##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2003

OR

o    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.)

|                                                             |  |           
|------------------------------------------------------------ |  | ----------
|901 Mariners Island Blvd., Suite 205, San Mateo, California |  | 94404     
|(Address of principal executive offices)                     |  | (Zip code)

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

Yes x      No o

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

Yes x      No o

As of June 30, 2003, 38,257,025 shares of the registrants Common Stock,
no par value, were issued and outstanding.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Condensed Consolidated Financial Statements                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|                              |                                                                                               | SIGNATURES                                          
|                              |                                                                                               | INDEX TO EXHIBITS                                   
|Exhibit 10.1                 
|Exhibit 10.2                 
|Exhibit 31.1                 
|Exhibit 31.2                 
|Exhibit 32.1                 
|Exhibit 32.2                 



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SCICLONE PHARMACEUTICALS, INC.

INDEX

|                                                                                              |                                                                                                                        |  |    |          |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- |  | -- | -------- |  | 
|                                                                                              |                                                                                                                        |  |    | PAGE NO.
|                                                                                              |                                                                                                                        |  |    |         
|PART I. FINANCIAL INFORMATION                                                                 |                                                                                                                        |  |    |         
|Item 1. Condensed Consolidated Financial Statements (Unaudited)                               |                                                                                                                        |  |    |         
|                                                                                              | Condensed Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002                                        |  |    | 3        | 
|                                                                                              | Condensed Consolidated Statements of Operations for the
Three-month and Six-month periods ended June 30, 2003 and
2002 |  |    | 4        | 
|                                                                                              | Condensed Consolidated Statements of Cash Flows for the
Six-month periods ended June 30, 2003 and 2002                 |  |    | 5        | 
|                                                                                              | Notes to Condensed Consolidated Financial Statements                                                                   |  |    | 6        | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                        |  | 11 |         
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                        |  | 27 |         
|Item 4. Controls and Procedures                                                               |                                                                                                                        |  | 27 |         
|PART II. OTHER INFORMATION                                                                    |                                                                                                                        |  |    |         
|Item 2. Changes in Securities and Use of Proceeds                                             |                                                                                                                        |  | 28 |         
|Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                        |  | 28 |         
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                        |  | 30 |         
|Signatures                                                                                    |                                                                                                                        |  | 32 |         

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Condensed Consolidated Financial Statements




SCICLONE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                                        |   |             |              |              |   |            |              |  
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | ------------ | ------------ | - | ---------- | ------------ | -
|                                           |                                                                                                                                                                        |   | June 30,    |              | December 31,
|                                           |                                                                                                                                                                        |   | 2003        |              | 2002        
|                                           |                                                                                                                                                                        |   |             |              |             
|                                           |                                                                                                                                                                        |   | (unaudited) |              | (Note 1)    
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                        |   |             |              |              |   |            |             
|                                           | Cash and cash equivalents                                                                                                                                              |   | $           | 25,363,000   |              |   | $          | 20,233,000   |  
|                                           | Restricted short-term investments                                                                                                                                      |   |             | 685,000      |              |   |            | 685,000      |  
|                                           | Other short-term investments                                                                                                                                           |   |             | 324,000      |              |   |            | 232,000      |  
|                                           | Accounts receivable, net of allowance of
$638,000 in 2003 and 2002                                                                                                     |   |             | 11,923,000   |              |   |            | 9,276,000    |  
|                                           | Inventories                                                                                                                                                            |   |             | 2,936,000    |              |   |            | 3,431,000    |  
|                                           | Prepaid expenses and other current assets                                                                                                                              |   |             | 2,358,000    |              |   |            | 2,297,000    |  
|                                           |                                                                                                                                                                        |   |             |              |              |   |            |             
|Total current assets                       |                                                                                                                                                                        |   | 43,589,000  |              |              |   | 36,154,000 |             
|Property and equipment, net                |                                                                                                                                                                        |   | 90,000      |              |              |   | 111,000    |             
|Intangible assets, net                     |                                                                                                                                                                        |   | 647,000     |              |              |   | 682,000    |             
|Other assets                               |                                                                                                                                                                        |   | 148,000     |              |              |   | 164,000    |             
|                                           |                                                                                                                                                                        |   |             |              |              |   |            |             
|Total assets                               |                                                                                                                                                                        | $ | 44,474,000  |              |              | $ | 37,111,000 |             
|                                           |                                                                                                                                                                        |   |             |              |              |   |            |             
|LIABILITIES AND SHAREHOLDERS EQUITY      
|Current liabilities:                       |                                                                                                                                                                        |   |             |              |              |   |            |             
|                                           | Accounts payable                                                                                                                                                       |   | $           | 4,213,000    |              |   | $          | 3,150,000    |  
|                                           | Accrued compensation and employee benefits                                                                                                                             |   |             | 839,000      |              |   |            | 1,089,000    |  
|                                           | Accrued clinical trials expense                                                                                                                                        |   |             | 739,000      |              |   |            | 966,000      |  
|                                           | Accrued professional fees                                                                                                                                              |   |             | 546,000      |              |   |            | 679,000      |  
|                                           | Deferred revenue                                                                                                                                                       |   |             | 895,000      |              |   |            | 895,000      |  
|                                           | Other accrued expenses                                                                                                                                                 |   |             | 224,000      |              |   |            | 259,000      |  
|                                           |                                                                                                                                                                        |   |             |              |              |   |            |             
|Total current liabilities                  |                                                                                                                                                                        |   | 7,456,000   |              |              |   | 7,038,000  |             
|Deferred revenue                           |                                                                                                                                                                        |   | 671,000     |              |              |   | 1,119,000  |             
|Convertible notes payable                  |                                                                                                                                                                        |   | 5,600,000   |              |              |   | 5,600,000  |             
|Commitments and contingencies              |                                                                                                                                                                        |   |             |              |              |   |            |             
|Shareholders equity:                      |                                                                                                                                                                        |   |             |              |              |   |            |             
|                                           | Common stock, no par value; 75,000,000
shares authorized; 38,257,025 and
36,904,916 shares issued and outstanding
at June 30, 2003 and December 31, 2002,
respectively |   |             | 161,334,000  |              |   |            | 156,290,000  |  
|                                           | Accumulated other comprehensive income                                                                                                                                 |   |             | 167,000      |              |   |            | 79,000       |  
|                                           | Accumulated deficit                                                                                                                                                    |   |             | (130,754,000 | )            |   |            | (133,015,000 | )
|                                           |                                                                                                                                                                        |   |             |              |              |   |            |             
|Total shareholders equity                 |                                                                                                                                                                        |   | 30,747,000  |              |              |   | 23,354,000 |             
|                                           |                                                                                                                                                                        |   |             |              |              |   |            |             
|Total liabilities and shareholders equity |                                                                                                                                                                        | $ | 44,474,000  |              |              | $ | 37,111,000 |             
|                                           |                                                                                                                                                                        |   |             |              |              |   |            |             

See notes to condensed consolidated financial statements

3



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SCICLONE PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)

|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |       |            | 
|------------------------------------------ | ----------------------------------- | ----------------------------------- | ---------- | ------------------ | ---------- | ---------------- | ---------- | ----- | ---------- | ---- | ---------- | ---- | ---------- | - | ---------- | ----- | ---------- | 
|                                           |                                     |                                     |            | Three months ended |            | Six months ended
|                                           |                                     |                                     |            | June 30,           |            | June 30,        
|                                           |                                     |                                     |            | 2003               |            | 2002             |            | 2003  |            | 2002
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |     
|Product sales                              |                                     | $                                   | 16,207,000 |                    |            | $                | 4,048,000  |       |            | $    | 21,207,000 |      |            | $ | 7,996,000  |      
|Contract revenue                           |                                     |                                     | 224,000    |                    |            |                  | 224,000    |       |            |      | 448,000    |      |            |   | 224,000    |      
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|Total revenue                              |                                     |                                     | 16,431,000 |                    |            |                  | 4,272,000  |       |            |      | 21,655,000 |      |            |   | 8,220,000  |      
|Cost of product sales                      |                                     |                                     | 2,931,000  |                    |            |                  | 815,000    |       |            |      | 3,947,000  |      |            |   | 1,607,000  |      
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|Gross margin                               |                                     |                                     | 13,500,000 |                    |            |                  | 3,457,000  |       |            |      | 17,708,000 |      |            |   | 6,613,000  |      
|Operating expenses:                        |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|                                           |                                     | Research and development            |            |                    | 4,308,000  |                  |            |       | 3,771,000  |      |            |      | 8,091,000  |   |            |       | 6,297,000  | 
|                                           |                                     | Sales and marketing                 |            |                    | 3,025,000  |                  |            |       | 2,066,000  |      |            |      | 5,254,000  |   |            |       | 4,074,000  | 
|                                           |                                     | General and administrative          |            |                    | 1,035,000  |                  |            |       | 955,000    |      |            |      | 2,047,000  |   |            |       | 1,947,000  | 
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|Total operating expenses                   |                                     |                                     | 8,368,000  |                    |            |                  | 6,792,000  |       |            |      | 15,392,000 |      |            |   | 12,318,000 |      
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|Income (loss) from operations              |                                     |                                     | 5,132,000  |                    |            |                  | (3,335,000 | )     |            |      | 2,316,000  |      |            |   | (5,705,000 | )    
|Interest and investment income             |                                     |                                     | 43,000     |                    |            |                  | 76,000     |       |            |      | 96,000     |      |            |   | 152,000    |      
|Interest and investment expense            |                                     |                                     | (90,000    | )                  |            |                  | (90,000    | )     |            |      | (181,000   | )    |            |   | (180,000   | )    
|Other income (expense), net                |                                     |                                     | 39,000     |                    |            |                  | 4,000      |       |            |      | 31,000     |      |            |   | (15,000    | )    
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|Net income (loss)                          |                                     | $                                   | 5,124,000  |                    |            | $                | (3,345,000 | )     |            | $    | 2,262,000  |      |            | $ | (5,748,000 | )    
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|Earnings per share:                        |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|                                           | Basic net income (loss) per share   |                                     | $          | 0.14               |            |                  | $          | (0.10 | )          |      | $          | 0.06 |            |   | $          | (0.17 | )         
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|                                           | Diluted net income (loss) per share |                                     | $          | 0.13               |            |                  | $          | (0.10 | )          |      | $          | 0.06 |            |   | $          | (0.17 | )         
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|Weighted average shares used in
computing: |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|                                           |                                     | Basic net income (loss) per share   |            |                    | 37,672,876 |                  |            |       | 33,595,568 |      |            |      | 37,497,477 |   |            |       | 33,092,358 | 
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      
|                                           |                                     | Diluted net income (loss) per share |            |                    | 40,490,411 |                  |            |       | 33,595,568 |      |            |      | 39,338,964 |   |            |       | 33,092,358 | 
|                                           |                                     |                                     |            |                    |            |                  |            |       |            |      |            |      |            |   |            |      

