##### 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 September 30, 2003

OR

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

For the transition period from ________________________to ______________________

Commission file number: 0-19825

SCICLONE PHARMACEUTICALS,
INC.

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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 | [   ]

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

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

As of September 30, 2003, 44,362,567 shares of the registrants Common
Stock, $0.001 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 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   
|INDEX TO EXHIBITS            
|Exhibit 10.1                 
|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 September 30,
2003 and December 31, 2002                                         |    | 3       
|           |                                                                                       | Condensed Consolidated Statements of Operations for the
Three-month and Nine-month periods ended September 30,
2003 and 2002 |    | 4       
|           |                                                                                       | Condensed Consolidated Statements of Cash Flows for the
Nine-month periods ended September 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 |                                                                                                                              | 10
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                              | 24
|Item 4.    | Controls and Procedures                                                               |                                                                                                                              | 24
|PART II.   | OTHER INFORMATION                                                                     |                                                                                                                              |   
|Item 6.    | Exhibits and Reports on Form 8-K                                                      |                                                                                                                              | 25
|Signatures |                                                                                       |                                                                                                                              |    | 27      

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

|                                           |                                                                                                                                                                             |   |            |               |   |              |            |              |   | 
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------- | ------------- | - | ------------ | ---------- | ------------ | - | 
|                                           |                                                                                                                                                                             |   |            | September 30, |   | December 31,
|                                           |                                                                                                                                                                             |   |            | 2003          |   | 2002        
|                                           |                                                                                                                                                                             |   |            |               |   |             
|                                           |                                                                                                                                                                             |   |            | (unaudited)   |   | (Note 1)    
|ASSETS                                     |                                                                                                                                                                             |   |            |               |   |              |            |             
|Current assets:                            |                                                                                                                                                                             |   |            |               |   |              |            |             
|                                           | Cash and cash equivalents                                                                                                                                                   |   | $          | 65,269,000    |   |              | $          | 20,233,000   |  
|                                           | Restricted short-term investments                                                                                                                                           |   |            | 685,000       |   |              |            | 685,000      |  
|                                           | Other short-term investments                                                                                                                                                |   |            | 302,000       |   |              |            | 232,000      |  
|                                           | Accounts receivable, net of allowance of $638,000 in 2003 and 2002                                                                                                          |   |            | 11,776,000    |   |              |            | 9,276,000    |  
|                                           | Inventories                                                                                                                                                                 |   |            | 4,156,000     |   |              |            | 3,431,000    |  
|                                           | Prepaid expenses and other current assets                                                                                                                                   |   |            | 2,771,000     |   |              |            | 2,297,000    |  
|                                           |                                                                                                                                                                             |   |            |               |   |              |            |             
|Total current assets                       |                                                                                                                                                                             |   | 84,959,000 |               |   |              | 36,154,000 |             
|Property and equipment, net                |                                                                                                                                                                             |   | 95,000     |               |   |              | 111,000    |             
|Intangible assets, net                     |                                                                                                                                                                             |   | 630,000    |               |   |              | 682,000    |             
|Other assets                               |                                                                                                                                                                             |   | 138,000    |               |   |              | 164,000    |             
|                                           |                                                                                                                                                                             |   |            |               |   |              |            |             
|Total assets                               |                                                                                                                                                                             | $ | 85,822,000 |               |   | $            | 37,111,000 |             
|                                           |                                                                                                                                                                             |   |            |               |   |              |            |             
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                                             |   |            |               |   |              |            |             
|Current liabilities:                       |                                                                                                                                                                             |   |            |               |   |              |            |             
|                                           | Accounts payable                                                                                                                                                            |   | $          | 3,670,000     |   |              | $          | 3,150,000    |  
|                                           | Accrued compensation and employee benefits                                                                                                                                  |   |            | 1,008,000     |   |              |            | 1,089,000    |  
|                                           | Accrued clinical trials expense                                                                                                                                             |   |            | 680,000       |   |              |            | 966,000      |  
|                                           | Accrued professional fees                                                                                                                                                   |   |            | 553,000       |   |              |            | 679,000      |  
|                                           | Deferred revenue                                                                                                                                                            |   |            | 895,000       |   |              |            | 895,000      |  
|                                           | Other accrued expenses                                                                                                                                                      |   |            | 283,000       |   |              |            | 259,000      |  
|                                           |                                                                                                                                                                             |   |            |               |   |              |            |             
