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

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2002

Commission file number: 0-27406

CONNETICS CORPORATION(Exact name of registrant as specified in its charter)

|                                                                       |  |                                               
|---------------------------------------------------------------------- |  | ----------------------------------------------
|Delaware(State or other jurisdiction of
incorporation or organization) |  | 94-3173928(IRS Employer
Identification Number)

3290 West Bayshore Road
Palo Alto, California 94303(Address of principal executive offices)

Registrants telephone number, including area code:(650) 843-2800

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 at least the past
90 days.    Yes  [X]    No  [   ]

The number of shares outstanding of the registrants common stock as of
May 10, 2002, was 30,620,363 shares.



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|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. 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                           
|PART II. OTHER INFORMATION   
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                    



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CONNETICS CORPORATION
TABLE OF CONTENTS

|         |  |                       |                                                                                                    |  |      |    | 
|-------- |  | --------------------- | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                       |                                                                                                    |  | Page
|         |  |                       |                                                                                                    |  |     
|PART I.  |  | FINANCIAL INFORMATION |                                                                                                    | 
|        
|         |  | Item 1                | Condensed Consolidated Financial Statements                                                        |  |      |    | 
|        
|        
|        
|        
|         |  |                       | Condensed Consolidated Balance Sheets at March 31, 2002 and
December 31, 2001                      |  |      | 3  | 
|        
|        
|        
|        
|         |  |                       | Condensed Consolidated Statements of Operations for the
three months ended March 31, 2002 and 2001 |  |      | 4  | 
|        
|        
|        
|        
|         |  |                       | Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001 |  |      | 5  | 
|        
|        
|        
|        
|         |  |                       | Notes to Condensed Consolidated Financial Statements                                               |  |      | 6  | 
|        
|         |  | Item 2                | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  |      | 12 | 
|        
|         |  | Item 3                | Quantitative and Qualitative Disclosures About Market Risks                                        |  |      | 18 | 
|        
|PART II. |  | OTHER INFORMATION     |                                                                                                    | 
|        
|         |  | Item 6                | Exhibits and Reports on Form 8-K                                                                   |  |      | 18 | 
|         |  |                       | (a)   Exhibits                                                                                     |  |      | 18 | 
|        
|        
|        
|        
|         |  |                       | (b)   Reports on Form 8-K                                                                          |  |      | 18 | 





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PART I. FINANCIAL INFORMATION




Item 1.   Financial Statements

CONNETICS CORPORATION




CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands)
(Unaudited)


|                                           |                                             |   |                            |          |   |           |        |              |   |        |  | 
|------------------------------------------ | ------------------------------------------- | - | -------------------------- | -------- | - | --------- | ------ | ------------ | - | ------ |  | 
|                                           |                                             |   |                            |          |   | March 31, |        | December 31,
|                                           |                                             |   |                            |          |   | 2002      |        | 2001        
|                                           |                                             |   |                            |          |   |           |        |             
|Assets                                     |                                             |   |                            |          |   |           |        |             
|Current assets:                            |                                             |   |                            |          |   |           |        |             
|                                           | Cash and cash equivalents                   |   | $                          | 5,156    |   |           | $      | 3,603        |  
|                                           | Short-term investments                      |   |                            | 35,328   |   |           |        | 42,734       |  
|                                           | Restricted cash                             |   |                            | 1,018    |   |           |        | 1,539        |  
|                                           | Accounts receivable, net                    |   |                            | 5,429    |   |           |        | 5,392        |  
|                                           | Other current assets                        |   |                            | 1,788    |   |           |        | 1,204        |  
|                                           |                                             |   |                            |          |   |           |        |             
|                                           |                                             |   | Total current assets       |          |   | 48,719    |        |              |   | 54,472 | 
|Property and equipment, net                |                                             |   | 3,861                      |          |   |           | 3,167  |             
|Restricted cash                            |                                             |   | 300                        |          |   |           | 600    |             
|Deposits and other assets                  |                                             |   | 336                        |          |   |           | 332    |             
|Goodwill, net                              |                                             |   | 6,271                      |          |   |           | 6,132  |             
|Other intangible assets, net               |                                             |   | 7,280                      |          |   |           | 7,624  |             
|                                           |                                             |   |                            |          |   |           |        |             
|Total assets                               |                                             |   | 66,767                     |          |   | $         | 72,327 |             
|                                           |                                             |   |                            |          |   |           |        |             
|Liabilities and Stockholders Equity       |                                             |   |                            |          |   |           |        |             
|Current liabilities:                       |                                             |   |                            |          |   |           |        |             
|                                           | Accounts payable                            |   | $                          | 3,642    |   |           | $      | 3,636        |  
|                                           | Accrued process development expenses        |   |                            | 762      |   |           |        | 1,209        |  
|                                           | Accrued payroll and related expenses        |   |                            | 1,650    |   |           |        | 2,599        |  
|                                           | Other accrued current liabilities           |   |                            | 1,160    |   |           |        | 1,507        |  
|                                           | Notes payable                               |   |                            | 398      |   |           |        |             |  
|                                           | Other current liabilities                   |   |                            | 755      |   |           |        | 663          |  
|                                           | Current portion of deferred revenue         |   |                            | 707      |   |           |        | 832          |  
|                                           |                                             |   |                            |          |   |           |        |             
|                                           |                                             |   | Total current liabilities  |          |   | 9,074     |        |              |   | 10,446 | 
|Deferred revenue, net of current portion   |                                             |   | 494                        |          |   |           | 527    |             
|Stockholders equity:                      |                                             |   |                            |          |   |           |        |             
|                                           | Preferred stock                             |   |                            |         |   |           |        |             |  
|                                           | Common stock and additional paid-in capital |   |                            | 166,179  |   |           |        | 164,300      |  
|                                           | Deferred compensation                       |   |                            | (61      | ) |           |        | (69          | )
|                                           | Accumulated deficit                         |   |                            | (112,666 | ) |           |        | (109,498     | )
|                                           | Accumulated other comprehensive income      |   |                            | 3,747    |   |           |        | 6,621        |  
|                                           |                                             |   |                            |          |   |           |        |             
|                                           |                                             |   | Total stockholders equity |          |   | 57,199    |        |              |   | 61,354 | 
|                                           |                                             |   |                            |          |   |           |        |             
|Total liabilities and stockholders equity |                                             | $ | 66,767                     |          |   | $         | 72,327 |             
|                                           |                                             |   |                            |          |   |           |        |             