See notes to condensed consolidated financial statements

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SCICLONE PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|                                                                                                   |                                                                |                                             |            |                  |            |      |            |            |           |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------- | ---------- | ---------------- | ---------- | ---- | ---------- | ---------- | --------- | -
|                                                                                                   |                                                                |                                             |            | Six months ended
|                                                                                                   |                                                                |                                             |            | June 30,        
|                                                                                                   |                                                                |                                             |            | 2003             |            | 2002
|                                                                                                   |                                                                |                                             |            |                  |            |     
|Operating activities:                                                                              |                                                                |                                             |            |                  |            |      |            |           
|Net income (loss)                                                                                  |                                                                | $                                           | 2,262,000  |                  |            | $    | (5,748,000 | )         
|Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |                                                                |                                             |            |                  |            |      |            |           
|                                                                                                   | Depreciation and amortization                                  |                                             |            | 90,000           |            |      |            | 292,000    |          
|                                                                                                   | Changes in operating assets and liabilities:                   |                                             |            |                  |            |      |            |            |          
|                                                                                                   |                                                                | Accounts receivable                         |            |                  | (2,647,000 | )    |            |            | (867,000  | )
|                                                                                                   |                                                                | Inventories                                 |            |                  | 495,000    |      |            |            | 164,000   |  
|                                                                                                   |                                                                | Prepaid expenses and other current assets   |            |                  | (59,000    | )    |            |            | 777,000   |  
|                                                                                                   |                                                                | Accounts payable and other accrued expenses |            |                  | 1,027,000  |      |            |            | (151,000  | )
|                                                                                                   |                                                                | Accrued compensation and employee benefits  |            |                  | (250,000   | )    |            |            | (298,000  | )
|                                                                                                   |                                                                | Accrued clinical trials expense             |            |                  | (226,000   | )    |            |            | 817,000   |  
|                                                                                                   |                                                                | Accrued professional fees                   |            |                  | (132,000   | )    |            |            | (18,000   | )
|                                                                                                   |                                                                | Deferred revenue                            |            |                  | (448,000   | )    |            |            | 2,461,000 |  
|                                                                                                   |                                                                |                                             |            |                  |            |      |            |           
|Net cash provided by (used in) operating activities                                                |                                                                |                                             | 112,000    |                  |            |      | (2,571,000 | )         
|                                                                                                   |                                                                |                                             |            |                  |            |      |            |           
|Investing activities:                                                                              |                                                                |                                             |            |                  |            |      |            |           
|                                                                                                   | Purchase of property and equipment                             |                                             |            | (20,000          | )          |      |            | (43,000    | )        
|                                                                                                   | Payment on purchase of marketable securities                   |                                             |            | (4,000           | )          |      |            | (7,000     | )        
|                                                                                                   |                                                                |                                             |            |                  |            |      |            |           
|Net cash used in investing activities                                                              |                                                                |                                             | (24,000    | )                |            |      | (50,000    | )         
|                                                                                                   |                                                                |                                             |            |                  |            |      |            |           
|Financing activities:                                                                              |                                                                |                                             |            |                  |            |      |            |           
|                                                                                                   | Proceeds from issuance of common stock, net of
financing costs |                                             |            | 5,042,000        |            |      |            | 10,524,000 |          
|                                                                                                   |                                                                |                                             |            |                  |            |      |            |           
|Net cash provided by financing activities                                                          |                                                                |                                             | 5,042,000  |                  |            |      | 10,524,000 |           
|                                                                                                   |                                                                |                                             |            |                  |            |      |            |           
|Net increase in cash and cash equivalents                                                          |                                                                |                                             | 5,130,000  |                  |            |      | 7,903,000  |           
|Cash and cash equivalents, beginning of period                                                     |                                                                |                                             | 20,233,000 |                  |            |      | 15,518,000 |           
|                                                                                                   |                                                                |                                             |            |                  |            |      |            |           
|Cash and cash equivalents, end of period                                                           |                                                                | $                                           | 25,363,000 |                  |            | $    | 23,421,000 |           
|                                                                                                   |                                                                |                                             |            |                  |            |      |            |           

See notes to condensed consolidated financial statements

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SCICLONE PHARMACEUTICALS, INC.




Notes to Condensed Consolidated Financial Statements
(unaudited)



|1. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles
consistent with those applied in, and should be read in conjunction with,
the audited financial statements for the year ended December 31, 2002
included in the Companys Form 10-K as filed with the Securities and
Exchange Commission. The interim financial information reflects all normal
recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods presented
and are not necessarily indicative of results for subsequent interim
periods or for the full year. The condensed consolidated balance sheet
data at December 31, 2002 is derived from the audited financial statements
at that date but does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
|  
|2. |  | Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Company recognizes revenue from product sales at the time of shipment.
There are no significant customer acceptance requirements or post shipment
obligations on the part of the Company. Sales to importing agents or
distributors are recognized at time of shipment when title to the product
is transferred to them, and they do not have contractual rights of return
except under limited terms regarding product quality. However, the Company
will replace products that have expired or are deemed to be damaged or
defective when delivered. Payments by the importing agents and distributors
are not contingent upon sale to the end user by the importing agents or
distributors.                                                                                                                                                                                                                                                                                           
|  
|   |  | Contract revenue for research and development is recorded as earned based
on the performance requirements of the contract. Nonrefundable contract
fees for which no further performance obligations exist, and there is no
continuing involvement by the Company, are recognized on the earlier of
when the payments are received or when collection is assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Revenue associated with substantive performance milestones is recognized
based on the achievement of the milestones, as defined in the respective
agreements and provided that (i) the milestone event is substantive and its
achievement is not reasonably assured at the inception of the agreement,
and (ii) there are no future performance obligations associated with the
milestone payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Net Income (Loss) Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted-average number of common shares outstanding for the period.
Diluted net income (loss) per share includes any dilutive impact from
convertible debt, stock options and warrants outstanding using the treasury
stock method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |  | The following is a reconciliation of the numerator and denominator used in
basic and diluted income (loss) per share computations for the three-month and six-month periods in
2003 and 2002, respectively:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                            |                              |                  |            |                    |           |                  |            |      |   |      |            |   |           |   |            |   |   | 
|------------------------------------------------------------------------------------------- | ---------------------------- | ---------------- | ---------- | ------------------ | --------- | ---------------- | ---------- | ---- | - | ---- | ---------- | - | --------- | - | ---------- | - | - | 
|                                                                                            |                              |                  |            | Three months ended |           | Six months ended
|                                                                                            |                              |                  |            | June 30,           |           | June 30,        
|                                                                                            |                              |                  |            | 2003               |           | 2002             |            | 2003 |   | 2002
|                                                                                            |                              |                  |            |                    |           |                  |            |      |   |     
|Numerator:                                                                                  |                              |                  |            |                    |           |                  |            |      |   |      |            |   |           |   |            |  
|Net income (loss)                                                                           |                              | $                | 5,124,000  |                    |           | $                | (3,345,000 | )    |   | $    | 2,262,000  |   |           | $ | (5,748,000 | )
|Effect of dilutive securities:                                                              |                              |                  |            |                    |           |                  |            |      |   |      |            |   |           |   |            |  
|                                                                                            | Interest on convertible note |                  |            | 24,000             |           |                  |            |     |   |      |            |  |           |   |            |  |  
|                                                                                            |                              |                  |            |                    |           |                  |            |      |   |      |            |   |           |   |            |  
|Net income (loss) used for diluted income (loss)
per share                                  |                              | $                | 5,148,000  |                    |           | $                | (3,345,000 | )    |   | $    | 2,262,000  |   |           | $ | (5,748,000 | )
|                                                                                            |                              |                  |            |                    |           |                  |            |      |   |      |            |   |           |   |            |  
|Denominator:                                                                                |                              |                  |            |                    |           |                  |            |      |   |      |            |   |           |   |            |  
|Weighted-average shares outstanding used
for basic income (loss) per share                  |                              |                  | 37,672,876 |                    |           |                  | 33,595,568 |      |   |      | 37,497,477 |   |           |   | 33,092,358 |  
|Effect of dilutive securities:                                                              |                              |                  |            |                    |           |                  |            |      |   |      |            |   |           |   |            |  
|                                                                                            |                              | Stock options    |            |                    | 2,241,170 |                  |            |      |  |      |            |   | 1,637,493 |   |            |   |  | 
|                                                                                            |                              | Warrants         |            |                    | 299,835   |                  |            |      |  |      |            |   | 203,994   |   |            |   |  | 
|                                                                                            |                              | Convertible note |            |                    | 276,530   |                  |            |      |  |      |            |   |          |   |            |   |  | 
|                                                                                            |                              |                  |            |                    |           |                  |            |      |   |      |            |   |           |   |            |  
|Weighted-average shares and dilutive stock
options used for diluted income (loss) per share |                              |                  | 40,490,411 |                    |           |                  | 33,595,568 |      |   |      | 39,338,964 |   |           |   | 33,092,358 |  
|                                                                                            |                              |                  |            |                    |           |                  |            |      |   |      |            |   |           |   |            |  