|Total current liabilities                  |                                                                                                                                                                             |   | 7,089,000  |               |   |              | 7,038,000  |             
|Deferred revenue                           |                                                                                                                                                                             |   | 448,000    |               |   |              | 1,119,000  |             
|Convertible notes payable                  |                                                                                                                                                                             |   | 5,600,000  |               |   |              | 5,600,000  |             
|Commitments and contingencies              |                                                                                                                                                                             |   |            |               |   |              |            |             
|Stockholders equity:                      |                                                                                                                                                                             |   |            |               |   |              |            |             
|                                           | Preferred stock; $0.001 par value;
10,000,000 shares authorized; no shares
outstanding in 2003 and 2002,
respectively                                                       |   |            |              |   |              |            |             |  
|                                           | Common stock; $0.001 par value (no par
value in 2002); 75,000,000 shares
authorized; 44,362,567 and 36,904,916
shares issued and outstanding in 2003 and
2002, respectively |   |            | 44,000        |   |              |            | 156,290,000  |  
|                                           | Additional paid-in capital                                                                                                                                                  |   |            | 206,106,000   |   |              |            |             |  
|                                           | Accumulated other comprehensive income                                                                                                                                      |   |            | 138,000       |   |              |            | 79,000       |  
|                                           | Accumulated deficit                                                                                                                                                         |   |            | (133,603,000  | ) |              |            | (133,015,000 | )
|                                           |                                                                                                                                                                             |   |            |               |   |              |            |             
|Total stockholders equity                 |                                                                                                                                                                             |   | 72,685,000 |               |   |              | 23,354,000 |             
|                                           |                                                                                                                                                                             |   |            |               |   |              |            |             
|Total liabilities and stockholders equity |                                                                                                                                                                             | $ | 85,822,000 |               |   | $            | 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 |           | Nine months ended
|                                                                               |  |                            |            | September 30,      |           | September 30,    
|                                                                               |  |                            |            | 2003               |           | 2002              |            | 2003 |           | 2002
|                                                                               |  |                            |            |                    |           |                   |            |      |           |     
|Product sales                                                                  |  | $                          | 5,421,000  |                    |           | $                 | 4,298,000  |      |           | $    | 26,628,000 |   |            | $ | 12,294,000 |  
|Contract revenue                                                               |  |                            | 224,000    |                    |           |                   | 224,000    |      |           |      | 672,000    |   |            |   | 448,000    |  
|                                                                               |  |                            |            |                    |           |                   |            |      |           |      |            |   |            |   |            |  
|Total revenue                                                                  |  |                            | 5,645,000  |                    |           |                   | 4,522,000  |      |           |      | 27,300,000 |   |            |   | 12,742,000 |  
|Cost of product sales                                                          |  |                            | 935,000    |                    |           |                   | 918,000    |      |           |      | 4,882,000  |   |            |   | 2,525,000  |  
|                                                                               |  |                            |            |                    |           |                   |            |      |           |      |            |   |            |   |            |  
|Gross margin                                                                   |  |                            | 4,710,000  |                    |           |                   | 3,604,000  |      |           |      | 22,418,000 |   |            |   | 10,217,000 |  
|Operating expenses:                                                            |  |                            |            |                    |           |                   |            |      |           |      |            |   |            |   |            |  
|                                                                               |  | Research and development   |            |                    | 4,585,000 |                   |            |      | 2,110,000 |      |            |   | 12,676,000 |   |            |   | 8,407,000 | 
|                                                                               |  | Sales and marketing        |            |                    | 1,892,000 |                   |            |      | 2,217,000 |      |            |   | 7,146,000  |   |            |   | 6,291,000 | 
|                                                                               |  | General and administrative |            |                    | 998,000   |                   |            |      | 960,000   |      |            |   | 3,045,000  |   |            |   | 2,907,000 | 
|                                                                               |  |                            |            |                    |           |                   |            |      |           |      |            |   |            |   |            |  
|Total operating expenses                                                       |  |                            | 7,475,000  |                    |           |                   | 5,287,000  |      |           |      | 22,867,000 |   |            |   | 17,605,000 |  
|                                                                               |  |                            |            |                    |           |                   |            |      |           |      |            |   |            |   |            |  
|Loss from operations                                                           |  |                            | (2,765,000 | )                  |           |                   | (1,683,000 | )    |           |      | (449,000   | ) |            |   | (7,388,000 | )
|Interest and investment income                                                 |  |                            | 47,000     |                    |           |                   | 100,000    |      |           |      | 143,000    |   |            |   | 252,000    |  
|Interest and investment expense                                                |  |                            | (90,000    | )                  |           |                   | (91,000    | )    |           |      | (271,000   | ) |            |   | (271,000   | )
|Other income (expense), net                                                    |  |                            | (42,000    | )                  |           |                   | 2,000      |      |           |      | (11,000    | ) |            |   | (13,000    | )
|                                                                               |  |                            |            |                    |           |                   |            |      |           |      |            |   |            |   |            |  
|Net loss                                                                       |  | $                          | (2,850,000 | )                  |           | $                 | (1,672,000 | )    |           | $    | (588,000   | ) |            | $ | (7,420,000 | )
|                                                                               |  |                            |            |                    |           |                   |            |      |           |      |            |   |            |   |            |  
|Basic and diluted net loss per share                                           |  | $                          | (0.07      | )                  |           | $                 | (0.05      | )    |           | $    | (0.02      | ) |            | $ | (0.22      | )
|                                                                               |  |                            |            |                    |           |                   |            |      |           |      |            |   |            |   |            |  
|Weighted average shares used in computing
basic and diluted net loss per share |  |                            | 38,768,350 |                    |           |                   | 36,869,133 |      |           |      | 37,925,757 |   |            |   | 34,365,118 |  
|                                                                               |  |                            |            |                    |           |                   |            |      |           |      |            |   |            |   |            |  