See accompanying notes to condensed consolidated financial statements.

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CONNETICS CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share amounts)
(Unaudited)


|                                          |                                     |                |        |                    |        |      |        |        |       | 
|----------------------------------------- | ----------------------------------- | -------------- | ------ | ------------------ | ------ | ---- | ------ | ------ | ----- | 
|                                          |                                     |                |        | Three Months Ended
|                                          |                                     |                |        | March 31,         
|                                          |                                     |                |        |                   
|                                          |                                     |                |        | 2002               |        | 2001
|                                          |                                     |                |        |                    |        |     
|Revenues:                                 |                                     |                |        |                    |        |      |        |       
|                                          | Product                             |                |        | 10,140             |        |      | $      | 7,655  |      
|                                          | Royalty                             |                |        | 649                |        |      |        |       |      
|                                          | License, contract and other         |                |        | 742                |        |      |        | 804    |      
|                                          |                                     |                |        |                    |        |      |        |       
|                                          |                                     | Total revenues |        |                    | 11,531 |      |        |        | 8,459 | 
|                                          |                                     |                |        |                    |        |      |        |       
|Operating costs and expenses:             |                                     |                |        |                    |        |      |        |       
|                                          | Cost of product revenues            |                |        | 675                |        |      |        | 1,105  |      
|                                          | Research and development            |                |        | 5,040              |        |      |        | 4,352  |      
|                                          | Selling, general and administrative |                |        | 9,581              |        |      |        | 7,612  |      
|                                          |                                     |                |        |                    |        |      |        |       
|                                          | Total operating costs and expenses  |                |        | 15,296             |        |      |        | 13,069 |      
|                                          |                                     |                |        |                    |        |      |        |       
|Loss from operations                      |                                     |                | (3,765 | )                  |        |      | (4,610 | )     
|Interest and other income                 |                                     |                | 430    |                    |        |      | 1,001  |       
|Gain on sale of investments               |                                     |                | 18     |                    |        |      | 122    |       
|Loss on foreign exchange forward contract |                                     |                |       |                    |        |      | (1,394 | )     
|Interest and other expense                |                                     |                | (75    | )                  |        |      | (7     | )     
|                                          |                                     |                |        |                    |        |      |        |       
|Loss before income taxes                  |                                     | $              | (3,392 | )                  |        | $    | (4,888 | )     
|Income tax benefit                        |                                     |                | 224    |                    |        |      |       |       
|                                          |                                     |                |        |                    |        |      |        |       
|Net loss                                  |                                     | $              | (3,168 | )                  |        | $    | (4,888 | )     
|                                          |                                     |                |        |                    |        |      |        |       
|Basic and diluted loss per share          |                                     | $              | (0.10  | )                  |        | $    | (0.16  | )     
|                                          |                                     |                |        |                    |        |      |        |       
|Shares used to calculate loss per share   |                                     |                | 30,496 |                    |        |      | 29,705 |       

See accompanying notes to condensed consolidated financial statements.

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CONNETICS CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)
(Unaudited)