| |  | Accounting For Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company accounts for its stock option and employee stock purchase plans
under the provisions of Accounting Principles Board Opinion 25 (APB 25)
and related Interpretations. Accordingly, the Company does not recognize
compensation expense in accounting for its stock option and employee stock
purchase plans for awards to employees and directors granted with exercise prices at fair market
value.                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Pro forma information regarding net income (loss) and net income (loss) per
share is required by Statement of Financial Accounting Standards No. 123
Accounting for Stock-Based Compensation (SFAS 123) and has been
determined as if the Company had accounted for its stock awards under the
fair value method of that Statement. The fair value for the options was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for the three month and six
month periods ended June 30, 2003 and the corresponding period in 2002:
risk-free interest rates of 2.00%; dividend yield of 0%; volatility factors
of the expected market price of the Companys common stock of 0.95,
respectively, and a weighted average expected life of the option of 4.00
years.
|
| |  | The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Companys employee stock
awards have characteristics significantly different from those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimate, in the Companys opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock options and stock purchases.                                                                                                                   
|
| |  | The following table illustrates the Companys pro forma net income (loss)
and net income (loss) per share, had compensation expense for the Companys
option and employee purchase plans been determined based on the fair value
at the grant date consistent with the provisions of SFAS 123, as amended by
SFAS 148:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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##### Table of Contents



|                                                                                                            |  |                    |           |                  |  |      |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ---------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                            |  | Three Months Ended |           | Six Months Ended
|                                                                                                            |  | June 30,           |           | June 30,        
|                                                                                                            |  | 2003               |           | 2002             |  | 2003 |            | 2002
|                                                                                                            |  |                    |           |                  |  |      |            |     
|Net income (loss)  as reported                                                                             |  | $                  | 5,124,000 |                  |  | $    | (3,345,000 | )    |  | $ | 2,262,000  |   |  | $ | (5,748,000 | )
|Total stock-based employee compensation
expense determined under the fair value
based method for all awards |  |                    | (731,000  | )                |  |      | (591,000   | )    |  |   | (1,300,000 | ) |  |   | (1,116,000 | )
|                                                                                                            |  |                    |           |                  |  |      |            |      |  |   |            |   |  |   |            |  
|Net income (loss)  pro forma                                                                               |  | $                  | 4,393,000 |                  |  | $    | (3,936,000 | )    |  | $ | 962,000    |   |  | $ | (6,864,000 | )
|                                                                                                            |  |                    |           |                  |  |      |            |      |  |   |            |   |  |   |            |  
|Basic net income (loss) per share  as
reported                                                             |  | $                  | 0.14      |                  |  | $    | (0.10      | )    |  | $ | 0.06       |   |  | $ | (0.17      | )
|                                                                                                            |  |                    |           |                  |  |      |            |      |  |   |            |   |  |   |            |  
|Diluted net income (loss) per share  as reported                                                           |  | $                  | 0.13      |                  |  | $    | (0.10      | )    |  | $ | 0.06       |   |  | $ | (0.17      | )
|                                                                                                            |  |                    |           |                  |  |      |            |      |  |   |            |   |  |   |            |  
|Basic net income (loss) per share  pro forma                                                               |  | $                  | 0.12      |                  |  | $    | (0.12      | )    |  | $ | 0.03       |   |  | $ | (0.21      | )
|                                                                                                            |  |                    |           |                  |  |      |            |      |  |   |            |   |  |   |            |  
|Diluted net income (loss) per share  pro
forma                                                             |  | $                  | 0.11      |                  |  | $    | (0.12      | )    |  | $ | 0.03       |   |  | $ | (0.21      | )
|                                                                                                            |  |                    |           |                  |  |      |            |      |  |   |            |   |  |   |            |  



|   |  | The effects of applying SFAS 123 for pro forma disclosures are not likely
to be representative of the effects on reported net income (loss) for
future years due to the different number of options granted each year.                                                                                                         
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Comprehensive Income (Loss)                                                                                                                                                                                                                                                                                                    
|  
|   |  | For the three-month periods ended June 30, 2003 and 2002, the Companys
total comprehensive income (loss) amounted to $5,233,000 and $(3,359,000),
respectively. For the six-month periods ended June 30, 2003 and 2002, the
Companys total comprehensive income (loss) amounted to $2,350,000 and
$(5,724,000), respectively.
|  
|4. |  | Available-For-Sale Securities                                                                                                                                                                                                                                                                                                  
|  
|   |  | The following is a summary of available-for-sale securities at June 30,
2003 and December 31, 2002:                                                                                                                                                                                                                            

|                   |                             |   |            |            |            |   |         |         |           |   |            |            | 
|------------------ | --------------------------- | - | ---------- | ---------- | ---------- | - | ------- | ------- | --------- | - | ---------- | ---------- | 
|                   |                             |   |            |            |            |   | Gross   |         | Estimated
|                   |                             |   | Amortized  |            | Unrealized |   | Fair   
|                   |                             |   | Cost       |            | Gains      |   | Value  
|                   |                             |   |            |            |            |   |        
|June 30, 2003:     |                             |   |            |            |            |   |         |         |           |   |            |           
|                   | Certificate of deposit      |   | $          | 791,000    |            |   | $       |        |           |   | $          | 791,000    | 
|                   | U.S. government obligations |   |            | 10,685,000 |            |   |         |        |           |   |            | 10,685,000 | 
|                   | Corporate equity securities |   |            | 51,000     |            |   |         | 167,000 |           |   |            | 218,000    | 
|                   |                             |   |            |            |            |   |         |         |           |   |            |            | 
|                   |                             | $ | 11,527,000 |            |            | $ | 167,000 |         |           | $ | 11,694,000 |           
|                   |                             |   |            |            |            |   |         |         |           |   |            |            | 
|December 31, 2002: |                             |   |            |            |            |   |         |         |           |   |            |           
|                   | Certificate of deposit      |   | $          | 787,000    |            |   | $       |        |           |   | $          | 787,000    | 
|                   | U.S. government obligations |   |            | 13,723,000 |            |   |         |        |           |   |            | 13,723,000 | 
|                   | Corporate equity securities |   |            | 51,000     |            |   |         | 79,000  |           |   |            | 130,000    | 
|                   |                             |   |            |            |            |   |         |         |           |   |            |            | 
|                   |                             | $ | 14,561,000 |            |            | $ | 79,000  |         |           | $ | 14,640,000 |           
|                   |                             |   |            |            |            |   |         |         |           |   |            |            | 



| |  | As of June 30, 2003, the available-for-sale securities are included as
follows: $10,685,000 in cash and cash equivalents; $685,000 in restricted
short-term investments and $324,000 in other short-term investments. As of
December 31, 2002, the available-for-sale securities are included as
follows: $13,723,000 in cash and cash equivalents; $685,000 in restricted
short-term investments and $232,000 in other short-term investments.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|5. |  | Inventories                                                                      
|-- |  | ---------------------------------------------------------------------------------
|  
|   |  | The following is a summary of inventories at June 30, 2003 and December 31, 2002:

|                 |  |          |           |              |  |   |           | 
|---------------- |  | -------- | --------- | ------------ |  | - | --------- | 
|                 |  | June 30, |           | December 31,
|                 |  | 2003     |           | 2002        
|                 |  |          |           |             
|Raw materials    |  | $        | 1,662,000 |              |  | $ | 2,190,000 | 
|Work in progress |  |          | 197,000   |              |  |   | 159,000   | 
|Finished goods   |  |          | 1,077,000 |              |  |   | 1,082,000 | 
|                 |  |          |           |              |  |   |           | 
|                 |  | $        | 2,936,000 |              |  | $ | 3,431,000 | 
|                 |  |          |           |              |  |   |           | 



