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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 June 30, 2003

Commission file number: 0-27406

CONNETICS CORPORATION

(Exact name of registrant as specified in its charter)


|                                                                                     |  |                                     
|------------------------------------------------------------------------------------ |  | ------------------------------------
|Delaware                                                                             |  | 94-3173928                          
|(State or other jurisdiction of
incorporation or organization)                       |  | (IRS Employer
Identification Number)
|                                                                                    
|3290 West
Bayshore RoadPalo Alto, California(Address of principal executive offices) |  | 94303(Zip Code)                     

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

As of
August 8, 2003, 31,692,935 shares of the Registrants common stock
were outstanding, at $0.001 par value.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|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                           
|                              | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION   
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|                              |                                                                                               | (a) Exhibits.                                       
|                              |                                                                                               | (b) Reports on Form 8-K                             
|EXHIBIT 4.1                  
|EXHIBIT 4.2                  
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 
|EXHIBIT 32.2                 



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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 June 30, 2003
and December 31, 2002                              |  |      | 3  | 
|                             |            |  |                                                                                       | Condensed Consolidated Statements of Operations for the
Three and Six Months ended June 30, 2003 and 2002 |  |      | 4  | 
|                             |            |  |                                                                                       | Condensed Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2003 and 2002           |  |      | 5  | 
|                             |            |  |                                                                                       | Notes to Condensed Consolidated Financial Statements                                                      |  |      | 6  | 
|                             | Item 2.    |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                                                                           |  | 12   |   
|                             | Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                           |  | 17   |   
|                             | Item 4.    |  | Controls and Procedures                                                               |                                                                                                           |  | 17   |   
|PART II OTHER INFORMATION   
|                             | Item 2.    |  | Changes in Securities and Use of Proceeds                                             |                                                                                                           |  | 18   |   
|                             | Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |                                                                                                           |  | 18   |   
|                             | Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |                                                                                                           |  | 19   |   
|                             |            |  |                                                                                       | (a) Exhibits                                                                                              |  |      | 19 | 
|                             |            |  |                                                                                       | (b) Reports on Form 8-K                                                                                   |  |      | 19 | 
|                             | Signatures |  |                                                                                       |                                                                                                           |  | 21   |   

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PART I. FINANCIAL INFORMATION




Item 1.Financial Statements




CONNETICS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

|                                           |                                        |                            |         |          |         |              |        |          |        | 
|------------------------------------------ | -------------------------------------- | -------------------------- | ------- | -------- | ------- | ------------ | ------ | -------- | ------ | 
|                                           |                                        |                            |         | June 30, |         | December 31,
|                                           |                                        |                            |         | 2003     |         | 2002        
|                                           |                                        |                            |         |          |         |             
|ASSETS                                    
|Current assets:                            |                                        |                            |         |          |         |              |        |         
|                                           | Cash and cash equivalents              |                            | $       | 47,562   |         |              | $      | 8,624    |       
|                                           | Short-term investments                 |                            |         | 65,977   |         |              |        | 24,440   |       
|                                           | Restricted cash                        |                            |         | 411      |         |              |        | 424      |       
|                                           | Accounts receivable, net of allowances |                            |         | 260      |         |              |        | 4,308    |       
|                                           | Prepaid and other current assets       |                            |         | 3,480    |         |              |        | 1,803    |       
|                                           |                                        |                            |         |          |         |              |        |         
|                                           |                                        | Total current assets       |         |          | 117,690 |              |        |          | 39,599 | 
|Property and equipment, net                |                                        |                            | 5,786   |          |         |              | 5,860  |         
|Restricted cash                            |                                        |                            |        |          |         |              | 300    |         
|Deposits and other assets                  |                                        |                            | 5,059   |          |         |              | 848    |         
|Goodwill, net                              |                                        |                            | 6,271   |          |         |              | 6,271  |         
|Other intangible assets, net               |                                        |                            | 6,622   |          |         |              | 6,675  |         
|                                           |                                        |                            |         |          |         |              |        |         
|Total assets                               |                                        | $                          | 141,428 |          |         | $            | 59,553 |         
|                                           |                                        |                            |         |          |         |              |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY      
|Current liabilities:                       |                                        |                            |         |          |         |              |        |         
|                                           | Accounts payable                       |                            | $       | 4,953    |         |              | $      | 7,760    |       
|                                           | Accrued clinical trial costs           |                            |         | 1,599    |         |              |        | 1,223    |       
|                                           | Accrued payroll and related expenses   |                            |         | 2,006    |         |              |        | 2,942    |       
|                                           | Accrued process development expenses   |                            |         | 606      |         |              |        | 633      |       
|                                           | Other accrued liabilities              |                            |         | 1,865    |         |              |        | 1,493    |       
|                                           | Current portion of deferred revenue    |                            |         | 380      |         |              |        | 363      |       
|                                           |                                        |                            |         |          |         |              |        |         
|                                           |                                        | Total current liabilities  |         |          | 11,409  |              |        |          | 14,414 | 
|Deferred revenue, net of current portion   |                                        |                            | 329     |          |         |              | 396    |         
|Convertible senior notes                   |                                        |                            | 90,000  |          |         |              |       |         
|Stockholders equity:                      |                                        |                            |         |          |         |              |        |         
|                                           | Preferred stock                        |                            |         |         |         |              |        |         |       
|                                           | Common stock                           |                            |         | 32       |         |              |        | 31       |       
|                                           | Additional paid-in capital             |                            |         | 172,407  |         |              |        | 169,769  |       
|                                           | Deferred compensation                  |                            |         | (39      | )       |              |        | (48      | )     
|                                           | Accumulated deficit                    |                            |         | (133,325 | )       |              |        | (126,088 | )     
|                                           | Accumulated other comprehensive income |                            |         | 615      |         |              |        | 1,079    |       
|                                           |                                        |                            |         |          |         |              |        |         
|                                           |                                        | Total stockholders equity |         |          | 39,690  |              |        |          | 44,743 | 
|                                           |                                        |                            |         |          |         |              |        |         
|Total liabilities and stockholders equity |                                        | $                          | 141,428 |          |         | $            | 59,553 |         
|                                           |                                        |                            |         |          |         |              |        |         