See notes to condensed consolidated financial statements

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SCICLONE PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|                                                                            |                                                                 |                                             |            |                   |            |      |            |            |           |  
|--------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------- | ---------- | ----------------- | ---------- | ---- | ---------- | ---------- | --------- | -
|                                                                            |                                                                 |                                             |            | Nine months ended
|                                                                            |                                                                 |                                             |            | September 30,    
|                                                                            |                                                                 |                                             |            | 2003              |            | 2002
|                                                                            |                                                                 |                                             |            |                   |            |     
|Operating activities:                                                       |                                                                 |                                             |            |                   |            |      |            |           
|Net loss                                                                    |                                                                 | $                                           | (588,000   | )                 |            | $    | (7,420,000 | )         
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                                                 |                                             |            |                   |            |      |            |           
|                                                                            | Depreciation and amortization                                   |                                             |            | 134,000           |            |      |            | 421,000    |          
|                                                                            | Changes in operating assets and liabilities:                    |                                             |            |                   |            |      |            |            |          
|                                                                            |                                                                 | Accounts receivable                         |            |                   | (2,500,000 | )    |            |            | (217,000  | )
|                                                                            |                                                                 | Inventories                                 |            |                   | (725,000   | )    |            |            | 733,000   |  
|                                                                            |                                                                 | Prepaid expenses and other current assets   |            |                   | (468,000   | )    |            |            | 436,000   |  
|                                                                            |                                                                 | Accounts payable and other accrued expenses |            |                   | 544,000    |      |            |            | 998,000   |  
|                                                                            |                                                                 | Accrued compensation and employee benefits  |            |                   | (81,000    | )    |            |            | (119,000  | )
|                                                                            |                                                                 | Accrued clinical trials expense             |            |                   | (286,000   | )    |            |            | 475,000   |  
|                                                                            |                                                                 | Accrued professional fees                   |            |                   | (126,000   | )    |            |            | 12,000    |  
|                                                                            |                                                                 | Deferred revenue                            |            |                   | (671,000   | )    |            |            | 2,237,000 |  
|                                                                            |                                                                 |                                             |            |                   |            |      |            |           
|Net cash used in operating activities                                       |                                                                 |                                             | (4,767,000 | )                 |            |      | (2,444,000 | )         
|                                                                            |                                                                 |                                             |            |                   |            |      |            |           
|Investing activities:                                                       |                                                                 |                                             |            |                   |            |      |            |           
|                                                                            | Purchase of property and equipment                              |                                             |            | (46,000           | )          |      |            | (49,000    | )        
|                                                                            | Payment on purchase of marketable securities                    |                                             |            | (11,000           | )          |      |            | (23,000    | )        
|                                                                            |                                                                 |                                             |            |                   |            |      |            |           
|Net cash used in investing activities                                       |                                                                 |                                             | (57,000    | )                 |            |      | (72,000    | )         
|                                                                            |                                                                 |                                             |            |                   |            |      |            |           
|Financing activities:                                                       |                                                                 |                                             |            |                   |            |      |            |           
|                                                                            | Proceeds from issuances of common stock, net of
financing costs |                                             |            | 49,860,000        |            |      |            | 10,526,000 |          
|                                                                            |                                                                 |                                             |            |                   |            |      |            |           
|Net cash provided by financing activities                                   |                                                                 |                                             | 49,860,000 |                   |            |      | 10,526,000 |           
|                                                                            |                                                                 |                                             |            |                   |            |      |            |           
|Net increase in cash and cash equivalents                                   |                                                                 |                                             | 45,036,000 |                   |            |      | 8,010,000  |           
|Cash and cash equivalents, beginning of period                              |                                                                 |                                             | 20,233,000 |                   |            |      | 15,518,000 |           
|                                                                            |                                                                 |                                             |            |                   |            |      |            |           
|Cash and cash equivalents, end of period                                    |                                                                 | $                                           | 65,269,000 |                   |            | $    | 23,528,000 |           
|                                                                            |                                                                 |                                             |            |                   |            |      |            |           