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

|                         |  |          |            |              |  |   |            |  
|------------------------ |  | -------- | ---------- | ------------ |  | - | ---------- | -
|                         |  | June 30, |            | December 31,
|                         |  | 2003     |            | 2002        
|                         |  |          |            |             
|Product rights           |  | $        | 2,456,000  |              |  | $ | 2,456,000  |  
|Accumulated amortization |  |          | (1,809,000 | )            |  |   | (1,774,000 | )
|                         |  |          |            |              |  |   |            |  
|                         |  | $        | 647,000    |              |  | $ | 682,000    |  
|                         |  |          |            |              |  |   |            |  



|   |  | Acquired ZADAXIN product rights are being amortized on a straight-line
basis beginning in September 1998. Amortization expense for the
three-month and six-month periods ended June 30, 2003 was $17,500 and
$35,000, respectively. Amortization expense for the three-month and
six-month periods ended June 30, 2002 was $102,000 and $204,000,
respectively. Amortization expense in 2002 was based on an estimated useful
life of six years. For the years ending December 31, 2003 through 2012,
annual amortization expense is expected to be $70,000. The Company
reassessed the estimated useful life of the assets as of January 1, 2003
to be an additional eight years through 2012. Based upon the progress in
the ZADAXIN clinical trials and the Companys actual experience of product
sales, the Company assessed that the acquired product rights will be useful
to the Company through 2012 when the European patent for the use of ZADAXIN
in the treatment of hepatitis C expires. The Companys policy is to
identify and record impairment losses, as circumstances dictate, on
intangible product rights when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those
assets. The Company reassesses the useful life of these assets in
accordance with current facts and circumstances.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|7. |  | Minimum Purchase Requirements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The Company does not have any minimum purchase requirements under its
contract manufacturing supply agreements for ZADAXIN and CPX.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|8. |  | Deferred Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | In January 2002, the Company received $2,685,000 from its European partner,
Sigma-Tau under the terms of its collaborative agreement announced in late
December 2001. This receipt has been recorded as deferred revenue and is
being recognized as contract revenue over the course of the ZADAXIN
hepatitis C U.S. clinical program beginning in April 2002 and the period of
sharing the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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|    |  | clinical data from this program with Sigma-Tau, the substantive performance
requirements under the contract. For the three-month and six-month periods
ended June 30, 2003, the Company recognized $224,000 and $448,000 as
contract revenue.                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|9.  |  | Shareholders Equity                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | In January 2003, the Company completed a $1,800,000 direct placement to
affiliates of Sigma-Tau less $13,000 in financing-related costs. The
affiliates purchased 504,938 shares of the Companys common stock at
$3.5648 per share. The shares issued were restricted securities, and
Sigma-Tau and its affiliates are not permitted to sell any of the shares
purchased in this private placement until January 24, 2004.
|   
|    |  | During the quarter ended June 30, 2003, the Company received approximately
$2,513,000 from the exercise of outstanding warrants to
purchase 562,500 shares of common stock by institutional investors.                                                                                                                                                                                                                     
|   
|10. |  | Subsequent Event                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | On July 28, 2003, the Company announced the reincorporation from the State of California to the State of Delaware had been
completed. In connection with the reincorporation, the Company terminated its shareholder rights agreement.                                                                                                                                                                                     

10



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

Special Note Regarding Forward-Looking Statements

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

Overview

SciClone Pharmaceuticals, Inc. is a biopharmaceutical company engaged in
the development and commercialization of therapeutics to treat life-threatening
diseases. We are currently evaluating our lead product, ZADAXIN, a thymosin
alpha 1 compound in several late-stage clinical trials, including two phase 3
clinical trials in the United States for the treatment of patients with the
hepatitis C virus, or HCV, who have failed previous HCV therapies. Nearly half
of all HCV patients who undergo current therapy fail to respond. We believe
the worldwide market for HCV therapies was approximately $2.5 billion in 2002
and will exceed $9 billion in 2012. If approved by the FDA, we expect ZADAXIN
to complement existing HCV therapies and to expand the HCV market opportunity.
In addition to the HCV trials, we are also evaluating ZADAXIN in a recently
completed phase 3 hepatitis B virus, or HBV, clinical trial in Japan, an
ongoing phase 2 malignant melanoma clinical trial in Europe and two ongoing
phase 2 liver cancer trials in the United States. Our other drug development
candidates include SCV-07, a potentially orally available therapeutic to treat
viral and infectious diseases, and other products to treat cystic fibrosis.

We recently completed a phase 3 clinical trial in Japan, using ZADAXIN as
an HBV monotherapy. We believe the data reported from this trial show that
ZADAXIN could be a safe and effective addition to therapies currently available
in Japan for the treatment of hepatitis B. We intend to use these data as the
basis for a regulatory filing in Japan for the treatment of chronic hepatitis
B.

In Europe, we are working with our exclusive marketing partner, Sigma-Tau,
for the development and commercialization of ZADAXIN. We and Sigma-Tau intend
to use data from our U.S. phase 3 HCV clinical trials, if they are positive, to
pursue regulatory approval for ZADAXIN for this indication in Europe. In
addition, Sigma-Tau is evaluating ZADAXIN in Europe in a phase 2 malignant
melanoma clinical trial. We are also evaluating the use of ZADAXIN in other
indications, including liver cancer.

ZADAXIN has been approved for sale in China for the treatment of HBV and
by the ministries of health in over 30 countries for various antiviral and
oncological indications. We estimate that ZADAXIN

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has been administered to over 10,000 patients to date in both clinical and
commercial use, alone and in combination with antiviral and anticancer drugs,
without producing any reported ZADAXIN-specific significant side effects or
toxicities.

We have maintained exclusive commercial and marketing rights to ZADAXIN
for all indications in the United States. We have intellectual property
protection for ZADAXIN as a therapy for HCV with patent protection until 2015
in the United States and until 2012 in Japan and the major commercial markets
in Europe. ZADAXIN is patent protected in Japan as a therapy for the treatment
of HBV until 2012.

Our objective is to be a leader in the development and commercialization
of novel drugs that can be effective primarily in the treatment of infectious
diseases and cancer. We plan to pursue this objective by:



| |  |  | Successfully commercializing ZADAXIN in the United States;   
| | - |  | -------------------------------------------------------------
|
| |  |  | Continuing to expand sales of ZADAXIN;                       
|
| |  |  | Focusing our resources on developing late-stage products; and
|
| |  |  | Selectively in-licensing or acquiring new products.          

Results of Operations

Total Revenue

Product sales were $16,207,000 and $21,207,000 for the three-month and
six-month periods ended June 30, 2003, as compared to $4,048,000 and $7,996,000
for the corresponding periods in 2002. The growth in the 2003 periods was
largely a result of a previously unanticipated increase in sales of ZADAXIN to
hospitals in China. This increase was related to the use of immune system
enhancers in connection with the treatment of severe acute respiratory
syndrome, or SARS. As the SARS epidemic has become more contained, we expect
sales in the third quarter and in future quarters will be more consistent with
sales patterns in prior quarters.

For the three-month and six-month periods ended June 30, 2003, all of our
product sales were derived from sales of ZADAXIN. Sales to customers in China accounted for
approximately 90% and 89% of this revenue for the three-month and six-month
periods, respectively.

Contract revenue was $224,000 and $448,000 for the three-month and
six-month periods ended June 30, 2003, as compared to $224,000 for each of the
corresponding periods in 2002. The contract revenue we recognized was in
connection with funds we received from Sigma-Tau in January 2002. This revenue
will be recognized as contract revenue over the course of the ZADAXIN hepatitis
C U.S. clinical program and the period of sharing the clinical data from this
program with Sigma-Tau in accordance with the requirements under our contract
with Sigma Tau.

Cost of Product Sales

Cost of product sales were $2,931,000 and $3,947,000 for the three-month
and six-month periods ended June 30, 2003 as compared to $815,000 and
$1,607,000 for the corresponding periods in 2002. The increase was primarily
due to higher unit sales of product. We expect cost of product sales to vary
from quarter to quarter, depending upon the level of ZADAXIN sales, the
absorption of fixed product-related costs, and any charges associated with
excess or expiring finished product inventory.

12



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Research and Development

Research and development expenses were $4,308,000 and $8,091,000 for the
three-month and six-month periods ended June 30, 2003, as compared to
$3,771,000 and $6,297,000 for the corresponding periods in 2002. The increase
in the three-month and six-month periods ended June 30, 2003 was primarily to
support our ZADAXIN phase 3 clinical trials in the U.S. and Japan. The
initiation and continuation of ZADAXIN clinical trials have had, and will
continue to have, the largest and most significant effect on our research and
development expenses. In general, we expect product research and development
expenses to increase in absolute dollars over the next several quarters and to
vary from quarter to quarter.

Sales and Marketing

Sales and marketing expenses were $3,025,000 and $5,254,000 for the
three-month and six-month periods ended June 30, 2003, as compared to
$2,066,000 and $4,074,000 for the corresponding periods in 2002. The increase
was primarily related to an increase in sales of ZADAXIN. We expect our sales
and marketing expenses to vary from quarter to quarter and to increase in the
next several years as we expect to expand our commercialization and marketing
efforts.