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 |        | Six Months Ended
|                                                          |                                              |                |        | June 30,           |        | June 30,        
|                                                          |                                              |                |        |                    |        |                 
|                                                          |                                              |                |        | 2003               |        | 2002             |        | 2003   |        | 2002
|                                                          |                                              |                |        |                    |        |                  |        |        |        |     
|Revenues:                                                 |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|                                                          | Product                                      |                | $      | 15,528             |        |                  | $      | 11,423 |        |      | $      | 29,839 |        |   | $       | 21,563 |       
|                                                          | Royalty                                      |                |        | 4,384              |        |                  |        | 766    |        |      |        | 5,320  |        |   |         | 1,416  |       
|                                                          | License, contract and other                  |                |        | 58                 |        |                  |        | 437    |        |      |        | 122    |        |   |         | 1,178  |       
|                                                          |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |        |       
|                                                          |                                              | Total revenues |        |                    | 19,970 |                  |        |        | 12,626 |      |        |        | 35,281 |   |         |        | 24,157 | 
|                                                          |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |        |       
|Operating costs and expenses:                             |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |       
|                                                          | Cost of product revenues                     |                |        | 1,185              |        |                  |        | 973    |        |      |        | 2,257  |        |   |         | 1,648  |       
|                                                          | Research and development                     |                |        | 8,619              |        |                  |        | 5,613  |        |      |        | 17,236 |        |   |         | 10,653 |       
|                                                          | Selling, general and administrative          |                |        | 10,792             |        |                  |        | 10,746 |        |      |        | 21,896 |        |   |         | 20,327 |       
|                                                          | Acquired in-process research and development |                |        |                   |        |                  |        | 2,000  |        |      |        |       |        |   |         | 2,000  |       
|                                                          | Loss on program termination                  |                |        |                   |        |                  |        | 312    |        |      |        |       |        |   |         | 312    |       
|                                                          |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |        |       
|                                                          | Total operating costs and expenses           |                |        | 20,596             |        |                  |        | 19,644 |        |      |        | 41,389 |        |   |         | 34,940 |       
|                                                          |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |        |       
|Loss from operations                                      |                                              |                | (626   | )                  |        |                  | (7,018 | )      |        |      | (6,108 | )      |        |   | (10,783 | )     
|Interest income                                           |                                              |                | 169    |                    |        |                  | 217    |        |        |      | 294    |        |        |   | 496     |       
|Gain on sale of investment                                |                                              |                |       |                    |        |                  | 1,552  |        |        |      |       |        |        |   | 1,570   |       
|Interest expense                                          |                                              |                | (230   | )                  |        |                  | (4     | )      |        |      | (231   | )      |        |   | (6      | )     
|Other income (expense), net                               |                                              |                | 33     |                    |        |                  | 93     |        |        |      | 87     |        |        |   | 171     |       
|                                                          |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |        |       
|Loss before income taxes                                  |                                              |                | (654   | )                  |        |                  | (5,160 | )      |        |      | (5,958 | )      |        |   | (8,552  | )     
|Income tax benefit (provision)                            |                                              |                | (1,202 | )                  |        |                  | (161   | )      |        |      | (1,279 | )      |        |   | 63      |       
|                                                          |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |        |       
|Net loss                                                  |                                              | $              | (1,856 | )                  |        | $                | (5,321 | )      |        | $    | (7,237 | )      |        | $ | (8,489  | )     
|                                                          |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |        |       
|Basic and diluted loss per share                          |                                              | $              | (0.06  | )                  |        | $                | (0.17  | )      |        | $    | (0.23  | )      |        | $ | (0.28   | )     
|                                                          |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |        |       
|Shares used to calculate basic and diluted
loss per share |                                              |                | 31,519 |                    |        |                  | 30,608 |        |        |      | 31,403 |        |        |   | 30,552  |       
|                                                          |                                              |                |        |                    |        |                  |        |        |        |      |        |        |        |   |         |        |       

See accompanying notes to condensed consolidated financial statements.