|                                      |                                                                             |                                           |   |                    |        |      |   |         |        |  
|------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------- | - | ------------------ | ------ | ---- | - | ------- | ------ | -
|                                      |                                                                             |                                           |   | Three Months Ended
|                                      |                                                                             |                                           |   | March 31,         
|                                      |                                                                             |                                           |   |                   
|                                      |                                                                             |                                           |   | 2002               |        | 2001
|                                      |                                                                             |                                           |   |                    |        |     
|Cash flows from operating activities: |                                                                             |                                           |   |                    |        |      |   |        
|                                      | Net loss                                                                    |                                           | $ | (3,168             | )      |      | $ | (4,888  | )     
|                                      | Adjustments to reconcile net loss to net cash
used in operating activities: |                                           |   |                    |        |      |   |         |       
|                                      |                                                                             | Depreciation and amortization             |   |                    | 521    |      |   |         | 213    |  
|                                      |                                                                             | Gain on sale of investment                |   |                    | (18    | )    |   |         | (122   | )
|                                      |                                                                             | Stock compensation expense                |   |                    | 20     |      |   |         | 66     |  
|                                      |                                                                             | Loss on foreign exchange forward contract |   |                    |       |      |   |         | 1,394  |  
|                                      | Changes in assets and liabilities:                                          |                                           |   |                    |        |      |   |         |       
|                                      |                                                                             | Accounts receivable                       |   |                    | (37    | )    |   |         | 1,450  |  
|                                      |                                                                             | Other assets                              |   |                    | (166   | )    |   |         | 104    |  
|                                      |                                                                             | Accounts payable                          |   |                    | 6      |      |   |         | (1,462 | )
|                                      |                                                                             | Accrued and other current liabilities     |   |                    | (1,651 | )    |   |         | (2,080 | )
|                                      |                                                                             | Deferred revenue                          |   |                    | (158   | )    |   |         | (33    | )
|                                      |                                                                             |                                           |   |                    |        |      |   |        
|                                      | Net cash used in operating activities                                       |                                           |   | (4,651             | )      |      |   | (5,358  | )     
|                                      |                                                                             |                                           |   |                    |        |      |   |        
|Cash flows from investing activities: |                                                                             |                                           |   |                    |        |      |   |        
|                                      | Purchases of short-term investments                                         |                                           |   | (10,527            | )      |      |   | (12,464 | )     
|                                      | Sales and maturities of short-term investments                              |                                           |   | 15,052             |        |      |   | 8,009   |       
|                                      | Purchases of property and equipment                                         |                                           |   | (1,010             | )      |      |   | (171    | )     
|                                      |                                                                             |                                           |   |                    |        |      |   |        
|                                      | Net cash provided by (used in) investing activities                         |                                           |   | 3,515              |        |      |   | (4,626  | )     
|                                      |                                                                             |                                           |   |                    |        |      |   |        
|Cash flows from financing activities: |                                                                             |                                           |   |                    |        |      |   |        
|                                      | Restricted cash                                                             |                                           |   | 821                |        |      |   | (450    | )     
|                                      | Payment
of notes payable                                                    |                                           |   | (24                | )      |      |   | (750    | )     
|                                      | Payments on obligations under capital leases                                |                                           |   |                   |        |      |   | (12     | )     
|                                      | Proceeds from issuance of common stock                                      |                                           |   | 1,867              |        |      |   | 119     |       
|                                      |                                                                             |                                           |   |                    |        |      |   |        
|                                      | Net cash provided by (used in) financing activities                         |                                           |   | 2,664              |        |      |   | (1,093  | )     
|                                      | Effect of foreign currency exchange rates on cash and cash equivalents      |                                           |   | 25                 |        |      |   |        |       
|                                      |                                                                             |                                           |   |                    |        |      |   |        
|                                      | Net change in cash and cash equivalents                                     |                                           |   | 1,553              |        |      |   | (11,077 | )     
|                                      | Cash and cash equivalents at beginning of period                            |                                           |   | 3,603              |        |      |   | 58,577  |       
|                                      |                                                                             |                                           |   |                    |        |      |   |        
|                                      | Cash and cash equivalents at end of period                                  |                                           | $ | 5,156              |        |      | $ | 47,500  |       
|                                      |                                                                             |                                           |   |                    |        |      |   |        

See accompanying notes to condensed consolidated financial statements.

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CONNETICS CORPORATION




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March 31, 2002
(Unaudited)


1.       Basis of Presentation and Policies

We have prepared the accompanying unaudited condensed consolidated
financial statements of Connetics Corporation (Connetics) in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In our opinion, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002. Certain prior year balances have been reclassified for
comparative purposes.

These unaudited condensed consolidated financial statements and notes
should be read in conjunction with audited financial statements and notes to
those financial statements for the year ended December 31, 2001 included in our
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements
include the accounts of Connetics and its wholly-owned subsidiary, Soltec
Research Pty Ltd. (Soltec) since April 20, 2001, the day following the
acquisition. All significant intercompany accounts and transactions are
eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Revenue Recognition

Product Sales.We recognize revenue from product sales when there is
persuasive evidence that an arrangement exists, when title has passed, the
price is fixed and determinable, and collection of the resulting receivable is
reasonably assured. We recognize product revenue net of allowances for
estimated returns, rebates, and chargebacks. We are obligated to accept from
customers the return of pharmaceuticals that have reached their expiration
date. To date we have not experienced significant returns of expired product.
Product shipping and handling costs are included in cost of product revenues.

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Royalty Revenue. Royalties from licensees are based on third-party sales.
We recognize royalties in the quarter in which the royalty payment is either
received from the licensee or may be reasonably estimated, which is typically
one quarter following the related sale by the licensee.

Royalty expenses directly related to product sales are classified in cost
of product revenues. Royalty expenses related to agreements with Soltec are
eliminated in consolidation.

Contract Revenue. We record contract revenue for research and
development, or R&D, as it is earned based on the performance requirements of
the contract. We recognize non-refundable contract fees for which no further
performance obligations exist, and for which Connetics has no continuing
involvement, on the earlier of when the payments are received or when
collection is assured.

We recognize revenue from non-refundable upfront license fees ratably over
the period in which we have continuing development obligations when, at the
time the agreement is executed, there remains significant risk due to the
incomplete state of the products development. Revenue associated with
substantial at risk performance milestones, as defined in the respective
agreements, is recognized based upon the achievement of the milestones. We
recognize revenue under R&D cost reimbursement contracts as the related costs
are incurred. Advance payments that we receive in excess of amounts earned are
classified as deferred revenue until they are earned.

Cash Equivalents and Short-term Investments

Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with original maturities of 90 days or less at the date of
purchase. Investments with maturities beyond three months at the date of
acquisition and that mature within one year from the balance sheet date are
considered to be short-term investments. We classify short-term
investments as available-for-sale at the time of purchase and carry
them at fair value,
with unrealized gains and losses reported as a separate component of
stockholders equity. The cost of securities sold is based on the specific
identification method.