General and Administrative

General and administrative expenses were $1,035,000 and $2,047,000 for the
three-month and six-month periods ended June 30, 2003, as compared to $955,000
and $1,947,000 for the corresponding periods in 2002. In the near term, we
expect general and administrative expenses to vary from quarter to quarter as
we increase our general and administrative activities and resources to support
increased expenditures on preclinical and clinical trials, testing, regulatory,
pre-commercialization and marketing activities.

Interest and Investment Income

Interest and investment income was $43,000 and $96,000 for the three-month
and six-month periods ended June 30, 2003, as compared to $76,000 and $152,000
for the corresponding periods in 2002. The decrease was primarily due to lower
interest rates.

Liquidity and Capital Resources

At June 30, 2003 and December 31, 2002, the Company had $26,372,000 and
$21,150,000, respectively, in cash, cash equivalents and short-term
investments, $685,000 of which was restricted cash at each date. The
short-term investments consist primarily of highly liquid marketable
securities.

Net cash provided by operating activities amounted to $112,000 for the
six-month period ended June 30, 2003 as compared to net cash used in operating
activities in the amount of $2,571,000 in the corresponding period in 2002. The
change was primarily due to net income in the 2003 period compared to net loss
in the 2002 period and increases in accounts payable partially offset by
increases in accounts receivable during the six-month period ended June 30,
2003 and an increase of $2,461,000 in deferred revenue during the 2002 period.

Net cash provided by financing activities amounted to $5,042,000 for the
six-month period ended June 30, 2003 and consisted of $2,513,000 from the
exercise of outstanding warrants to purchase common stock by institutional
investors, gross proceeds of $1,800,000 from a direct placement to affiliates
of Sigma-Tau in January 2003, less $13,000 in financing-related costs, $631,000
related to

13



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exercises of outstanding options under our employee stock option plans,
and $111,000 from the issuance of common stock under our employee stock
purchase plan.

Our contractual obligations and other commitments as of June 30, 2003 were
as follows:

|                                   |  |                        |            |      |  |             |         |           |  |               |           |  |  |   |           |  |  |   |   | 
|---------------------------------- |  | ---------------------- | ---------- | ---- |  | ----------- | ------- | --------- |  | ------------- | --------- |  |  | - | --------- |  |  | - | - | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual                        |  |                        |            |      |  | Less than 1 |         |           |  |               |           |  |  |   |           |  |  |  
|Obligations                        |  | Total                  |            | year |  | 1-3 years   |         | 4-5 years |  | After 5 years
|                                   |  |                        |            |      |  |             |         |           |  |              
|Convertible notes payable          |  | $                      | 5,600,000  |      |  | $           |        |           |  | $             | 5,600,000 |  |  | $ |          |  |  | $ |  | 
|Operating leases                   |  |                        | 5,551,000  |      |  |             | 650,000 |           |  |               | 4,028,000 |  |  |   | 873,000   |  |  |   |  | 
|Minimum annual royalty obligations |  |                        | 390,000    |      |  |             | 65,000  |           |  |               | 195,000   |  |  |   | 130,000   |  |  |   |  | 
|                                   |  |                        |            |      |  |             |         |           |  |               |           |  |  |   |           |  |  |   |   | 
|Total contractual obligations      |  | $                      | 11,541,000 |      |  | $           | 715,000 |           |  | $             | 9,823,000 |  |  | $ | 1,003,000 |  |  | $ |  | 

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

None of our officers or directors was involved in any related party
transactions with the Company in the three-month and six-month periods ended
June 30, 2003 and 2002.

Management intends to give priority use of the Companys financial
resources to ZADAXIN clinical programs in the United States. We also expect to
use cash in coming quarters to increase inventory levels. This increase will
allow us to carefully manage the changes in suppliers we are undertaking.
Management believes our existing capital resources and interest on funds
available are adequate to maintain our current and planned operations through
at least the next twelve months. We will need to obtain additional capital to
support our long-term product development. Assuming approval of ZADAXIN by the
U.S. FDA and other regulatory authorities, we may also require additional
capital for our commercialization programs. The need, timing and amount of
additional funding will depend upon numerous factors, including the level of
ZADAXIN sales, the timing and amount of manufacturing costs related to ZADAXIN,
the availability of complementary products, technologies and businesses, the
initiation and continuation of preclinical and clinical trials and testing,
particularly ZADAXIN trials in the U.S. and Japan, the timing of regulatory
approvals, developments in relationships with existing or future collaborative
parties and the status of competitive products. In the event we need to raise
additional financing, the unavailability or the inopportune timing of any
financing could prevent or delay our long-term product development and
commercialization programs, either of which would severely hurt our business.

Risk Factors

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

If we are unable to commercialize ZADAXIN in various markets for multiple indications, particularly in the United States for the treatment of HCV, our
business 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, Europe and Japan. We are also
dependent on our ability to increase ZADAXIN sales in existing markets, and
launch ZADAXIN in new markets. In particular, our ability to achieve and
sustain profitability will depend in large part on our

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ability to commercialize ZADAXIN for the treatment of HCV in the United
States. We cannot assure you that we will achieve significant levels of sales
or that we will receive approval for ZADAXIN for the treatment of HCV in the
United States or for the treatment of HCV or other indications in other
countries. If we are unable to do so, our business will be harmed.

If we do not obtain regulatory approval for ZADAXIN for the intended indications that we are evaluating, our revenues will be limited and we will
not become profitable.

Our ability to execute on our business strategy requires that we obtain
regulatory approval for the use of ZADAXIN, particularly for the treatment of
HCV in the United States, both HBV and HCV in Japan and both HCV and malignant
melanoma in Europe. If our current phase 3 trials in the United States and
current and future trials in Europe yield favorable results, we intend to
submit applications for marketing approval of ZADAXIN for the treatment of HCV
in the United States and through our partner, Sigma-Tau, for the treatment of
HCV and malignant melanoma in Europe. Based on the results of our recently
completed phase 3 trial in Japan, we intend to submit a regulatory filing for
the treatment of HBV in Japan. In addition, we also would intend to use our US
phase 3 HCV clinical data as a major supportive element in seeking marketing
approval of ZADAXIN for the treatment of HCV in Japan. The regulatory approval
process in the United States, Europe and Japan is demanding and typically
requires 12 months or more in the United States and 18 months or more in Europe
and Japan from the date of submission of a New Drug Application. We have
committed significant resources, including capital and time, to develop
ZADAXIN, particularly for HCV in the United States, with the goal of obtaining
such approvals. If we do not obtain these approvals, we will be unable to
achieve any substantial increase in our revenue.

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 is also
time-consuming and expensive. In some countries where we are contemplating
marketing and selling ZADAXIN, the regulatory approval process often relies on
prior approvals obtained in the United States, Europe or Japan. Without such
prior approvals, our ability to obtain regulatory approvals for ZADAXIN 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 ZADAXIN. Even if we are
able to complete the clinical trials we have sponsored or are planning in a
timely or cost-effective manner, these trials may not fulfill the applicable
regulatory approval criteria, in which case we will not be able to obtain
regulatory approval in these countries. 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 our products in countries
where we currently do not have such rights, our revenues will be limited.

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

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trials may also adversely affect our ability to market and sell ZADAXIN in
markets where it is approved for sale.

We will only be able to promote our products for approved indications, which could adversely affect their use and, therefore, our profitability.

In the United States and most other countries, we may only promote
products for those specific indications for which we have received regulatory
approval. The approved indications typically are those for which extensive
clinical trials have been conducted. For example, while we believe that ZADAXIN
might be useful as a first course of therapy for all HCV patients, we do not
have any ongoing clinical trials to show this, and consequently we do not
currently expect to be able to market ZADAXIN for this indication. If the FDA
or comparable regulatory agencies believe that we are marketing our products
for indications other than those for which they have been approved, we could
face severe consequences, including fines and removal of the product from the
market.

If the results of our clinical trials are not favorable, we will be unable to obtain regulatory approval for the intended indications we are evaluating.

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 drug products are safe and efficacious under regulatory guidelines to
qualify for commercial sale. We cannot assure you, nor can you rely on our
previous clinical trial results to predict, that our ongoing or future clinical
trials will yield favorable results. Adverse or inconclusive clinical results
would prevent us from filing for regulatory approval of ZADAXIN for the
indications that we are evaluating, and our current programs in those areas
would fail.

We are currently conducting phase 3 clinical trials based on the use of
ZADAXIN in combination with pegylated interferon alpha for the treatment of HCV
patients who did not previously respond to treatment. We cannot assure you
that these phase 3 clinical trials will yield sufficient or adequate data to
demonstrate appropriate safety and efficacy under FDA guidelines. Any failure
to obtain sufficient or adequate data could delay or prevent us from securing
FDA approval. In the past, Alpha-1 Biomedical, from which we acquired certain
rights to thymosin alpha 1, conducted a phase 3 clinical trial of thymosin
alpha 1 as a therapy for HBV that did not produce statistically significant
results.