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CONNETICS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                      |                                                                             |                                                           |   |                  |        |      |   |         |        |  
|------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------------- | - | ---------------- | ------ | ---- | - | ------- | ------ | -
|                                      |                                                                             |                                                           |   | Six Months Ended
|                                      |                                                                             |                                                           |   | June 30,        
|                                      |                                                                             |                                                           |   |                 
|                                      |                                                                             |                                                           |   | 2003             |        | 2002
|                                      |                                                                             |                                                           |   |                  |        |     
|Cash flows from operating activities: |                                                                             |                                                           |   |                  |        |      |   |        
|                                      | Net loss                                                                    |                                                           | $ | (7,237           | )      |      | $ | (8,489  | )     
|                                      | Adjustments to reconcile net loss to net cash used in
operating activities: |                                                           |   |                  |        |      |   |         |       
|                                      |                                                                             | Depreciation                                              |   |                  | 649    |      |   |         | 614    |  
|                                      |                                                                             | Amortization of intangible assets and debt issuance costs |   |                  | 459    |      |   |         | 408    |  
|                                      |                                                                             | Allowance
for rebates, returns and chargebacks            |   |                  | 2,150  |      |   |         | 448    |  
|                                      |                                                                             | Gain on sale of investment                                |   |                  |       |      |   |         | (1,570 | )
|                                      |                                                                             | Stock compensation expense                                |   |                  | 9      |      |   |         | 12     |  
|                                      |                                                                             | Stock issued pursuant to license agreement                |   |                  |       |      |   |         | 12     |  
|                                      | Changes in assets and liabilities:                                          |                                                           |   |                  |        |      |   |         |       
|                                      |                                                                             | Accounts receivable, net                                  |   |                  | 1,909  |      |   |         | 840    |  
|                                      |                                                                             | Other assets                                              |   |                  | (2,440 | )    |   |         | (778   | )
|                                      |                                                                             | Accounts payable                                          |   |                  | (2,997 | )    |   |         | 3,073  |  
|                                      |                                                                             | Accrued and other current liabilities                     |   |                  | (373   | )    |   |         | (1,719 | )
|                                      |                                                                             | Deferred revenue                                          |   |                  | (48    | )    |   |         | (316   | )
|                                      |                                                                             |                                                           |   |                  |        |      |   |         |       
|                                      | Net cash used in operating activities                                       |                                                           |   | (7,919           | )      |      |   | (7,465  | )     
|                                      |                                                                             |                                                           |   |                  |        |      |   |         |       
|Cash flows from investing activities: |                                                                             |                                                           |   |                  |        |      |   |        
|                                      | Purchases of short-term investments                                         |                                                           |   | (59,974          | )      |      |   | (19,405 | )     
|                                      | Sales and maturities of short-term investments                              |                                                           |   | 17,903           |        |      |   | 30,415  |       
|                                      | Purchases of property and equipment                                         |                                                           |   | (423             | )      |      |   | (2,463  | )     
|                                      | Acquisition of patent                                                       |                                                           |   | (200             | )      |      |   |        |       
|                                      |                                                                             |                                                           |   |                  |        |      |   |         |       
|                                      | Net cash provided by (used in) investing activities                         |                                                           |   | (42,694          | )      |      |   | 8,547   |       
|                                      |                                                                             |                                                           |   |                  |        |      |   |         |       
|Cash flows from financing activities: |                                                                             |                                                           |   |                  |        |      |   |        
|                                      | Restricted cash                                                             |                                                           |   | 312              |        |      |   | 1,429   |       
|                                      | Proceeds
from issuance of convertible senior notes, net of issuance costs   |                                                           |   | 86,503           |        |      |   |        |       
|                                      | Proceeds from issuance of common stock, net of issuance costs               |                                                           |   | 2,638            |        |      |   | 2,919   |       
|                                      |                                                                             |                                                           |   |                  |        |      |   |         |       
|                                      | Net cash provided by financing activities                                   |                                                           |   | 89,453           |        |      |   | 4,348   |       
|                                      |                                                                             |                                                           |   |                  |        |      |   |         |       
|                                      | Effect of foreign currency exchange rates on cash and cash
equivalents      |                                                           |   | 98               |        |      |   | 125     |       
|                                      |                                                                             |                                                           |   |                  |        |      |   |         |       
|                                      | Net change in cash and cash equivalents                                     |                                                           |   | 38,938           |        |      |   | 5,555   |       
|                                      | Cash and cash equivalents at beginning of period                            |                                                           |   | 8,624            |        |      |   | 3,603   |       
|                                      |                                                                             |                                                           |   |                  |        |      |   |         |       
|                                      | Cash and cash equivalents at end of period                                  |                                                           | $ | 47,562           |        |      | $ | 9,158   |       
|                                      |                                                                             |                                                           |   |                  |        |      |   |         |       

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation and Policies

We have prepared the accompanying unaudited condensed consolidated
financial statements of Connetics Corporation (Connetics) in accordance with
accounting principles generally accepted in the United States 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. We believe that we have included
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation. We have reclassified certain
prior year balances to conform to the current years presentation.

Operating results for the six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003. For a better understanding of Connetics and its financial
statements, we recommend reading these unaudited, condensed, consolidated
financial statements and notes in conjunction with the audited consolidated
financial statements and notes to those financial statements for the year
ending December 31, 2002, which are included in our Annual Report on Form
10-K/A as filed with the Securities and Exchange Commission.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Connetics Corporation, Connetics Holdings Pty Ltd., and Connetics Australia Pty
Ltd. (formerly Soltec Research Pty Ltd.). All intercompany accounts and
transactions have been eliminated in consolidation.

Use of Estimates

To prepare financial statements in conformity with accounting principles
generally accepted in the United States, management must make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates based
upon future events.

We evaluate our estimates on an on-going basis, including those related to
recoverability of accounts receivable and inventory, revenue recognition and
accrued liabilities for clinical trial activities. We base our estimations on
historical experience and on various other specific assumptions that we believe
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources.