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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | SciClone was reincorporated in the State of Delaware on July 18, 2003. 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 Loss Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Potentially dilutive common shares from
convertible debt, stock options and warrants are excluded, as their effect
is antidilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

6



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| |  | 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 loss and net loss per share is required
by Statement of Financial Accounting Standards No. 123 Accounting for
Stock-Based Compensation (SFAS 123) as amended by Statement of Financial
Accounting Standards No. 148 Accounting for Stock-Based
Compensation-Transition and Disclosure (SFAS 148) 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
nine month periods ended September 30, 2003 and the corresponding periods
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 and 0.96, 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 loss and net
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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                                                                            |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                            |  | Three Months Ended |            | Nine Months Ended
|                                                                                                            |  | September 30,      |            | September 30,    
|                                                                                                            |  | 2003               |            | 2002              |  | 2003 |            | 2002
|                                                                                                            |  |                    |            |                   |  |      |            |     
|Net loss  as reported                                                                                      |  | $                  | (2,850,000 | )                 |  | $    | (1,672,000 | )    |  | $ | (588,000   | ) |  | $ | (7,420,000 | )
|Total stock-based employee compensation expense
determined under the fair value based method for
all awards |  |                    | (844,000   | )                 |  |      | (595,000   | )    |  |   | (2,164,000 | ) |  |   | (1,711,000 | )
|                                                                                                            |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Net loss  pro forma                                                                                        |  | $                  | (3,694,000 | )                 |  | $    | (2,267,000 | )    |  | $ | (2,752,000 | ) |  | $ | (9,131,000 | )
|                                                                                                            |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share  as reported                                                          |  | $                  | (0.07      | )                 |  | $    | (0.05      | )    |  | $ | (0.02      | ) |  | $ | (0.22      | )
|                                                                                                            |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share  pro forma                                                            |  | $                  | (0.10      | )                 |  | $    | (0.06      | )    |  | $ | (0.07      | ) |  | $ | (0.27      | )
|                                                                                                            |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  



|   |  | The effects of applying SFAS 123 for pro forma disclosures are not likely
to be representative of the effects on reported net loss for future years
due to the different number of options granted each year.                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Comprehensive Loss                                                                                                                                                                                                                                                                                                        
|  
|   |  | For the three-month periods ended September 30, 2003 and 2002, the
Companys total comprehensive loss amounted to $(2,879,000) and
$(1,690,000), respectively. For the nine-month periods ended September 30,
2003 and 2002, the Companys total comprehensive loss amounted to
$(529,000) and $(7,414,000), respectively.