Our HCV clinical trials have been designed to show that the combination of
ZADAXIN and pegylated interferon alpha adds a significant clinical benefit when
compared to the use of pegylated interferon alpha alone in non-responders. We
cannot assure you that the results of this combination therapy will yield the
favorable results we expect, or that the independent use of pegylated
interferon alpha will not perform better than anticipated, which could reduce
the chances that a new drug application, or NDA, will be approved. If the
combination therapy of ZADAXIN and pegylated interferon alpha causes
significant adverse side effects beyond those caused by pegylated interferon
alpha alone, our clinical trials could be delayed, patients may drop out at a
greater than anticipated rate, we may be forced to halt the trials or the FDA
may reject an NDA due to safety issues. If any of the foregoing occurs, our
efforts to market and sell ZADAXIN in the United States will be impaired, our
business will suffer and the price of our stock may decline.

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If we experience delays in patient enrollment in our clinical trials, we may not be able to obtain regulatory approval in accordance with our anticipated
timeline.

In our two current phase 3 HCV clinical trials in the United States, one
trial is treating patients with mild cirrhosis of the liver and the other trial
is treating patients with no liver damage. If we are unable to enroll a
sufficient number of patients in these trials, if enrollment is delayed or if
patient drop out rates are higher than anticipated, our ability to proceed with
our clinical trials and prepare an NDA would be adversely affected. We are
experiencing competition for patients for both of our HCV trials, particularly
for patients with mild cirrhosis of the liver, from trials sponsored by other
commercial drug developers and from a trial sponsored by the National
Institutes of Health. Competition for the enrollment of similar patients in
other clinical trials or other delays in enrollment may prevent us from
enrolling patients quickly enough to meet our current timing expectations for
completing our phase 3 trials, which would delay the preparation of an NDA. If
we are not able to fully enroll patients for these clinical trials or patient
drop out rates are higher than anticipated, it could reduce the chances that
our NDA will be approved.

We cannot predict the safety profile of the use of ZADAXIN when used in combination with other drugs.

Many of our trials involve the use of ZADAXIN in combination with other
drugs. Some of these drugs have caused adverse patient reactions. Even if
ZADAXIN does not produce adverse side effects when used alone, we cannot
predict how it will work with other drugs, including causing possible adverse
side effects not directly attributable to the other drugs which could
compromise the safety profile of ZADAXIN when used in certain combination
therapies.

Due to the outbreak of SARS in China, sales of ZADAXIN in the second quarter of 2003 were significantly higher than expected and are not indicative of future
sales.

Our sales for the quarter ending June 30, 2003 increased substantially as
a result of a previously unanticipated increase in sales of ZADAXIN to
hospitals in China. This increase was related to the use of immune system
enhancers, including ZADAXIN, in connection with the treatment of severe acute
respiratory syndrome, or SARS. In future quarters, sales of ZADAXIN for the
treatment of SARS could be affected by changes in treatment in China, changes
in the rate of infection and the emergence of evidence as to the effectiveness
or ineffectiveness of ZADAXIN or of other potential treatments for SARS.

As the SARS epidemic has become more contained, we expect sales in the
third quarter and in future quarters to be more consistent with sales patterns
of prior quarters. We believe inventory levels at importers have or will
shortly return to normal levels. However, if increased sales in the second
quarter result in above normal inventory levels at the importers, such above
normal inventory levels could result in decreased orders from importers and a related decrease in sales in future quarters relative to
historic levels. We could experience fluctuations in sales in future quarters
as a result of similar factors.

Our sales of ZADAXIN 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 ending June 30, 2003 were greatly affected by
the demand in China for ZADAXIN in connection with the treatment of SARS. It
is not possible to predict at this time if SARS will re-emerge, like influenza,
as a seasonal public health problem and what effect, if any, this would have on
future sales of ZADAXIN. To the extent that ZADAXIN is purchased in connection
with future

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outbreaks of SARS or other 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.

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 ZADAXIN have expired, including
composition of matter patents, we have rights to other patents and patent
applications relating to ZADAXIN, including method of use patents with respect
to the use of ZADAXIN for certain indications. If other parties develop
ZADAXIN for other indications, including conducting clinical trials for such
indications, our patents and other rights might not be sufficient to prohibit
them from marketing ZADAXIN.

Pharmaceutical products are either not patentable or have only recently
become patentable in some of the countries in which we market or may market
ZADAXIN. 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. We are aware that other companies
are marketing generic thymosin alpha 1 in China, possibly in violation of our
trademark or other rights, and we expect such violations of our rights to
continue. 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 ZADAXIN. 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, US patent applications may be kept
confidential while pending in the Patent and Trademark Office, and patent
applications filed in foreign countries are often first published six 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,

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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.

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

We rely on third parties, who are subject to regulatory oversight, to
supply our clinical and commercial products. If unanticipated deficiencies in
these suppliers occur, we could experience delays in our ability to assemble a
timely and acceptable NDA. 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. Not all of the ZADAXIN planned to be used in our HCV clinical trials
has been manufactured and received. F. Hoffmann La-Roche is our exclusive
supplier of pegylated interferon alpha for our current clinical trials, and we
have not received all the pegylated interferon alpha to be used in the clinical
trials. F. Hoffman La-Roches agreement with us to provide our supply of
pegylated interferon alpha can be terminated by them without cause on 30-days
notice, in which case we would need to purchase their product for use in the
clinical trials. Any delay in receiving, or a recall of, pegylated interferon
alpha or ZADAXIN, including by reason of Roches termination of its supply
arrangement with us, could delay the clinical trials or detract from the
integrity of the trial data. If any of the foregoing occurs, our ability to
complete our clinical trials in the United States and to market and sell
ZADAXIN worldwide will be delayed or impaired, our business will suffer and the
price of our stock may decline. We have been in the process of qualifying a
new additional manufacturer of ZADAXIN and if we encounter problems with this
process of validation, our sales or our clinical trials could be adversely
affected.

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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 regulatory requirements and at an acceptable
cost. Manufacturing interruptions could significantly delay clinical
development of potential products and reduce third-party or clinical researcher
interest and support of proposed trials. These interruptions could also impede
commercialization of our products, including sales of ZADAXIN in approved
markets, and impair our competitive position. Any of these developments would
harm our business.

We are in the process of changing suppliers and such changes require
qualification of the new suppliers with regulatory agencies, quality assurance
and other steps which could cause delays or interruptions of supply. Although
we are increasing inventories to prepare to manage any such occurrences, we may
still experience interruptions in supply which could adversely affect our
results.

In some countries, a manufacturing change may require additional
regulatory approvals. If we do not obtain the required regulatory approvals
for a manufacturing change in a timely fashion, new ZADAXIN marketing approvals
may be delayed or sales may be interrupted until the manufacturing change is
approved. Either of these results would harm our business.

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

We may not be able to successfully develop or commercialize our products.

While we have limited sales of ZADAXIN in certain markets, we do not yet
have regulatory approval for ZADAXIN for our principal target markets, and, in
this respect, ZADAXIN is still being developed. Our other products are in
earlier stages of development than ZADAXIN. 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 being ready for sale. We cannot assure you 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. If any of our
products, even if developed and approved, cannot be successfully commercialized
in a timely manner, our business will be harmed and the price of our stock may
decline.

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

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to use a different course of treatment, demand for our drug products would
be reduced. Failure to do any of the above will hurt our operations.

We rely on third-party clinical investigators to conduct our clinical trials
and, as a result, we may encounter delays outside our control.

We have limited experience in conducting and managing clinical trials and
we rely, in part, on third parties, particularly clinical research
organizations and our development partners, to assist us in managing and
monitoring clinical trials. Our reliance on these third parties may result in
delays in completing, or failure to complete, these clinical trials if third
parties fail to fulfill their obligations to us.

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

We believe our existing resources will be sufficient to complete our US
phase 3 clinical trials However, we cannot assure you that such funds will be
sufficient to complete the trials and, if the trials are successful and we
receive FDA approval, to begin commercialization of ZADAXIN in the United
Sates, or that such sales of ZADAXIN will result in profitable operations. In
addition, we may need additional funds in the future to support future growth
and achieve profitability. 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 have a history of operating losses and an accumulated deficit. We expect to
continue to incur losses in the near term and may never achieve profitability.

We have experienced significant operating losses since our inception, and
as of June 30, 2003, we had an accumulated deficit of approximately $131
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, particularly in the United
States, and these losses may increase if we cannot increase or sustain revenue.
As a result, we may never achieve profitability.

Our revenue is dependent on the sale of ZADAXIN in foreign countries,
particularly China, and if we experience difficulties in our foreign sales
efforts, our financial condition will be harmed.

Our product revenue in the near term is highly dependent on the sale of
ZADAXIN in foreign countries. If we experience difficulties in our foreign
sales efforts, our business will suffer and our financial condition will be
harmed. Substantially all of our ZADAXIN sales are to customers in China.
Sales of ZADAXIN in China may be limited due to its low average personal
income, lack of patient cost reimbursement, poorly developed infrastructure and
existing and potential competition from other products, including generics.
Several local companies have introduced lower priced locally manufactured
generic competitive products. If these sales continue, there could be a
negative impact on the price and the volume of ZADAXIN sold in China and this
would harm our business.