Cash equivalents and investments are financial instruments that
potentially subject us to concentration of risk to the extent recorded on the
balance sheet. We believe we have established guidelines for investment of our
excess cash relative to diversification and maturities that maintain safety and
liquidity. We invest our excess cash in debt instruments of the U.S.
Government and its agencies and high-quality corporate issuers, and, by policy,
restrict our exposure to any single corporate issuer by imposing concentration
limits. To minimize the exposure due to adverse shifts in interest rates, we
maintain investments at an average maturity of generally less than one year.

Foreign Currency

Soltecs functional currency is the Australian dollar. We translate
Soltecs local currency balance sheet into U.S. dollars using the exchange
rates in effect at the balance sheet date; for revenue and expense accounts we
use a weighted average exchange rate during the period. Foreign currency
translation adjustments are recorded in comprehensive income (loss). Net gains

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and losses resulting from foreign exchange transactions are included in the
consolidated statement of operations and were immaterial for the three months
ended March 31, 2002 and the year ended December 31, 2001.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation.
We determine depreciation using the straight-line method over the estimated
useful lives of the assets, generally three to five years. We
amortize leasehold
improvements and assets acquired under capital lease arrangements are amortized
over the shorter of the estimated useful lives of the assets or the lease term.

Impairment of Long Lived Assets

We periodically perform reviews to determine if the carrying value of
long-term assets (goodwill, purchased intangibles, property and equipment) is
impaired. The reviews look for the existence of facts or circumstances, either
internal or external, which indicate that the carrying value of the asset
cannot be recovered. No such impairment has been indicated to date. If in the
future management determines the existence of impairment indicators, we would
use undiscounted cash flows to initially determine whether impairment should be
recognized. If necessary, we would perform subsequent calculations to measure
the amount of the impairment loss based on the excess of the carrying value
over the fair value of the impaired assets. If quoted market prices for the
assets are not available, the fair value would be calculated using the present
value of estimated expected future cash flows or other appropriate valuation
methodologies. The cash flow calculation would be based on managements best
estimates using appropriate assumption and projections at the time.

Recent Accounting Pronouncements

SFAS
142.In July 2001 the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). Under SFAS 142, effective January 1, 2002, we are no longer
required to amortize goodwill and intangible assets with indefinite lives, but
are required to periodically review these assets for impairment. Intangible
assets determined to have definite lives will continue to be amortized over
their useful lives. We adopted SFAS 142 effective January 1, 2002 and
reclassified amounts to goodwill that were previously allocated to assembled
workforce. Upon adoption we ceased the amortization of goodwill previously
representing expense of approximately $0.7 million per year. We
will continue to amortize over their useful lives other intangible
assets that meet the criteria for separate recognition from goodwill. We performed an impairment
test of goodwill as of January 1, 2002, which did not result in an impairment
charge at transition. We continue to monitor the carrying value of goodwill
and intangible assets through the annual impairment tests. See also Note 4
Goodwill and Other Intangible Assets. No adjustment for impairment was
required for the three month period ended March 31, 2002.

SFAS 144. In October 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS 144), which
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. SFAS 144 supercedes SFAS
121, Accounting for the Impairment of Long-Lived

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Assets and for Long-Lived Assets to be Disposed Of. SFAS 144 requires that
long-lived assets to be disposed of by sale be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS 144 excludes from the
definition of long-lived assets goodwill and other intangibles that are not
amortized in accordance with SFAS 142. SFAS 144 also expands the reporting of
discontinued operations to include components of an entity that have been or
will be disposed of rather than limiting such discontinuance to a segment of a
business. SFAS 144 is effective for years ending after December 15, 2001. We
adopted SFAS 144 effective January 1, 2002, and it did not have a significant
impact on our financial position or results of operations.

2.       Net Income (Loss) Per Share

We compute basic net income (loss) per common share by dividing net
income (loss) applicable to common stockholders by the weighted average number
of common shares outstanding during the period. We compute diluted net income
per share using the weighted average of all common and diluted equivalent
stock options and warrants outstanding during the period. We excluded all
stock option and warrants from the calculation of diluted loss per common
share for the three month periods ended March 31, 2002 and March 31, 2001
because these securities are anti-dilutive during these periods.

3.       Comprehensive Loss

During the three month period ended March 31, 2002, total comprehensive
loss amounted to $6.0 million, compared to a comprehensive loss of $8.5 million
for the comparable period in 2001. The components of comprehensive income
(loss) for the three month period ended March 31, 2002 and March 31, 2001 are
as follows:

|                                        |  |                    |        |      |  |   |        |  
|--------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                        |  | Three months ended
|                                        |  | March 31,         
|                                        |  |                   
|(In thousands)                          |  | 2002               |        | 2001
|                                        |  |                    |        |      |  |   |       
|Net loss                                |  | $                  | (3,168 | )    |  | $ | (4,888 | )
|Foreign currency translation adjustment |  |                    | 25     |      |  |   |       |  
|Unrealized loss on securities           |  |                    | (2,899 | )    |  |   | (3,568 | )
|                                        |  |                    |        |      |  |   |       
|Comprehensive loss                      |  | $                  | (6,042 | )    |  | $ | (8,456 | )
|                                        |  |                    |        |      |  |   |       

4.       Goodwill and Other Intangible Assets

In April 2001, we acquired Soltec and accounted for the acquisition using
the purchase method of accounting. Accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values on the acquisition date. We purchased all of the shares
of Soltecs capital stock for $16.9 cash plus transaction costs of
approximately $250,000. The purchase price was allocated to: existing
technology of $6.8 million, goodwill of $6.6 million, tangible net assets
assumed of $1.3 million, patents and core technology of $1.2 million, acquired
in-process research and development of $1.1 million, and assembled workforce of
$150,000.