7



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|4. |  | Available-For-Sale Securities                                                                           
|-- |  | --------------------------------------------------------------------------------------------------------
|  
|   |  | The following is a summary of available-for-sale securities at September
30, 2003 and December 31, 2002:

|                    |                             |   |            |            |            |   |         |         |           |   |            |            | 
|------------------- | --------------------------- | - | ---------- | ---------- | ---------- | - | ------- | ------- | --------- | - | ---------- | ---------- | 
|                    |                             |   |            |            |            |   | Gross   |         | Estimated
|                    |                             |   | Amortized  |            | Unrealized |   | Fair   
|                    |                             |   | Cost       |            | Gains      |   | Value  
|                    |                             |   |            |            |            |   |        
|September 30, 2003: |                             |   |            |            |            |   |         |         |           |   |            |           
|                    | Certificate of deposit      |   | $          | 798,000    |            |   | $       |        |           |   | $          | 798,000    | 
|                    | U.S. government obligations |   |            | 53,194,000 |            |   |         |        |           |   |            | 53,194,000 | 
|                    | Corporate equity securities |   |            | 51,000     |            |   |         | 138,000 |           |   |            | 189,000    | 
|                    |                             |   |            |            |            |   |         |         |           |   |            |           
|                    |                             | $ | 54,042,000 |            |            | $ | 138,000 |         |           | $ | 54,181,000 |           
|                    |                             |   |            |            |            |   |         |         |           |   |            |           
|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 September 30, 2003, the available-for-sale securities are included as
follows: $53,194,000 in cash and cash equivalents; $685,000 in restricted
short-term investments and $302,000 in other short-term investments. As of
December 31, 2002, the available-for-sale securities are included as
follows: $13,723,000 in cash and cash equivalents; $685,000 in restricted
short-term investments and $232,000 in other short-term investments.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The following is a summary of inventories at September 30, 2003 and
December 31, 2002:                                                                                                                                                                                                                                                                                                                                                              

|                 |  |               |           |              |  |   |           | 
|---------------- |  | ------------- | --------- | ------------ |  | - | --------- | 
|                 |  | September 30, |           | December 31,
|                 |  | 2003          |           | 2002        
|                 |  |               |           |             
|Raw materials    |  | $             | 2,255,000 |              |  | $ | 2,190,000 | 
|Work in progress |  |               | 101,000   |              |  |   | 159,000   | 
|Finished goods   |  |               | 1,800,000 |              |  |   | 1,082,000 | 
|                 |  |               |           |              |  |   |           | 
|                 |  | $             | 4,156,000 |              |  | $ | 3,431,000 | 
|                 |  |               |           |              |  |   |           | 



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

|                         |  |               |            |              |  |   |            |  
|------------------------ |  | ------------- | ---------- | ------------ |  | - | ---------- | -
|                         |  | September 30, |            | December 31,
|                         |  | 2003          |            | 2002        
|                         |  |               |            |             
|Product rights           |  | $             | 2,456,000  |              |  | $ | 2,456,000  |  
|Accumulated amortization |  |               | (1,826,000 | )            |  |   | (1,774,000 | )
|                         |  |               |            |              |  |   |            |  
|                         |  | $             | 630,000    |              |  | $ | 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 nine-month periods ended September 30, 2003 was $17,500 and
$52,500, respectively. Amortization expense for the three-month and
nine-month periods ended September 30, 2002 was $102,000 and $307,000,
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
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|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 clinical data from this program with Sigma-Tau, the substantive
performance requirements under the contract. For the three-month and
nine-month periods ended September 30, 2003, the Company recognized
$224,000 and $672,000 as contract revenue.                                                                                                                                                                                                          
|  
|9. |  | Stockholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | In September 2003, the Company completed a public offering of 6,000,000
shares of common stock at $8 per share and received net proceeds of
$44,524,000 from the sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                              

9



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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
and its ability to complement existing therapies, our future financial results,
the timing and outcome of clinical trials, our ability to submit applications
for marketing approval of our products, the use of cash to increase inventory
levels, 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, in several
late-stage clinical trials for the treatment of patients with the hepatitis C
virus, or HCV, the hepatitis B virus, or HBV, and certain types of cancer. Our
primary focus is the successful completion of our two ongoing ZADAXIN phase 3
HCV clinical trials in the United States. 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 clinical trial in Japan, an ongoing
phase 2 malignant melanoma clinical trial in Europe with our exclusive European
marketing partner, Sigma-Tau, two ongoing phase 2 pilot studies in the United
States for the treatment of liver cancer, and a pilot study of hepatitis C
triple drug combination therapy in a clinical trial in Mexico. 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.