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 or determinable, and collection of the resulting receivable is
reasonably assured. We recognize product revenue net of estimated allowances
for discounts, rebates, returns and chargebacks. We are obligated to accept
from customers the return of pharmaceuticals that have reached their expiration
date. We authorize returns for damaged products and exchanges for expired
products in accordance with our return goods policy and procedures, and we
establish reserves for such amounts at the time of sale. To date we have not
experienced significant returns of damaged or expired product. Product
shipping and handling costs are included in the cost of product revenues.

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.

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.

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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. We recognize revenue associated
with substantial at risk performance milestones, as defined in the respective
agreements, 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. Short-term investments are classified
as available for sale at the time of purchase and are carried at fair value,
and we report unrealized gains and losses as a separate component of
stockholders equity. We determine the cost of securities sold using the
specific identification method.

Cash
equivalents and short term 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 investing our
excess cash with respect 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

Connetics Australias functional currency is the Australian dollar. We
translate Connetics Australia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 and losses resulting from foreign exchange transactions are
included in the consolidated statements of operations and were immaterial for
all periods presented.

Income Taxes

We account for income taxes using the asset and liability method. Under
this method, we recognize deferred tax assets and liabilities for the future
tax consequences attributable to differences between (1) the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and (2) operating loss and tax credit carryforwards. We
measure deferred tax assets and liabilities using enacted tax rates that are
expected to apply to taxable income in the years in which we anticipate those
temporary differences will be recovered or settled. We establish a valuation
for the net deferred tax assets when realization is uncertain.

Property and Equipment

Property
and equipment are stated at cost less accumulated depreciation. We
calculate 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
over the shorter of the estimated useful lives of the assets or the lease term.

Goodwill, Purchased Intangibles and Impairment of Long Lived Assets

We record goodwill in a business combination when the purchase price of
the net tangible and intangible assets we acquire exceeds their fair value.
Under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, effective January 1, 2002, we are not required to
amortize goodwill and

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intangible assets with indefinite lives, but are required to periodically
review these assets for impairment. Intangible assets determined to have
definite lives are amortized over their useful lives, which in our case is ten
years.

We
adopted SFAS 142 effective January 1, 2002, and in conjunction with the
implementation of SFAS 142 we performed an impairment test of
goodwill as of that date, which did not result in an impairment charge at transition.
SFAS 142 also requires that we test goodwill for impairment on an annual basis
or more frequently if indicators of potential impairment exist. We performed
the annual test as of October 1, 2002, which did not result in an impairment
charge. We will perform this test on October 1 of each year or more frequently
if indicators of potential impairment exist.

We periodically perform reviews to determine if the carrying value of
long-term assets, other than 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 we determine the existence of impairment indicators,
we would use undiscounted cash flows to initially determine whether impairment
should be recognized. If necessary, we would perform a subsequent calculation
to measure the amount of 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, we would calculate the fair value 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.

Stock-Based Compensation

We use the intrinsic-value method of accounting for stock-based awards
granted to employees, as allowed under Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations. Accordingly, we do not recognize any compensation in our
financial statements in connection with stock options granted to employees with
exercise prices not less than fair market value. We also do not record any
compensation expense in connection with our Employee Stock Purchase Plan as
long as the purchase price is not less than 85% of the fair market value at the
beginning or end of each offering period, whichever is lower.

For options granted to non-employees, we have determined compensation
expense in accordance with SFAS No. 123 and Emerging Issues Task Force No.
96-18, as the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measured. We
periodically re-measure the compensation expense for options granted to
non-employees as they vest.

Although SFAS 123 allows us to continue to follow the present APB 25
guidelines, we are required to disclose pro formanet loss and basic and
diluted loss per share as if the fair value based method had been applied to
all awards.

|                                                                                                              |                                      |      |                    |       |                  |      |        |       |   |   |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ---- | ------------------ | ----- | ---------------- | ---- | ------ | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                              |                                      |      | Three Months Ended |       | Six Months Ended
|                                                                                                              |                                      |      | June 30,           |       | June 30,        
|                                                                                                              |                                      |      |                    |       |                 
|(in thousands except per share amounts):                                                                      |                                      | 2003 |                    | 2002  |                  | 2003 |        | 2002 
|                                                                                                              |                                      |      |                    |       |                  |      |        |      
|Net loss, as reported                                                                                         |                                      | $    | (1,856             | )     |                  | $    | (5,321 | )     |   | $ | (7,237  | )     |   | $ | (8,489  | )    
|Add: Stock based compensation expense, included in
reported net loss                                         |                                      |      | 5                  |       |                  |      | 4      |       |   |   | 9       |       |   |   | 12      |      
|Deduct: Total stock-based employee compensation
expense determined under the fair value method
for all awards |                                      |      | (2,017             | )     |                  |      | (923   | )     |   |   | (3,766  | )     |   |   | (2,115  | )    
|                                                                                                              |                                      |      |                    |       |                  |      |        |       |   |   |         |       |   |   |         |      
|Pro forma net loss                                                                                            |                                      | $    | (3,868             | )     |                  | $    | (6,240 | )     |   | $ | (10,994 | )     |   | $ | (10,592 | )    
|                                                                                                              |                                      |      |                    |       |                  |      |        |       |   |   |         |       |   |   |         |      
|Loss per share:                                                                                               |                                      |      |                    |       |                  |      |        |       |   |   |         |       |   |   |         |      
|                                                                                                              | Basic and diluted loss  as reported |      | $                  | (0.06 | )                |      | $      | (0.17 | ) |   | $       | (0.23 | ) |   | $       | (0.28 | )
|                                                                                                              | Basic and diluted loss  pro forma   |      | $                  | (0.12 | )                |      | $      | (0.20 | ) |   | $       | (0.35 | ) |   | $       | (0.35 | )
|                                                                                                              |                                      |      |                    |       |                  |      |        |       |   |   |         |       |   |   |         |      