In addition, our ZADAXIN sales and operations in other parts of Asia, as
well as in Latin America and the Middle East, are subject to a number of risks,
including difficulties and delays in obtaining registrations, permits, pricing
approvals and reimbursement and unexpected changes in regulatory requirements.
In addition, we experience other issues with managing foreign sales operations
including long payment cycles, difficulties in accounts receivable collection
and, especially from significant customers, fluctuations in the timing and
amount of orders. Operations in foreign countries also expose

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us to risks relating to difficulties in enforcing our proprietary rights,
currency fluctuations, and adverse or deteriorating economic conditions.

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

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

China uses a tiered method to import and distribute finished
pharmaceutical products. At each port of entry, and prior to moving the
product forward to the distributors, government-licensed importing agents must
process and evaluate each shipment to determine whether such shipment satisfies
Chinas quality assurance requirements. In order to efficiently manage this
process, the importing agents typically place large, and therefore relatively
few, orders within any six 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 four to six importers 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.

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

We currently have limited sales, marketing and distribution capabilities,
and we anticipate that we may be relying on third-party collaborators to sell,
market and distribute our products for the foreseeable future. If our
arrangements with these third parties are not successful, or if we are unable
to enter into additional third-party arrangements, we may need to substantially
expand our sales, marketing and distribution force. Our efforts to expand may
not succeed, or we may lack sufficient resources to expand in a timely manner,
either of which will harm our operating results. 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.

Commercialization of some of our products depends on collaborations with
others. If our collaborators are not successful, or if we are unable to find
future collaborators, we may not be able to properly develop and commercialize
our products.

We depend in part on our distributors and business partners to develop
and/or promote our drugs, and if they are not successful in their efforts or
fail to do so, our business will suffer. For example, Sigma-Tau is responsible
for the development and marketing of ZADAXIN in Europe. We generally do not
have control over the amount and timing of resources that our business partners
devote to ZADAXIN, and they have not always performed as or when expected. If
they do not perform their obligations as we expect, particularly obligations
regarding clinical trials, our development expenses would increase and the
development and/or sale of our products could be limited or delayed, which
could hurt our business and cause our stock price to decline. In addition, our
relationships with these companies may not be successful. Disputes may arise
with our collaborators, including disputes over ownership rights to

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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.

If we make any acquisitions, we will incur a variety of costs and may never realize the anticipated benefits.

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

We may lose market share or otherwise fail to compete effectively in the
intensely competitive biopharmaceutical industry.

Competition in the biopharmaceutical industry is intense, and we expect
that competition 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 are focused on developing ZADAXIN as a treatment for HCV and HBV and
certain cancers. Several large biopharmaceutical companies have substantial
commitments to interferon alpha, an approved drug for treating HBV and HCV, and
to lamivudine and adefovir, approved drugs to treat HBV. 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 HCV, HBV, cancer and other diseases that will be superior to
ours.

If we do not achieve our projected development goals in the time frames we
announce and expect, the commercialization of our products may be delayed, the
credibility of our management may be adversely affected and, as a result, our
stock price may decline.

For planning purposes, we estimate the timing of the accomplishment of
various scientific, clinical, regulatory and other product development goals,
which we sometimes refer to as milestones. These milestones may include the
commencement or completion of scientific studies and clinical trials and the
submission of regulatory filings. From time to time, we publicly announce the
expected timing of some of these milestones. All of these milestones are based
on a variety of assumptions. The actual timing of these milestones can vary
dramatically compared to our estimates, in many cases for reasons beyond our
control. If we do not meet these milestones as publicly announced, the
commercialization of our products may be delayed, the credibility of our
management may be adversely affected, investors could be disappointed and, as a
result, our stock price may decline.

If third-party reimbursement is not available or patients cannot otherwise pay
for ZADAXIN, we may not be able to successfully market ZADAXIN.

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Significant uncertainty exists as to the reimbursement status of new
therapeutic products, such as ZADAXIN. We cannot assure you that third-party
insurance coverage and reimbursement will be available for therapeutic products
we might develop. The failure to obtain third-party reimbursement for our
products, particularly in the United States, Europe and Japan, would harm our
business. Further, we cannot assure you that additional limitations will not
be imposed in the future in the United States on drug coverage and
reimbursement due to proposed health care reforms. 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 payors 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 will reduce our gross margins and may harm our business.

If we lose key personnel or are unable to attract and retain additional, highly
skilled personnel required for the expansion of our activities, our business
will suffer.

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

We may be subject to product liability lawsuits, and our insurance may be inadequate to cover damages.

Clinical trials or marketing of any of our current and potential products
may expose us to liability claims from the use of these products. We currently
carry product liability insurance. However, we cannot be certain that we will
be able to maintain insurance on acceptable terms, 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 China. Heightened tensions resulting
from the current geopolitical conditions in the Middle East and 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.

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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 the
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.

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

As of June 30, 2003, stock options for 5,689,963 shares of common stock
were outstanding, of which options to purchase 3,765,376 shares were
exercisable. Also outstanding as of the same date were warrants exercisable
for 1,008,000 shares of common stock at prices ranging from $2.25 to $7.00 per
share, and two notes convertible into a total of 684,140 shares of common
stock. The note holder has the right to purchase up to $8.3 million of
additional convertible notes due on or before March 2006, which, if fully
issued, will be convertible into 684,140 shares of our common stock. Upon
exercise of options or warrants, or conversion of the notes, these issued
shares of common stock will be freely tradable.

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

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:



| |  | results of clinical trials involving ZADAXIN;                                                                                              
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | progress of ZADAXIN through the regulatory process, especially regulatory actions in the United States;                                    
| |  | announcements of technological innovations or new products by us or our competitors;                                                       
| |  | 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 company assessments or financial estimates by securities analysts;                                                              
| |  | actual or anticipated fluctuations in our operating results;                                                                               
| |  | 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.                                                                  

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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.

If our officers, directors and largest stockholders elect to act together, they
may be able to control our management and operations, acting in their best
interests and not necessarily those of other stockholders.

As of June 30, 2003, our directors and officers owned or had the right to
acquire approximately 8.2% of the outstanding shares of our common stock. Also
as of June 30, 2003, our two largest stockholders, Sigma-Tau (and its
affiliates) and Randal J. Kirk, owned in the aggregate approximately 17.7% of
the outstanding shares of our capital stock. As a result, due to their
concentration of stock ownership, our directors, officers and largest
stockholders, if they act together, may be able to influence our management and
operation and may be able to affect or influence all matters requiring a
stockholder vote, including the election of all directors and the amendment of
charter documents or the approval of a merger, sale of assets or other major
corporate transactions.

Although they are independent of each other and not part of a group, we
recently obtained the support of Sigma-Tau and Mr. Kirk for our proposal to the
stockholders to reincorporate in Delaware, and without that support we would
not have been able to obtain the required stockholder approval for those
matters.

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 the stockholders.
Prior to our recent reincorporation in Delaware, we had a shareholder rights
plan, also commonly known as a poison pill, which we agreed to terminate in
connection with obtaining shareholder approval for reincorporation. We
currently do not intend to adopt a shareholder rights plan. However, our
charter documents do contain certain anti-takeover provisions, including
provisions in our certificate of incorporation providing that stockholders may
not accumulate votes, stockholders meetings may be called by stockholders only
if they hold 25% or more of 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, under applicable Delaware law, our board of directors may adopt
additional anti-takeover measures in the future.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we invest in highly liquid and
high quality U.S. government and agency obligations. Our investments in U.S.
government and agency obligations are subject to interest rate risk. To
minimize the exposure due to an adverse shift in interest rates, we invest in
short term securities and maintain an average maturity of less than one year.
A hypothetical 60 basis point increase in interest rates would result in an
approximate $88,392 decrease (0.6%) in fair value of our available-for-sale
securities.

The potential change noted above is based on sensitivity analyses
performed on our financial position at June 30, 2003. Actual results may differ
materially.




Item 4. Controls and Procedures

Under the supervision and with the participation of our management,
including our Chief Executive Officer and 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
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this quarterly report.

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PART II. OTHER INFORMATION




Item 2. Changes in Securities and Use of Proceeds



|(c) |  | Recent Sales of Equity Securities
|--- |  | ---------------------------------

During the quarter ended June 30, 2003, we received approximately
$2,513,000 from the exercise of outstanding warrants to purchase
562,500 shares of common stock by institutional investors.




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

We held our Annual Meeting of Shareholders on June 25, 2003 to elect seven
(7) directors, to ratify Ernst & Young LLP as independent auditors, to
reincorporate the Company as a Delaware corporation and adopt certain
additional charter revisions, and to increase the number of shares which may be
issued under the 1996 Employee Stock Purchase Plan.