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Upon the adoption of SFAS 142 effective January 1, 2002 we reclassified
amounts to goodwill that were previously allocated to assembled workforce.
Upon adoption we ceased the amortization of goodwill previously representing
expense of approximately $0.7 million per year. Other intangible assets that
meet the criteria for separate recognition from goodwill. We will continue to amortize over their useful lives.

Changes in the carrying amount of goodwill for the quarter ended March 31,
2002, are as follows (in thousands);

|                                                                         |  |   |       | 
|------------------------------------------------------------------------ |  | - | ----- | 
|Balance as of December 31, 2001                                          |  | $ | 6,132 | 
|Reclassification of intangible asset  assembled workforce into
goodwill |  |   | 139   | 
|                                                                         |  |  
|Balance as of March 31, 2002                                             |  | $ | 6,271 | 
|                                                                         |  |  

The components of our other intangible assets at March 31, 2002, are as follows
(in thousands):

|                    |  |          |       |              |  |     |      |   |  |   |       | 
|------------------- |  | -------- | ----- | ------------ |  | --- | ---- | - |  | - | ----- | 
|                    |  | Gross    |       |              |  |     |      |   |  |  
|                    |  | Carrying |       | Accumulated  |  |     |      |  
|                    |  | Amount   |       | Amortization |  | Net
|                    |  |          |       |              |  |    
|Existing technology |  | $        | 6,810 |              |  | $   | (653 | ) |  | $ | 6,157 | 
|Patents             |  |          | 1,307 |              |  |     | (184 | ) |  |   | 1,123 | 
|                    |  |          |       |              |  |     |      |   |  |   |       | 
|Total               |  | $        | 8,117 |              |  | $   | (837 | ) |  | $ | 7,280 | 
|                    |  |          |       |              |  |     |      |   |  |   |       | 

Amortization expense of our other intangible assets for the first quarter of
2002 was $205,000 and for the first quarter of 2001 was $0.

The expected future annual amortization expense of our other intangible assets
is as follows
(in thousands):

|                                          |  |            |       |              |       | 
|----------------------------------------- |  | ---------- | ----- | ------------ | ----- | 
|                                          |  |            |       | Amortization
|For the Year Ended December 31,           |  | Expense   
|                                          |  |           
|                                          |  | 2002       |       | $            | 810   | 
|                                          |  | 2003       |       |              | 805   | 
|                                          |  | 2004       |       |              | 805   | 
|                                          |  | 2005       |       |              | 805   | 
|                                          |  | 2006       |       |              | 805   | 
|                                          |  | 2007       |       |              | 805   | 
|                                          |  | Thereafter |       |              | 2,650 | 
|                                          |  |            |       |              |       | 
|Total expected future annual amortization |  | $          | 7,485 |             
|                                          |  |            |       |              |       | 

5.       Licensing Agreement with Pharmacia

At the end of December 2001, we entered into an agreement granting
Pharmacia Corporation exclusive global rights, excluding Japan, to our
proprietary foam drug-delivery technology for use with Pharmacias Rogaine®
hair loss treatment. Under the agreement,

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Pharmacia paid an initial licensing fee, milestone payments and a royalty on
product sales. Pharmacia will be responsible for most product development
activities and costs, and we have agreed to provide certain pre-clinical
development support. We recognized $125,000 of revenue related to this
agreement in the quarter ended March 31, 2002.

6.       License for Liquipatch

In March 2002, Soltec expanded its exclusive global license to Novartis
Consumer Health, S.A. to cover Liquipatch drug-delivery system for use
in all topical
antifungal applications. Novartis exercised its right to expand the license
agreement, and will continue to be responsible for all product development
costs, and to pay Soltec license fees, milestone payments and royalties on future
product sales. We recognized $580,000 of contract revenue related to this agreement in
the quarter ended March 31, 2002.

7.       DPT Laboratories Ltd.

In March 2002, we entered into an agreement with DPT Laboratories, Ltd. to
construct an aerosol filling line at DPTs plant on their premises in Texas.
The agreement is retroactive to November 1, 2001, to cover certain
pre-construction payments we made in December 2001. We are responsible for the
cost of the construction and the related equipment, which is currently expected
to be approximately $2.3 million. After the aerosol line is completed,
Connetics will pay DPT rent for the facility of $56,000 per year. DPT and
Connetics simultaneously entered into a manufacturing agreement for DPT to
manufacture and fill Connetics commercial aerosol products. We are also party
to a separate research and development agreement for the manufacture of
clinical supplies for our aerosol products and product candidates.