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For purposes of this analysis, we estimate the fair value of each option
grant on the date of grant using the Black-Scholes option-pricing model. The
weighted average assumptions used in the model were as follows:

|                          |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                          |  | Stock Option Plans
|                          |  |                   
|                          |  | Three Months Ended |       | Six Months Ended
|                          |  | June 30,           |       | June 30,        
|                          |  |                    |       |                 
|                          |  | 2003               |       | 2002             |  | 2003 |       | 2002
|                          |  |                    |       |                  |  |      |       |     
|Expected stock volatility |  |                    | 61.64 | %                |  |      | 65.28 | %    |  |  | 63.51 | % |  |  | 65.28 | %
|Risk-free interest rate   |  |                    | 4.38  | %                |  |      | 4.63  | %    |  |  | 5.86  | % |  |  | 4.63  | %
|Expected life (in years)  |  |                    | 3.15  |                  |  |      | 2.98  |      |  |  | 4.01  |   |  |  | 3.53  |  
|Expected dividend yield   |  |                    | 0.0   | %                |  |      | 0.0   | %    |  |  | 0.0   | % |  |  | 0.0   | %

|                          |  |                     |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|------------------------- |  | ------------------- | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                          |  | Stock Purchase Plan
|                          |  |                    
|                          |  | Three Months Ended  |       | Six Months Ended
|                          |  | June 30,            |       | June 30,        
|                          |  |                     |       |                 
|                          |  | 2003                |       | 2002             |  | 2003 |       | 2002
|                          |  |                     |       |                  |  |      |       |     
|Expected stock volatility |  |                     | 61.70 | %                |  |      | 81.46 | %    |  |  | 61.70 | % |  |  | 81.46 | %
|Risk-free interest rate   |  |                     | 4.72  | %                |  |      | 5.95  | %    |  |  | 4.72  | % |  |  | 5.95  | %
|Expected life (in years)  |  |                     | 1.39  |                  |  |      | 1.35  |      |  |  | 1.39  |   |  |  | 1.35  |  
|Expected dividend yield   |  |                     | 0.0   | %                |  |      | 0.0   | %    |  |  | 0.0   | % |  |  | 0.0   | %

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that 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 our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, we do not
believe that the existing models necessarily provide a reliable single measure
of the fair value of our options.

The effects on pro formadisclosures of applying SFAS 123 are not likely
to be representative of the effects on reported results of future periods.

Recent Accounting Pronouncements

SFAS 146. In July 2002, the Financial Accounting Standards Board, or
FASB, issued Statement of Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit and Disposal Activities (SFAS 146). This
statement revises the accounting for exit and disposal activities under
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity.
Specifically, SFAS 146 requires that companies record the costs to exit an
activity or dispose of long-lived assets when those costs are incurred. SFAS
146 requires that the measurement of the liability be at fair value. The
provisions of SFAS 146 are effective prospectively for exit or disposal
activities initiated after December 31, 2002. Adoption of SFAS 146 did not
have a significant impact on our financial statements.

FIN 45. In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that
upon issuance of a guarantee, the guarantor must recognize a liability for the
fair value of the obligation it assumes under that guarantee. FIN 45 is
effective on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 did not have a significant impact on our
financial statements.

FIN 46.In January 2003, the FASB issued Interpretation 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires that
companies that control another entity through interests other than voting
interests

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should consolidate the controlled entity. FIN 46 applies to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. The
consolidation requirements apply to entities existing prior to January 31, 2003
in the first fiscal year or interim period beginning after June 15, 2003.
Certain disclosure requirements apply to all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The adoption of FIN 46 is not expected to have a significant
impact on our financial position or results of operations.

2.     Net Loss Per Share

We compute basic net loss per share by dividing net loss by the weighted average of common shares outstanding
during the period. We compute diluted net loss per share using the weighted
average of all potential shares of common stock outstanding during the period.
We excluded all stock options, warrants and convertible debt from the
calculation of diluted loss per share for the three and six month
periods ended June 30, 2003 and 2002, because these securities were
anti-dilutive during these periods.

3.     Comprehensive Loss

During the six months ended June 30, 2003, total comprehensive loss
amounted to $7.7 million, compared to a total comprehensive loss
of $13.8
million for the comparable period in 2002. The components of comprehensive
loss for the three and six-month periods ended June 30, 2003 and 2002 are as
follows (in thousands):

|                                                                                                             |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                             |  | Three months ended |        | Six months ended
|                                                                                                             |  | June 30,           |        | June 30,        
|                                                                                                             |  |                    |        |                 
|                                                                                                             |  | 2003               |        | 2002             |  | 2003 |        | 2002
|                                                                                                             |  |                    |        |                  |  |      |        |     
|Net loss                                                                                                     |  | $                  | (1,856 | )                |  | $    | (5,321 | )    |  | $ | (7,237 | ) |  | $ | (8,489  | )
|Foreign currency translation adjustment                                                                      |  |                    | 31     |                  |  |      | 54     |      |  |   | 69     |   |  |   | 79      |  
|Change in unrealized gain (loss) on securities,
net of reclassification adjustments for realized
gain (loss) |  |                    | (308   | )                |  |      | (2,441 | )    |  |   | (532   | ) |  |   | (5,340  | )
|                                                                                                             |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |         |  
|Comprehensive loss                                                                                           |  | $                  | (2,133 | )                |  | $    | (7,708 | )    |  | $ | (7,700 | ) |  | $ | (13,750 | )
|                                                                                                             |  |                    |        |                  |  |      |        |      |  |   |        |   |  |   |         |  