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 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.

Results of Operations

Total Revenue

Product sales were $5,421,000 and $26,628,000 for the three-month and
nine-month periods ended September 30, 2003, as compared to $4,298,000 and
$12,294,000 for the corresponding periods in 2002. The growth in sales during
the first nine months of 2003 was largely a result of an unanticipated
temporary increase in sales of ZADAXIN to hospitals in China during the second
quarter of 2003. This increase was related to the use of immune system
enhancers in connection with the treatment of severe acute respiratory

10



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syndrome, or SARS. As this SARS epidemic has been contained, we expect
sales in future quarters will be consistent with sales patterns in the first
and third quarter of 2003.

For the three-month and nine-month periods ended September 30, 2003, all
of our product sales were derived from sales of ZADAXIN. Sales to customers in
China accounted for approximately 88% and 89% of this revenue for the
three-month and nine-month periods, respectively.

Contract revenue was $224,000 and $672,000 for the three-month and
nine-month periods ended September 30, 2003, as compared to $224,000 and
$448,000 for 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 $935,000 and $4,882,000 for the three-month and
nine-month periods ended September 30, 2003 as compared to $918,000 and
$2,525,000 for the corresponding periods in 2002. The increase in the
three-month and nine-month periods ended September 30, 2003 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.

Research and Development

Research and development expenses were $4,585,000 and $12,676,000 for the
three-month and nine-month periods ended September 30, 2003, as compared to
$2,110,000 and $8,407,000 for the corresponding periods in 2002. The increases
in the three-month and nine-month periods ended September 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 $1,892,000 and $7,146,000 for the
three-month and nine-month periods ended September 30, 2003, as compared to
$2,217,000 and $6,291,000 for the corresponding periods in 2002. The decrease
in the three-month period ended September 30, 2003 was due to lower promotional
and advertising expenses. The increase in the nine-month period was due to an
increase in sales of ZADAXIN. We expect our sales and marketing expenses to
vary from quarter to quarter depending primarily upon the level of sales.

General and Administrative

General and administrative expenses were $998,000 and $3,045,000 for the
three-month and nine-month periods ended September 30, 2003, as compared to
$960,000 and $2,907,000 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.

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Interest and Investment Income

Interest and investment income was $47,000 and $143,000 for the
three-month and nine-month periods ended September 30, 2003, as compared to
$100,000 and $252,000 for the corresponding periods in 2002. The decrease in
interest and investment income was primarily due to lower interest rates.

Liquidity and Capital Resources

On September 30, 2003 and December 31, 2002, the Company had $66,256,000
and $21,150,000, respectively, in cash, cash equivalents and short-term
investments, $685,000 of which was restricted cash at each date. The increase
in cash and cash equivalents was primarily due to the proceeds received from
our public offering of common stock in September 2003. The short-term
investments consist primarily of highly liquid marketable securities.

Net cash used by operating activities amounted to $4,767,000 for the
nine-month period ended September 30, 2003 as compared to net cash used by
operating activities in the amount of $2,444,000 in the corresponding period in
2002. The change was primarily due to a reduction in net loss partially offset
by increases in accounts receivable and inventories during the nine-month
period ended September 30, 2003, and an increase of $2,237,000 in deferred
revenue during the 2002 period.

Net cash provided by financing activities amounted to $49,860,000 for the
nine-month period ended September 30, 2003 and consisted of net proceeds of
$44,524,000 from a public offering of 6,000,000 shares of common stock,
$2,536,000 from the exercise of outstanding warrants to purchase common stock
by institutional investors, net proceeds of $1,787,000 from a direct placement
to affiliates of Sigma-Tau in January 2003, $824,000 related to exercises of
outstanding options under our employee stock option plans, and $188,000 from
the issuance of common stock under our employee stock purchase plan.