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

This MD&A should be read in conjunction with the MD&A included in our
Annual Report on Form 10-K for the year ended December 31, 2001, and with the
unaudited condensed consolidated financial statements and notes to financial
statements included in this report. Our disclosure and analysis in this
Report, in other reports that we file with the Securities and Exchange
Commission, in our press releases and in public statements of our officers
contain forward-looking statements within the meaning of Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act.
Forward-looking statements give our current expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historical or current events. They use words such as anticipate,
estimate, expect, will, may, intend, plan, believe and similar
expressions in connection with discussion of future operating or financial
performance. These include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies
such as legal proceedings, and financial results. Forward-looking statements
may turn out to be wrong. They can be affected by inaccurate assumptions or by
known or unknown risks and uncertainties. Many factors mentioned in this
Report  for example, governmental regulation and competition in our industry 
will be important in determining future results. No forward-looking statement
can be guaranteed, and actual results may vary materially from those
anticipated in any forward-looking statement. Some of the factors that, in our
view, could cause actual results to differ are discussed under the caption
Factors That May Affect Future Results, Financial Condition and the Market
Price of Securities and in our Annual Report on Form 10-K. Our historical
operating results are not necessarily indicative of the results to be expected
in any future period.

OVERVIEW

Our commercial business is focused on the dermatology marketplace, which
is characterized by a large patient population that is served by relatively
small, and therefore more accessible, groups of treating physicians. We
currently market two pharmaceutical products, Luxíq® and OLUX®. Both products
have clinically proven therapeutic advantages and we are providing quality
customer service to physicians through our experienced sales and marketing
staff. In December 2001, we filed a supplemental New Drug Application, or
sNDA, with the FDA, requesting clearance to market OLUX for non-scalp
indications. The application is currently under review with the FDA.

In April 2001, we completed the acquisition of Soltec for approximately
$16.9 million. We accounted for this transaction using the purchase method and
allocated $1.1 million of the purchase price to in-process research and
development, based on an independent valuation, and the balance to the tangible
assets of Soltec, existing technology and goodwill. As we are now focusing on
our dermatology business, in April 2001 we sold our rights to Ridaura,
including inventory, to Prometheus for $9.0 million in cash plus a royalty on
annual sales in excess of $4.0 million for the next five years.

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In addition to our commercial business, we own the rights to a recombinant
form of a natural hormone called relaxin. On May 23, 2001, we announced our
decision to reduce our investment in the development of relaxin and to search
for licensing opportunities or other strategic alternatives for the product.
We eliminated 27 employee positions related to relaxin. In 2001, we recorded a
$1.1 million charge representing estimated costs accrued in connection with the
reduction in workforce and the wind down of relaxin development contracts.

RESULTS OF OPERATIONS

Revenues

|                                           |                           |                |        |                    |        |   |       |       |       | 
|------------------------------------------ | ------------------------- | -------------- | ------ | ------------------ | ------ | - | ----- | ----- | ----- | 
|                                           |                           |                |        | Three Months Ended
|                                           |                           |                |        | March 31,         
|                                           |                           |                |        |                   
|Revenues (In thousands)                    |                           | 2002           |        | 2001              
|                                           |                           |                |        |                   
|Product:                                   |                           |                |        |                    |        |   |       |      
|                                           | OLUX®                     |                | $      | 6,798              |        |   |       | 1,739 |      
|                                           | Luxíq®                    |                |        | 3,322              |        |   |       | 3,895 |      
|                                           | Other                     |                |        | 20                 |        |   |       |      |      
|                                           | Ridaura®                  |                |        |                   |        |   |       | 2,021 |      
|                                           |                           |                |        |                    |        |   |       |      
|Total product revenues                     |                           | $              | 10,140 |                    |        | $ | 7,655 |      
|License, contract, royalty:                |                           |                |        |                    |        |   |       |      
|                                           | Royalty                   |                |        | 649                |        |   |       |      |      
|                                           | Novartis                  |                |        | 580                |        |   |       |      |      
|                                           | Pharmacia                 |                |        | 125                |        |   |       |      |      
|                                           | F.H. Faulding & Co., Ltd. |                |        | 20                 |        |   |       | 20    |      
|                                           | Paladin Labs, Inc.        |                |        | 13                 |        |   |       | 13    |      
|                                           | Other contract            |                |        | 4                  |        |   |       |      |      
|                                           | InterMune                 |                |        |                   |        |   |       | 771   |      
|                                           |                           |                |        |                    |        |   |       |      
|Total license, contract & royalty revenues |                           | $              | 1,391  |                    |        | $ | 804   |      
|                                           |                           |                |        |                    |        |   |       |      
|                                           |                           | Total revenues |        | $                  | 11,531 |   |       | $     | 8,459 | 
|                                           |                           |                |        |                    |        |   |       |      

Our product revenues for the three month period ended March 31, 2002, were
$10.1 million, compared to $7.7 million for the three months ended March 31,
2001. The increase in total product revenues for the three months ended March
31, 2002 was due to sales growth of OLUX, which we began marketing in November
2000. We also recognized product revenue on sales of Ridaura until the April
2001 sale of that product line to Prometheus Laboratories, Inc.

Contract and royalty revenues for the three month period ended March 31,
2002 were $1.4 million, compared to $33,000 for the three months ended March
31, 2001. The increase in contract and royalty revenues for the three months
ended March 31, 2002 is attributable to income received under Soltec contract
and royalty agreements. We acquired Soltec in April 2001. We expect contract
revenues to fluctuate significantly depending on achieving milestones under
existing agreements, and on new business opportunities.

Effective April 1, 2000 we assigned to InterMune, Inc. (formerly InterMune
Pharmaceuticals, Inc.) our remaining rights and obligations under a license
with Genentech for Actimmune and the corresponding supply agreement. In
exchange, InterMune paid us

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approximately $5.2 million, which included the prepayment of a $1.0
million obligation owed in 2002. An additional $942,000 was payable at the end
of March 2001, and was offset by related product rebates and chargebacks of
$171,000.