Accumulated
other comprehensive income included $494,000 of net unrealized gains
on investments and $121,000 of foreign currency translation
adjustments as of June 30, 2003 and $1.0 million of
unrealized gains on investments and $53,000 of foreign currency
translation adjustments as of December 31, 2002.

4.     Goodwill and Other Intangible Assets

There were no changes in the carrying amount of goodwill during the three
months ended June 30, 2003. The components of our other intangible assets at
June 30, 2003, are as follows (in thousands):

|                    |  |                |       |              |  |     |        |   |  |   |       | 
|------------------- |  | -------------- | ----- | ------------ |  | --- | ------ | - |  | - | ----- | 
|                    |  | Gross Carrying |       | Accumulated  |  |     |        |  
|                    |  | Amount         |       | Amortization |  | Net
|                    |  |                |       |              |  |    
|Existing technology |  | $              | 6,810 |              |  | $   | (1,504 | ) |  | $ | 5,306 | 
|Patents             |  |                | 1,661 |              |  |     | (345   | ) |  |   | 1,316 | 
|                    |  |                |       |              |  |     |        |   |  |   |       | 
|Total               |  | $              | 8,471 |              |  | $   | (1,849 | ) |  | $ | 6,622 | 
|                    |  |                |       |              |  |     |        |   |  |   |       | 

Amortization expense for our other intangible assets was $202,000 and
$403,000 for the three and six months ended June 30, 2003, respectively. For
the same reporting periods in the prior year the amortization expense was
$205,000 and $407,000, respectively.

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

|                                      |  |                      |       | 
|------------------------------------- |  | -------------------- | ----- | 
|                                      |  | Amortization Expense
|                                      |  |                     
|Remaining six months in 2003          |  | $                    | 416   | 
|For the year ending December 31, 2004 |  | $                    | 833   | 
|For the year ending December 31, 2005 |  | $                    | 833   | 
|For the year ending December 31, 2006 |  | $                    | 833   | 
|For the year ending December 31, 2007 |  | $                    | 833   | 
|For the year ending December 31, 2008 |  | $                    | 833   | 
|Thereafter                            |  | $                    | 2,041 | 
|                                      |  |                      |       | 
|                                      |  | $                    | 6,622 | 
|                                      |  |                      |       | 

5.     Convertible Subordinated Notes

On May 28, 2003, we issued $90 million of 2.25% convertible senior notes
due May 30, 2008 in a private offering to Goldman, Sachs & Co., who resold the
notes to qualified institutional investors. The notes are unsecured and rank
equal to all the Companys future unsecured and unsubordinated debts. The
notes are convertible at any time at the option of the note holders into the
Companys common stock at a conversion price of $21.41 per share subject to
adjustment in certain circumstances. This conversion price is higher than our
stock price on the notes issuance date. Interest on the notes is payable
semi-annually in arrears in May and November and the Company can redeem all or
a portion of the notes at any time on or after May 30, 2005. Offering expenses
of $3.5 million related to the sale of these notes have been included in other
assets and are amortized to interest expense over the contractual term of the
notes. As of June 30, 2003, the fair value of these notes
approximated $85.6 million.

6.     Subsequent Events

On
July 2, 2003 we announced we had submitted a New Drug Application
with the U.S. Food and Drug Administration for Extina, an
investigational new drug formulation of 2% ketoconazole in our proprietary foam
delivery system, as a potential new treatment for seborrheic dermatitis.

On July 15, 2003, we assigned our rights to recombinant human relaxin to
BAS Medical, Inc., a private, development-stage company focused on the
development and marketing of novel medical treatments. We announced the
transaction on July 21, 2003. As part of the transaction, we will receive up
to $1.0 million in licensing and milestone fees, plus royalties on future
product sales. Upon the execution of the definitive agreement, we received a
$100,000 upfront assignment fee that we will recognize as license revenue in the
third quarter of 2003. The remaining $900,000 will be received upon the
achievement of various milestones. BAS Medical will assume rights to develop
and commercialize relaxin for all indications of use. In addition to the
assignment fee, in the third quarter of 2003, we will recognize $661,000 in deferred
revenue relating to previous relaxin license agreements. All of our
obligations under existing contracts related to relaxin were also transferred
to BAS Medical as part of this transaction.

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

This discussion and analysis should be read in conjunction with the MD&A
included in our Annual Report on Form 10-K/A for the year ended December 31,
2002, 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 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/A. 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, OLUX® and Luxíq®. Both products
have clinically proven therapeutic advantages and we are providing quality
customer service to physicians through our experienced sales and marketing
professionals. In December 2002, we received approval from the U.S.
Food and Drug Administration, or FDA, to sell
OLUX for the treatment of non-scalp psoriasis.

