review the recently announced results of the HCV clinical trial in order to determine the next steps for an optimal thymalfasin development program.

We cannot assure you that the final design of any trial that is approved will meet our expectations, that we or Sigma-Tau will receive approval for the
indication or that we will achieve significant levels of sales. Further, we have not reached agreement on expense sharing for the trial, and our future expenses and ability to proceed with the trial are dependent in part on the conclusion of such
discussions. If we cannot proceed with the trial for any reason or the trial is unsuccessful, or even if successful, if we do not achieve commercially meaningful results, our business will be harmed.



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| |  |  | We modified our risk factor regarding key personnel, which now reads in full as follows:
| | - |  | ----------------------------------------------------------------------------------------

If we lose key personnel or are unable to attract and retain additional, highly skilled and experienced 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 worldwide nature of our business. There is intense competition for qualified management, scientific, clinical, regulatory, and sales and marketing 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 particular, our efforts to in-license or acquire, develop and commercialize product candidates for China require the addition of clinical and regulatory personnel and the
capabilities to expand our sales and marketing operation. In addition, we assign numerous key responsibilities to a limited number of individuals, and we would experience difficulty in finding immediate replacements for any of them. In April 2008,
our former Executive Vice President and Chief Financial Officer departed the Company and we are currently searching for a replacement. 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 for any of our personnel.



| |  |  | We modified our risk factor regarding successfully developing or commercializing our products, the second paragraph of which now reads in full as follows:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

We may not be able to successfully develop or commercialize our products. We may consider strategic alliances with other companies in
efforts to broaden our product development pipeline.

To fully develop our products, we will need to commit substantial resources to
extensive research, development, pre-clinical testing, clinical trials, manufacturing scale-up and regulatory approval prior to the potential products being ready for sale. We cannot assure that our efforts will produce commercially viable products.
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. For the DC Bead, we are obligated to pay half of the costs in our efforts
to obtain regulatory approval in China. For RP101, we are obligated to make milestone payments if a phase 3 trial is successful. 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 modified our risk factor regarding operating losses, which now reads in full as follows:
| | - |  | -------------------------------------------------------------------------------------------

We have a history of operating losses and an accumulated deficit. We expect to incur losses in the near term and may not be profitable in the future.

Although we reported operating net income for the three months ended September 30, 2008, we reported net loss of $5,205,000 for the nine months
ended September 30, 2008. In addition, we have experienced significant operating losses in the past, and as of September 30, 2008, we had an accumulated deficit of approximately $174 million. 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, and these losses may increase if we cannot increase or sustain revenue. As a result, we may not
achieve profitability in the future.



| |  |  | We modified our risk factor regarding that we have limited sales, marketing and distribution capabilities outside of China, which now reads in full as follows:
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

We have limited sales, marketing and distribution capabilities outside of China, which may adversely affect our ability to
successfully commercialize our products.

Outside of our current principal market of China, we have limited sales, marketing and
distribution capabilities, and we anticipate that we may be relying on third-party collaborators to sell, market and distribute our products for the foreseeable future particularly in the major pharmaceutical markets of the United States, Europe and
Japan should we receive regulatory approval to market our products in those territories. 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. We may receive approvals permitting us to sell in additional markets but not have the financial resources to fund sales and marketing efforts. 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 future operating results. Moreover, 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.



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| |  |  | We modified our risk factor regarding our ability to establish and maintain adequate manufacturing relationships, which now reads in full as follows:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

If we are not able to establish and maintain adequate manufacturing relationships, the development and sale of our products could be
impaired.

To be successful, our products must be manufactured in commercial quantities, in compliance with stringent regulatory
requirements and at an acceptable cost. Typically we have at any time only one supplier for each phase of manufacturing of our product and the failure to manage, retain, or timely replace our suppliers would harm our business. The manufacturing
facilities of our suppliers are subject to inspection by regulatory authorities to ensure their compliance with regulatory requirements and standards. Manufacturing interruptions or failure to comply with regulatory requirements could significantly
delay clinical development of potential products and reduce third-party or clinical researcher interest and support of proposed trials. These interruptions or failures could also impede commercialization of our products, including sales of
thymalfasin in approved markets, and impair our competitive position. Any of these developments would harm our business.

We are in the
process of registering new suppliers for ZADAXIN with regulatory agencies in markets where thymalfasin is approved for sale. This process, quality assurance and other steps could cause delays or interruptions of supply in certain other markets. In
some countries, a manufacturing change may require additional regulatory approvals that may delay thymalfasin marketing approvals in new markets. 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.



| |  |  | We modified our risk factor regarding our investments being subject to certain risks, which now reads in full as follows:
| | - |  | -------------------------------------------------------------------------------------------------------------------------

Our investments are subject to certain risks which could materially adversely affect our overall financial position.