Cost of Product Revenues

Our cost of product revenues includes the costs of manufacturing Luxíq and
OLUX and (until April 2001) Ridaura, royalty payments based on a percentage of
our product revenues and product freight and distribution costs from CORD
Logistics, Inc., the third party that handles all of our product distribution
activities. We recorded cost of product revenues of $675,000 for the three
months ended March 31, 2002, compared to $1.1 million for the three months
ended March 31, 2001. The decrease in cost of product revenues is primarily
due to a change in product mix arising from discontinued sales of Ridaura
effective April 1, 2001. Ridaura had higher manufacturing costs than our other
products.

Research and Development

Research and development expenses include salaries and benefits,
laboratory supplies, external research programs, clinical studies and allocated
overhead costs such as rent, supplies and utilities. In addition to clinical
site payments, clinical costs include costs of manufacturing clinical supplies
and costs associated with product stability studies. Research and development
expenses were $5.0 million for the three months ended March 31, 2002, compared
to $4.4 million for the comparable period in 2001. The primary reason for the
increase is that we have included the research and development activities of
our wholly owned subsidiary, Soltec, since the acquisition in April
2001. Partially offset by the reduction in relaxin activities
beginning in the second quarter of 2001.

We expect research and development expenses for our internally funded
activities to remain at the same level or increase for the next few quarters,
as we continue to develop our current products, as well as continue to engage
in new product discovery and development activities. We are unable to predict
the total level of spending on any particular development program because of
the uncertainty of clinical study programs and the timing of FDA approval. For
the quarter ended March 31, 2002, Soltec accounted for approximately $401,000
of the total research and development expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $9.6 million for the
three months ended March 31, 2002, compared to $7.6 million for the comparable
period in 2001. The increase in expenses was due to increased headcount and
increased market research and sales promotions costs related to the launch of
OLUX and Luxiq 50 gram units, as well as the amortization of intangible assets
associated with the acquisition of Soltec, over their estimated useful lives.

We expect selling, general and administrative expenses to remain
consistent or be slightly higher in 2002 due to the launch of physician samples
of OLUX and Luxíq, and the commencement of marketing efforts relating to the
anticipated outcome of clinical trials for antifungal foam and anti-acne foam.

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Interest and other income (expense)

Interest
and other income was $430,000 for the three month period ended
March 31, 2002, compared with $1.0 million for the comparable period in 2001.
The decrease in interest income during the three month period ended March 31,
2002 was due to lower interest rates during this period compared to the same
period in 2001, as well as lower cash balances in the bank.

In
February 2001, we entered into a foreign exchange forward contract in
connection with the acquisition of Soltec. During the three months
ended March 31, 2001 we recorded a $1.4 million loss on that foreign
exchange forward contract. The acquisition of Soltec was completed in
April 2001. We have not entered into any other similar foreign
exchange forward contracts and as such, we had no related gain or loss
to recognize in the three months ended March 31, 2002.

Income Taxes

Income
tax benefit of $224,000 for the three months ended March 31,
2002 reflects a U.S. tax benefit of $540,000 reduced by $316,000 of
foreign tax provision recorded by our Australian subsidiary, Soltec.
According to the provisions of the Job Creation and Worker Assistance
Act of 2002 enacted on March 9, 2002, taxpayers are allowed to
carry back net operating losses generated in 2001 and 2002 to offset
alternative minimum tax paid in the last five years. For the tax year
ending December 31, 2001, the Company incurred a net operating
loss of approximately $25 million of which a portion of the net
operating loss may be carried back to offset approximately $540,000
of alternative minimum tax incurred in the tax year ending
December 31, 2000.

Net Loss

We expect to incur losses for the remainder of 2002 and the foreseeable
future. These losses are expected to fluctuate from period to period based on
timing of product revenues, sales and marketing expenses, clinical material
purchases, clinical trial expenses, and possible acquisitions of new products
and technologies.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Use of Cash.We have financed our operations to date
primarily through proceeds from equity financings, sale of investments,
collaborative arrangements with corporate partners, bank loans, gross margins
and product revenues. At March 31, 2002, cash, cash equivalents and short-term
investments totaled $40.5 million compared to $46.3 million at December 31,
2001. Our cash balances are held in a variety of interest-bearing instruments
including high-grade corporate bonds, commercial paper and money market
accounts.

Cash flows from operating activities.Cash used in operations for the
three month period ended March 31, 2002 was $5.1 million compared to $5.4
million for the three month period ended March 31, 2001. Net loss of $3.2
million for the first three months of 2002 was affected by non-cash charges of
$521,000 of depreciation and amortization and pay down of accrued liabilities.

Cash flows from investing activities.Investing activities provided $3.5
million in cash during the three month period ended March 31, 2002, due
primarily to sales of $15.1 million of short-term investments offset by $10.5
million of short term investment purchases.

Cash flows from financing activities.Financing activities provided $3.1
million for the three months ended March 31, 2002, including $821,000
representing the release of previously restricted certificates of deposit for
our controlled disbursements account, security for building rent, and
collateral on certain officers personal bank loans. We also received $1.9
million in

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proceeds from the issuance of common stock during the quarter
ended March 31, 2002.

Working Capital.Working capital decreased by $4.4 million to $39.6
million at March 31, 2002 from $44.0 million at December 31, 2001. Our working
capital primarily decreased as we used cash in operations.