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

|                                   |  |                        |            |      |  |                    |         |             |  |                |           |  |  |   |           |  |  |   |   | 
|---------------------------------- |  | ---------------------- | ---------- | ---- |  | ------------------ | ------- | ----------- |  | -------------- | --------- |  |  | - | --------- |  |  | - | - | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual                        |  |                        |            |      |  | October - December |         |             |  |                |           |  |  |   |           |  |  |  
|Obligations                        |  | Total                  |            | 2003 |  | 2004 - 2005        |         | 2006 - 2007 |  | 2008 and after
|                                   |  |                        |            |      |  |                    |         |             |  |               
|Convertible notes payable          |  | $                      | 5,600,000  |      |  | $                  |        |             |  | $              | 5,600,000 |  |  | $ |          |  |  | $ |  | 
|Operating leases                   |  |                        | 5,302,000  |      |  |                    | 344,000 |             |  |                | 2,805,000 |  |  |   | 2,153,000 |  |  |   |  | 
|Minimum annual royalty obligations |  |                        | 325,000    |      |  |                    | 65,000  |             |  |                | 130,000   |  |  |   | 130,000   |  |  |   |  | 
|                                   |  |                        |            |      |  |                    |         |             |  |                |           |  |  |   |           |  |  |   |   | 
|Total contractual obligations      |  | $                      | 11,227,000 |      |  | $                  | 409,000 |             |  | $              | 8,535,000 |  |  | $ | 2,283,000 |  |  | $ |  | 

|                  |  |                                            |         |                    |  |             |         |             |  |                |   |  |  |   |   |  |  |   |   | 
|----------------- |  | ------------------------------------------ | ------- | ------------------ |  | ----------- | ------- | ----------- |  | -------------- | - |  |  | - | - |  |  | - | - | 
|                  |  | Amount of Commitment Expiration Per Period
|                  |  |                                           
|Other Commercial  |  | Total Amounts                              |         | October - December |  |             |         |             |  |                |   |  |  |   |   | 
|Commitments       |  | Committed                                  |         | 2003               |  | 2004 - 2005 |         | 2006 - 2007 |  | 2008 and after
|                  |  |                                            |         |                    |  |             |         |             |  |               
|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 nine-month periods ended
September 30, 2003 and 2002.

We intend 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 so as to manage the changes in
suppliers we are undertaking. We believe our existing capital resources and
interest on funds available are sufficient to complete our current U.S. phase 3
clinical trials and, if the trials are successful and we receive FDA approval,
to begin commercialization of ZADAXIN in the United States. However, we cannot
assure you that such funds will be sufficient, or that sales of ZADAXIN, if
approved in the United States, will result in profitable operations. 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

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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 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. 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,

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

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 significantly
impaired, our business will suffer and the price of our stock may decline.

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.

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Each of our two current phase 3 HCV clinical trials in the United States
are designed to enroll 500 patients, one trial treating patients with no liver
damage and the other trial treating patients with mild cirrhosis of the liver.
The 500 patient enrollment is complete in the first trial, however if we are
unable to enroll a sufficient number of patients in the second trial, if such
enrollment is delayed or if patient drop out rates in either trial are higher
than anticipated, our ability to proceed with our clinical trials and prepare
an NDA would be adversely affected. In particular, we are experiencing
competition 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 both of 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 are known to cause 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 were more than 200% greater
than sales for any quarter in our history 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 a result of the containment of the recent SARS epidemic, we expect
sales in future quarters to be more consistent with sales patterns of the third
quarter, which has significantly lower sales results than those of the second
quarter in 2003. 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 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.

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.

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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 the 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 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 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.

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 and ZADAXIN analogs, including method of use
patents with

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respect to the use of ZADAXIN for certain indications. If other parties
develop generic forms of 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 and selling such generic forms of
ZADAXIN. If other parties develop analogs or derivatives of ZADAXIN, our
patents and other rights might not be sufficient to prohibit them from
marketing these analogs or derivatives.

Pharmaceutical products are either not patentable or have only recently
become patentable in some of the countries in which we market or may market
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, U.S. patent applications may be kept
confidential for up to 18 months 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, 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

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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 one or more important areas of
our business including our sales, clinical trials or the regulatory approval
process.