In addition to revenue from product sales, we receive royalties on sales
of RID®, Actimmune® and Ridaura® in the U.S., and internationally on sales of
Banlice®, Milice®, Bettamousse®, and on a super-concentrated aerosol spray
licensed worldwide. We have licenses with Novartis and Pharmacia Corporation,
which have the potential to bear royalties in the future depending on approval
of their products for sale.

During
the first half of 2003, we had three product candidates in Phase
III clinical trials: Extina, a foam formulation of a 2% concentration of the
antifungal drug ketoconazole, for the treatment of seborrheic dermatitis;
Actiza, a formulation of 1% clindamycin in our proprietary foam delivery
system for the treatment of acne; and Velac ® Gel (a first-in-class combination
of 1% clindamycin and 0.025% tretinoin) for the treatment of acne.

In April 2003, we announced the outcome of a Phase III clinical trial
evaluating Extina. The four-week, double-blinded active- and
placebo-controlled trial included 619 patients at 25 centers. As designed, the
trial results demonstrated that Extina was not inferior to Nizoral®
(ketoconazole) 2% Cream as measured by the primary endpoint of Investigators
Static Global Assessment (ISGA). The trial was also designed to compare
Extina to placebo foam per the ISGA. The result, although in favor of
Extina, did not achieve statistical significance. On all other
endpoints, statistical significance was achieved; therefore we
believe that the totality of the data demonstrated that Extina was
clinically superior to placebo foam. On July 2,
2003 we announced we had submitted a New Drug Application (NDA) with the FDA for Extina.

In June 2003, we announced the completion of patient enrollment in our
Phase III clinical trial for Actiza, a formulation of 1% clindamycin delivered
in our proprietary foam delivery system, for the treatment of acne. The Phase
III trial includes 1,026 patients at 18 centers, in which patients are treated
for 12 weeks in a double-blinded, placebo and active controlled design. We
anticipate data from the trial will be available in the fall of 2003.

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In May
2003 we issued $90 million of convertible senior
notes in a private placement pursuant to Rule 144A of the
Securities Act of 1933. The notes bear an interest rate of
2.25% per year and have a five-year term. The notes are convertible into
Connetics common stock at a price equal to approximately $21.41 per share,
subject to adjustment in certain circumstances, which represents a 35% premium
over the closing price on the date the offering was announced. We will use the
proceeds from the offering to augment our cash reserves for general corporate
purposes, including potential future product or company acquisitions, capital
expenditures and working capital.

Critical Accounting Policies

There have been no material changes to our critical accounting policies,
from those reported in the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations in our annual report on Form 10-K/A for the year ended December 31, 2002.

Results of Operations

Revenues

|                                             |                                |                |                |        |                    |        |                  |        |       |        |       |        |        |        |       |        |        |        | 
|-------------------------------------------- | ------------------------------ | -------------- | -------------- | ------ | ------------------ | ------ | ---------------- | ------ | ----- | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | ------ | 
|                                             |                                |                |                |        | Three Months Ended |        | Six Months Ended
|                                             |                                |                |                |        | June 30,           |        | June 30,        
|                                             |                                |                |                |        |                    |        |                 
|                                             |                                |                |                |        | (in thousands)     |        | (in thousands)  
|                                             |                                |                |                |        | 2003               |        | 2002             |        | 2003  |        | 2002 
|                                             |                                |                |                |        |                    |        |                  |        |       |        |      
|Revenues
Product:                            |                                |                |                |        |                    |        |                  |        |       |        |       |        |        |        |       |       
|                                             |                                | OLUX®          |                | $      | 11,004             |        |                  | $      | 7,728 |        |       | $      | 20,879 |        |       | $      | 14,526 |       
|                                             |                                | Luxíq®         |                |        | 4,491              |        |                  |        | 3,653 |        |       |        | 8,879  |        |       |        | 6,975  |       
|                                             |                                | Other          |                |        | 33                 |        |                  |        | 42    |        |       |        | 81     |        |       |        | 62     |       
|                                             |                                |                |                |        |                    |        |                  |        |       |        |       |        |        |        |       |        |        |       
|                                             | Total product revenues         |                |                | 15,528 |                    |        |                  | 11,423 |       |        |       | 29,839 |        |        |       | 21,563 |       
|                                             | Royalty, license and contract: |                |                |        |                    |        |                  |        |       |        |       |        |        |        |       |        |       
|                                             |                                | Royalty        |                |        | 4,384              |        |                  |        | 766   |        |       |        | 5,320  |        |       |        | 1,416  |       
|                                             |                                | Novartis       |                |        |                   |        |                  |        |      |        |       |        |       |        |       |        | 580    |       
|                                             |                                | Pharmacia      |                |        | 25                 |        |                  |        | 375   |        |       |        | 56     |        |       |        | 500    |       
|                                             |                                | Other contract |                |        | 33                 |        |                  |        | 62    |        |       |        | 66     |        |       |        | 98     |       
|                                             |                                |                |                |        |                    |        |                  |        |       |        |       |        |        |        |       |        |        |       
|Total royalty, license and contract revenues |                                |                | 4,442          |        |                    |        | 1,203            |        |       |        | 5,442 |        |        |        | 2,594 |       
|                                             |                                |                |                |        |                    |        |                  |        |       |        |       |        |        |        |       |        |        |       
|                                             |                                |                | Total revenues |        | $                  | 19,970 |                  |        | $     | 12,626 |       |        | $      | 35,281 |       |        | $      | 24,157 | 
|                                             |                                |                |                |        |                    |        |                  |        |       |        |       |        |        |        |       |        |        |       

Our product revenues were $15.5 million for the three months ended June
30, 2003 and $29.8 million for the six months ended June 30, 2003, compared to
$11.4 million and $21.6 million for the three and six months ended June 30,
2002. The increase in total product revenues for the three and six months
ended June 30, 2003 compared to the same periods in 2002 was due to continued
sales growth in the number of units of OLUX sold as well as the effects of
price increases for OLUX and Luxíq, initiated in the fourth quarter of 2002 and the second quarter
of 2003.