Contractual Obligations and Commercial Commitments.There have been no
material changes in the reported contractual obligations and commercial
commitments since December 31, 2001. As of March 31, 2002, we had no
off-balance sheet financing arrangements or commitments other than those
disclosed in the Annual Report on Form 10-K for the year ended December 31,
2001, consisting primarily of operating lease agreements for our facilities.

Restricted Cash and Cash Equivalents.In the quarter ended March 31,
2002, $821,000 was released from previously restricted certificates of deposit
for our controlled disbursements account, security for building rent, and
collateral on certain officers personal bank loans. As of March 31, 2001,
$1.3 million of our total cash and cash equivalents balance was restricted
cash, held in various certificates of deposit, for specific purposes.

We believe our existing cash, cash equivalents and short-term investments,
cash generated from product sales and collaborative arrangements with corporate
partners, will be sufficient to fund our operating expenses, debt obligations
and capital requirements through at least the next 12 months. Our future
capital uses and requirements depend on numerous factors, including the
progress of our research and development programs, the progress of clinical
testing, the time and costs involved in building and qualifying a new aerosol
filling facility, the time and costs involved in obtaining regulatory
approvals, the cost of filing, prosecuting, and enforcing patent claims and
other intellectual property rights, competing technological and market
developments, the level of product revenues, and the possible acquisition of
new products and technologies. Therefore such capital uses and requirements
may increase in future periods. As a result, we may require additional funds
prior to reaching profitability and may attempt to raise additional funds
through equity or debt financings, collaborative arrangements with corporate
partners or from other sources. We are currently evaluating a number of
business development opportunities, including the possibility of acquiring or
in-licensing other products. If we successfully reach agreements with third
parties, these transactions may require us to use some of our available cash,
or to raise additional cash by liquidating some of our investment portfolio
and/or issuing stock in connection with the transaction.

We currently have no commitments for any additional financings. If we
need to raise additional money to fund our operations, funding may not be
available to us on acceptable terms, or at all. If we are unable to raise
additional funds when needed, we may not be able to market our products as
planned or continue development of our other products, or we could be required
to delay, scale back or eliminate some or all of our research and development
programs.

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FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND THE MARKET
PRICE OF SECURITIES

There are many factors that affect our business and
the results of our operations,
some of which are beyond our control. In our Annual Report on
Form 10-K we list of some of the important factors that may
cause the actual results of our operations in future periods to
differ materially from the results currently expected or desired. Due
to these factors, we believe that quarter-to-quarter comparisons of
our results of operations are not a good indication of our future
performance. The factors discussed in our reports filed with the
Securities and Exchange Commission, including our Annual Report on
Form 10-K for the year ended December 31, 2001, in
particular under the caption Factors That May Affect Future
Results, Financial Condition and the Market Price of
Securities, should be carefully considered when evaluating our
business and prospects.

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OUR BUSINESS STRATEGY MAY CAUSE FLUCTUATING OPERATING RESULTS

Our operating results and financial condition may fluctuate from quarter
to quarter and year to year depending upon the relative timing of events or
uncertainties that may arise. For example, the following events or occurrences
could cause fluctuations in our financial performance from period to period:



| |  | changes in the levels we spend to develop new product lines,
| | - | ------------------------------------------------------------
|
| |  | changes in the amount we spend to promote our products,     



| |  | changes in treatment practices of physicians that
currently prescribe our products,                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | changes in reimbursement policies of health plans and
other similar health insurers, including changes that affect
newly developed or newly acquired products,
|
| |  | forward-buying patterns by wholesalers that may result
in significant quarterly swings in revenue reporting,                                                  
|
| |  | increases in the cost of raw materials used to manufacture our products,                                                                                      
|
| |  | the development of new competitive products by others,                                                                                                        
|
| |  | the mix of products that we sell during any time period, and                                                                                                  
|
| |  | our responses to price competition.                                                                                                                           




Item 3.   Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the reported market risks or
foreign currency exchange risks since December 31, 2001.




PART II.   OTHER INFORMATION




Item 6.   Exhibits and Reports on Form 8-K

|    |                                                                                                                  |                                                                                                                                                                                   
|--- | ---------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Exhibits.     None.                                                                                             
|   
|(b) | Reports on Form 8-K. We filed the following Current Reports on Form 8-K
during the quarter ended March 31, 2002:
|   
|    | (i)                                                                                                              | We filed a Current Report on Form 8-K dated December 21,
2001, with the Securities and Exchange Commission on January 2,
2002, under Item 5  Other Events, and Item 7  Exhibits.
|   
|    | (ii)                                                                                                             | We filed a Current Report on Form 8-K dated March 1, 2002,
with the Securities and Exchange Commission on March 6, 2002, under
Item 5  Other Events.                             

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| |       |                                                                                                                                                                                      
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (iii) | We filed a Current Report on Form 8-K/A-1 dated December 21,
2001, with the Securities and Exchange Commission on March 19, 2002,
under Item 5  Other Events, and Item 7 - Exhibits.

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SIGNATURE

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

| |     |                       |                                                                                                    
| | --- | --------------------- | ---------------------------------------------------------------------------------------------------
| |     | CONNETICS CORPORATION
|
| | By: | /s/                   | JOHN L. HIGGINS                                                                                    
| |     |                      
| |     |                       | John L. Higgins
Exec. Vice President, Finance
and Corporate Development and Chief
Financial Officer

Date: May 14, 2002

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