We rely on third parties, who are subject to regulatory oversight, to
supply our clinical and commercial products. 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 U.S. clinical trials,
and we have not received all the pegylated interferon to be used in the
clinical trials. F. Hoffmann 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.

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

To be successful, our products must be manufactured in commercial
quantities, in compliance with stringent regulatory requirements and at an
acceptable cost. Manufacturing interruptions or failure to comply with
regulatory requirements could significantly delay clinical development of
potential products and reduce third-party or clinical researcher interest and
support of proposed trials. These interruptions or failures could also impede
commercialization of our products, including sales of 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.

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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 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 and our sales have
been primarily in a single country, China. 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. If unexpected and serious adverse events are reported, or if
expected efficacy results are not achieved, it would have a material adverse
effect on our business. Our future revenue will also depend in part on our
ability to develop other commercially viable and accepted products. Market
acceptance of our products will depend on many factors, including our ability
to convince prospective customers to use our products as an alternative to
other treatments and therapies and to convince prospective strategic partners
to market our products effectively and to manufacture our products in
sufficient quantities with acceptable quality and at an acceptable cost. In
addition, doctors must opt to use treatments involving our products. If doctors
elect to use a different course of treatment, demand for our drug products
would be reduced. Failure to do any of the above will 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
current U.S. phase 3 clinical trials and, if the trials are successful and we
receive FDA approval, to begin commercialization of ZADAXIN in the United
States. However, we cannot assure that such funds will be sufficient, or that
sales of ZADAXIN, if approved in the United States, 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 September 30, 2003, we had an accumulated deficit of approximately $134
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,

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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.

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
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.

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

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

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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, 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.

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.

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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.

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 and Japan;                          
|
| |  |  | timing and achievement of milestones;                                                                                                      
|
| |  |  | 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 quarterly 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.                                                                  

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

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

As of September 30, 2003, stock options to purchase 5,597,209 shares of
common stock were outstanding, of which options to purchase 3,871,535 shares
were exercisable. Also outstanding as of the same date were warrants
exercisable for 1,004,760 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.

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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.

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 September 30, 2003 our directors and officers owned or had the right
to acquire approximately 7.3% of the outstanding shares of our common stock.
Our two largest stockholders, Sigma-Tau (and its affiliates) and Randal J.
Kirk, owned in the aggregate approximately 15.3% 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 terminated in connection
with the 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 cumulate 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 currently 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 $98,005 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 September 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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##### Table of Contents









PART II. OTHER INFORMATION

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)        |  | Form of Indemnity Agreement by and between the Registrant and each
director and executive officer of SciClone Pharmaceuticals, Inc.
|               |  |                                                                                                                                    
|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.

|    |  |                                                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------
|(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 filed on May 15, 2001.            
|    |  |                                                                                                              
|(5) |  | Filed herewith.                                                                                              

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##### Table of Contents



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



| | 1. |  | On July 28, 2003, the Company filed a Current Report on Form 8-K
pursuant to Item 7 and Item 12.    
| | -- |  | ----------------------------------------------------------------------------------------------------
|
| | 2. |  | On July 28, 2003, the Company filed a Current Report on Form 8-K
pursuant to Item 5
and Item 7.     
|
| | 3. |  | On September 24, 2003, the Company filed a Current Report on
Form 8-K pursuant to Item 5 and Item 7.

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##### Table of Contents






SIGNATURES

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

|                       |  |  |  |                                            
|---------------------- |  |  |  | -------------------------------------------
|                       |  |  |  | SCICLONE PHARMACEUTICALS, INC.
(Registrant)
|                       |  |  |  |                                            
|Date: October 31, 2003 |  |  |  | /s/ Richard A. Waldron                     
|                       |  |  |  |                                            
|                       |  |  |  | Richard A. Waldron                         
|                       |  |  |  | Chief Financial Officer                    
|                       |  |  |  | (Principal Financial & Accounting Officer) 

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##### Table of Contents






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)    |  | Form of Indemnity Agreement by and between the
Registrant and each director and executive officer of
SciClone Pharmaceuticals, Inc.
|           |  |                                                                                                                                     |  |              |  | 
|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.



| | (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 filed on May 15, 2001.            
|
| | (5) |  | Filed herewith.                                                                                              

28