We invest our cash in accordance with an established internal policy and customarily in instruments which historically have been highly liquid and
carried relatively low risk. However, with recent turmoil in the credit markets, similar types of investments have experienced losses in value or liquidity issues which differ from their historical pattern. For example, we routinely have
invested in money market funds with large financial institutions. One or more of these funds could experience losses or liquidity problems and, although to date some of the largest financial institutions who sponsor such funds have offset
similar losses, there is no assurance that our financial institutions would either not incur losses or would offset any losses were they to occur. Further, we hold auction rate securities (ARS) which are collateralized by student
loans with most of such collateral in the aggregate being guaranteed by the U.S. government. These ARS are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar
intervals, usually every month. As of September 30, 2008, we held $1,629,000 of auction rate security investments and all of these had experienced failed auctions since February 2008. An auction failure means that the parties wishing
to sell securities could not. When an auction fails, the interest rate on such securities resets to a default rate which is usually higher and would require payment by the issuer, affecting its creditworthiness and therefore
potentially its ability to redeem such obligations and therefore avoid the higher interest payments.

In October 2008, the Company received,
from UBS AG, its broker-dealer, the offer of a nontransferable right to sell all of its ARS holdings at par to its broker-dealer at any time during the period of June 30, 2010 through July 2, 2012. The Company is currently evaluating the
offer which is must accept no later than November 14, 2008, or the offer will expire.

As a result of the aforementioned, our ability
to liquidate these investments and fully recover the carrying value of these investments in the near term is limited or may not exist. We have not written down any of our ARS investments as of September 30, 2008; however, we have reclassified
these holdings to long-term. Should any of our cash investments permanently lose value or have their liquidity impaired, it would have a material and adverse effect on our overall financial position by imperiling our ability to fund our
operations and forcing us to seek additional financing sooner than we would otherwise and such financing may not be available on commercially attractive terms.



| |  |  | We added a risk factor regarding our stock price volatility and our compliance with certain NASDAQ listing requirements which reads in full as follows:
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

Our stock price may continue to experience volatility and if we do not continue to comply with certain NASDAQ Global Market
(NASDAQ) listing requirements, our common stock may be delisted which would make it more difficult to sell our common stock.

Our common stock is listed on NASDAQ. As of October 29, 2008, the closing bid price of our common stock was $0.93. On October 16, 2008, the NASDAQ suspended its requirement to maintain a minimum bid price of $1.00 and also
suspended the rules requiring a minimum market value of publicly held shares through Friday, January 16, 2009. However, these rules will be reinstated Monday, January 19, 2009. If we fail to meet NASDAQs listing criteria our common
stock may be delisted. Our common stock would thereafter be traded in the non-NASDAQ, over-the-counter market. If our common stock were delisted, it may be more difficult to dispose of, or get an accurate market value of, our common stock. This
could severely limit our common shareholders ability to sell our common stock in the secondary market.



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| |  |  | We added a risk factor regarding our risk of securities class action litigation which reads in full as follows:
| | - |  | ---------------------------------------------------------------------------------------------------------------

We are at risk of securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us because biotechnology companies have experienced
greater than average stock price volatility in recent years. If we faced such litigation, it could result in substantial costs and a diversion of managements attention and resources, which could harm our business.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | Submission of Matters To a Vote of Security Holders
|------- | ---------------------------------------------------

None.



|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------



|               |  |                                                                                            
|-------------- |  | -------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                
|               | 
|31.1           |  | Rule 13a-14(a) Certification of Chief Executive Officer and Acting Chief Financial Officer.
|               | 
|32.1           |  | Section 1350 Certification of Chief Executive Officer and Acting Chief Financial Officer.  



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SIGNATURE

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: November 6, 2008 |  |  |  | /s/ Friedhelm Blobel, Ph.D.                                             
|                       |  |  |  | Friedhelm Blobel, Ph.D.                                                 
|                       |  |  |  | President and Chief Executive Officer and Acting Chief Financial Officer
|                       |  |  |  | (Principal Financial Officer)                                           



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INDEX TO EXHIBITS



|               |  |                                                                                            
|-------------- |  | -------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit                                                                                    
|               | 
|31.1           |  | Rule 13a-14(a) Certification of Chief Executive Officer and Acting Chief Financial Officer.
|               | 
|32.1           |  | Section 1350 Certification of Chief Executive Officer and Acting Chief Financial Officer.  



41