At the Annual Meeting of Shareholders, all of the director
nominees were elected with voting as follows:

|                      |  |     |            |          |  |       |           | 
|--------------------- |  | --- | ---------- | -------- |  | ----- | --------- | 
|                      |  |     |            |          |  | Votes
|                      |  | For |            | Withheld
|                      |  |     |            |         
|Jere E. Goyan, Ph.D.  |  |     | 32,607,764 |          |  |       | 942,892   | 
|Donald R. Sellers     |  |     | 32,407,150 |          |  |       | 1,143,506 | 
|John D. Baxter, M.D.  |  |     | 32,579,891 |          |  |       | 970,765   | 
|Edwin C. Cadman, M.D. |  |     | 32,609,414 |          |  |       | 941,242   | 
|Rolf H. Henel         |  |     | 32,699,327 |          |  |       | 851,329   | 
|Jon S. Saxe           |  |     | 32,642,228 |          |  |       | 908,428   | 
|Dean S. Woodman       |  |     | 32,612,289 |          |  |       | 938,367   | 

Shareholders ratified the appointment of Ernst & Young LLP as independent
auditors for the Company for the fiscal year ending December 31, 2003. Voting
was as follows: 33,108,792 for; 283,229, against; and 158,635 abstaining.

Shareholders approved the reincorporation of SciClone Pharmaceuticals as a
Delaware corporation. Voting was as follows: 20,580,489 for; 1,012,673
against; 116,975 abstaining; and 11,840,519 broker non-votes.

Shareholders approved three additional charter revision proposals to
eliminate cumulative voting, eliminate shareholder action by written consent
and increase the percentage of shareholders required to call a special meeting
of shareholders from ten to twenty-five percent. Voting was as follows:



| |  |  | Elimination of Cumulative Voting  19,815,967 for;
1,655,875 against; 238,295 abstaining; and 11,840,519 broker
non-votes.          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Elimination of Shareholder Written Consent  19,030,002
for; 2,400,829 against; 279,306 abstaining; and 11,840,519 broker
non-votes.

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Increase in Percentage of Shareholders Required to Call a Special Meeting
 19,041,085 for; 2,451,919 against; 217,133 abstaining; and 11,840,519 broker
non-votes.

Shareholders approved the increase in the maximum aggregate number of
shares of Common Stock that may be issued under the Companys 1996 Employee
Stock Purchase Plan by 500,000 shares from 500,000 shares to 1,000,000 shares.
Voting was as follows: 31,474,219 for; 1,790,337 against; and 286,100
abstaining.

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##### Table of Contents






Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------

|               |  |                                                                                                                           
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                               
|               |  |                                                                                                                           
|3(i).1(1)      |  | Amended and Restated Certificate of Incorporation.                                                                        
|               |  |                                                                                                                           
|3(ii).1(1)     |  | Bylaws.                                                                                                                   
|               |  |                                                                                                                           
|4.1(2)         |  | Rights Agreement dated as of July 25, 1997 between the Registrant and Chase Mellon Shareholder Services, LLC.             
|               |  |                                                                                                                           
|4.2(1)*        |  | First Amendment to Rights Agreement dated as of July 17, 2003 between the Registrant and Mellon Investor Services LLC.    
|               |  |                                                                                                                           
|4.3(3)*        |  | 6% Convertible Note dated as of December 7, 2000 by the Registrant in favor of UBS AG, London Branch.                     
|               |  |                                                                                                                           
|4.4(3)*        |  | Option Agreement dated as of October 26, 2000 by and between the Registrant and UBS AG, London Branch.                    
|               |  |                                                                                                                           
|4.5(3)*        |  | Amendment No. 1 to Option Agreement dated as of December 19, 2000 by and between the Registrant and UBS AG, London Branch.
|               |  |                                                                                                                           
|4.6(4)*        |  | 6% Convertible Note dated as of March 21, 2001 by the Company in favor of UBS AG, London Branch.                          
|               |  |                                                                                                                           
|4.7(4)*        |  | Option Agreement dated as of February 16, 2001 by and between the Company and UBS AG, London Branch.                      
|               |  |                                                                                                                           
|4.8(4)*        |  | Amendment No.1 to Option Agreement dated as of March 21, 2001 by and between the Company and UBS AG, London Branch.       
|               |  |                                                                                                                           
|10.1(5)        |  | Change in Control Agreement between the Company and Hans P. Schmid effective as of April 22, 2003.                        
|               |  |                                                                                                                           
|10.2(5)**      |  | Registrants 1996 Employee Stock Purchase Plan, as amended.                                                               
|               |  |                                                                                                                           
|31.1(5)        |  | Section 302 Certification of Chief Executive Officer.                                                                     
|               |  |                                                                                                                           
|31.2(5)        |  | Section 302 Certification of Chief Financial Officer.                                                                     
|               |  |                                                                                                                           
|32.1(5)        |  | Section 906 Certification of Chief Executive Officer.                                                                     
|               |  |                                                                                                                           
|32.2(5)        |  | Section 906 Certification of Chief Financial Officer.                                                                     

* Certain information in this exhibit has been omitted and filed separately with
the Securities and Exchange Commission pursuant to a confidential treatment
request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.

** Management compensatory plan or arrangement.



|(1) |  | Incorporated by reference from the Companys Current Report on Form 8-K
filed on July 28, 2003.              
|--- |  | -------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference from the Companys Current Report on Form 8-K
filed on October 14, 1997.           
|   
|(3) |  | Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 2000.
|   
|(4) |  | Incorporated by reference from the Companys Quarterly Report on Form
10-Q on May 15, 2001.                  
|   
|(5) |  | Filed herewith.                                                                                              

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|(b) |  | Reports on Form 8-K
|--- |  | -------------------



| | 1. |  | On April 24, 2003, the Company filed a Current Report on Form 8-K pursuant to Item 7 and Item 12.
| | -- |  | -------------------------------------------------------------------------------------------------
|
| | 2. |  | On May 7, 2003, the Company filed a Current Report on Form 8-K pursuant to Item 5 and Item 7.    
|
| | 3. |  | On June 26, 2003, the Company filed a Current Report on Form 8-K pursuant to Item 5 and Item 7.  

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SIGNATURES

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

|                    |  |                                                                                                              
|------------------- |  | -------------------------------------------------------------------------------------------------------------
|                    |  | SCICLONE PHARMACEUTICALS, INC.
(Registrant)                                                                  
|                    |  |                                                                                                              
|Date: July 30, 2003 |  | /s/ Richard A. Waldron

Richard A. Waldron
Chief Financial Officer
(Principal Financial & Accounting Officer)

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INDEX TO EXHIBITS

|           |  |                                                                                                                           |  |              |  | 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | 
|           |  |                                                                                                                           |  | Sequentially
|Exhibit    |  |                                                                                                                           |  | Numbered    
|Number     |  | Exhibit                                                                                                                   |  | Page        
|           |  |                                                                                                                           |  |             
|3(i).1(1)  |  | Amended and Restated Certificate of Incorporation                                                                        
|           |  |                                                                                                                          
|3(ii).1(1) |  | Bylaws                                                                                                                   
|           |  |                                                                                                                          
|4.1(2)     |  | Rights Agreement dated as of July 25, 1997 between the
Registrant and Chase Mellon Shareholder Services, LLC             
|           |  |                                                                                                                          
|4.2(1)*    |  | First Amendment to Rights Agreement dated as of July 17,
2003 between the Registrant and Mellon Investor Services
LLC    
|           |  |                                                                                                                          
|4.3(3)*    |  | 6% Convertible Note dated as of December 7, 2000 by the
Registrant in favor of UBS AG, London Branch                     
|           |  |                                                                                                                          
|4.4(3)*    |  | Option Agreement dated as of October 26, 2000 by and
between the Registrant and UBS AG, London Branch                    
|           |  |                                                                                                                          
|4.5(3)*    |  | Amendment No. 1 to Option Agreement dated as of December
19, 2000 by and between the Registrant and UBS AG, London
Branch
|           |  |                                                                                                                          
|4.6(4)*    |  | 6% Convertible Note dated as of March 21, 2001 by the
Company in favor of UBS AG, London Branch                          
|           |  |                                                                                                                          
|4.7(4)*    |  | Option Agreement dated as of February 16, 2001 by and
between the Company and UBS AG, London Branch                      
|           |  |                                                                                                                          
|4.8(4)*    |  | Amendment No. 1 to Option Agreement dated as of March 21,
2001 by and between the Company and UBS AG, London
Branch      
|           |  |                                                                                                                          
|10.1(5)    |  | Change in Control Agreement between the Company and Hans
P. Schmid effective as of April 22, 2003.                       
|           |  |                                                                                                                          
|10.2(5)**  |  | Registrants 1996 Employee Stock Purchase Plan, as amended                                                               
|           |  |                                                                                                                          
|31.1(5)    |  | Section 302 Certification of Chief Executive Officer                                                                     
|           |  |                                                                                                                          
|31.2(5)    |  | Section 302 Certification of Chief Financial Officer                                                                     
|           |  |                                                                                                                          
|32.1(5)    |  | Section 906 Certification of Chief Executive Officer                                                                     
|           |  |                                                                                                                          
|32.2(5)    |  | Section 906 Certification of Chief Financial Officer                                                                     

* Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.

** Management compensatory plan or arrangement.



|(1) |  | Incorporated by reference from the Companys Current Report on Form 8-K
filed on July 28, 2003.   
|--- |  | --------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference from the Companys Current Report on Form 8-K
filed on October 14, 1997.

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|(3) |  | Incorporated by reference from the Companys Annual Report on Form 10-K
for the year ended December 31, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------
|   
|(4) |  | Incorporated by reference from the Companys Quarterly Report on Form
10-Q on May 15, 2001.                  
|   
|(5) |  | Filed herewith.                                                                                              

34