Royalty, license and contract revenues were $4.4 million and $5.4 million
for the three and six months ended June 30, 2003, compared to $1.2 million and
$2.6 million for the three and six months ended June 30, 2002. Royalty,
license and contract revenue was higher for the second quarter of 2003 compared
to the second quarter of 2002 primarily due to a one-time royalty payment
made by a third party in the amount of $2.9 million in
connection with Connetics aerosol spray technology, as well as an
increase year over year in the quarterly royalties paid by the same party of
approximately $654,000 in the second quarter of 2003 and an increase in royalty
revenues of $51,000 related to the sales of Actimmune.

We have an agreement with Prometheus Laboratories, Inc. pursuant to which
we receive a royalty on Prometheus annual sales of Ridaura in excess of $4.0
million, in any calendar year through March 2006. We recognize
royalty revenue in the quarter in which the royalty payment is either
received or may be reasonably estimated. We recognized $0 and $133,000 of royalty revenue
in the three and six months ended June 30, 2003 and $0 in both of the
comparable periods for 2002 in conjunction with this agreement.

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We have an agreement with InterMune, Inc. pursuant to which we receive a
royalty on InterMunes sales of Actimmune in the United States. We recognized
$95,000 and $187,000 of royalty revenue for the three and six months ended June
30, 2003, and $44,000 of royalty revenue for both of the three and six months
ended June 30, 2002, in connection with this agreement.

Cost of Product Revenues

Our cost of product revenues includes the third party costs of
manufacturing OLUX and Luxíq, depreciation costs associated with Connetics owned equipment located at the DPT facility in Texas, royalty
payments based on a percentage of our product revenues, and product freight and
distribution costs from Cardinal Health Specialty Pharmaceutical Services
(formerly CORD Logistics, Inc.), the third party that handles all of our
product distribution activities. Currently, DPT Laboratories, Ltd., AccraPac
Group, Inc., and InyX Pharma, Ltd. (formerly Miza Pharmaceuticals) manufacture
commercial supplies of OLUX and Luxíq. We recorded costs of product revenues
of $1.2 million for the three months ended June 30, 2003 and $2.3 million for
the six months ended June 30, 2003, compared to $973,000 and $1.6 million for
the three and six months ended June 30, 2002. The increase in the cost of
product revenues in the three and six month periods ended June 30, 2003
compared to the same periods in 2002 is directly attributable to the increase
in sales volume of our products.

Research and Development

Research and development expenses include costs of personnel to support
our research and development activities, costs of preclinical studies, costs of
conducting our clinical trials, such as clinical investigator fees, monitoring
costs, data management and drug supply costs, external research programs, and
an allocation of facilities costs, salaries and benefits, and overhead costs
such as rent, supplies and utilities. In the six months ended June
30, 2003 we incurred costs associated with ten clinical trials in
various stages of completion, compared to four clinical trials in
various stages of completion in the six months ended June 30, 2002.
There was also a significant increase in the number of patients
enrolled in the clinical trial work performed during the six months
ended June 30, 2003 compared to the same six month period in 2002. As of June 30 2003, we were still conducting concurrent Phase III
clinical trials for Velac and Actiza.

Research
and development expenses were $8.6 million and $5.6 million for the
three months ended June 30, 2003 and 2002, respectively. The increase is primarily due to increased clinical trial costs of $2.2 million
as well as increased employee and travel related costs of $576,000
associated with the increased headcount needed to support the
increased activities in the clinical trial area as well as other R&D
activities.

Research
and development expenses were $17.2 million and $10.7 million for the
six months ended June 30, 2003 and 2002, respectively. The increase
is due primarily to increased clinical trial costs
of $5.6 million as well as increased employee & travel related costs
of $877,000 associated with the increased headcount needed to support
the increased activities in the clinical trial area as well as other
R&D activities.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $10.8 million for the
three months ended June 30, 2003 and $21.9 million for the six months ended
June 30, 2003, compared to $10.7 million and $20.3 million for the comparable
periods in 2002. Although expenditures were relatively flat for the three
months ended June 30, 2003 compared with the same period in 2002, there was
some fluctuation in the areas of expenditures between the periods. For the
three months ended June 30, 2003 there was an overall increase of $569,000 in
employee-related costs due to increased headcount, an increase of $288,000 in
miscellaneous selling, general and administrative expenses, partially
offset by a decrease in consulting
and outside services of $820,000, compared with the same period in 2002.

For the six months ended June 30, 2003 there was an overall increase of
$985,000 in employee-related costs due to increased headcount, an increase of
$288,000 in miscellaneous selling, general and administrative expenses, an increase of $588,000 in
consulting and outside service expenses, partially offset by a decrease in travel
expenses of $291,000 compared with the same period in 2002.

Interest and other income (expense), net

Interest income was $169,000 and $294,000 for the three and six months
ended June 30, 2003 and $217,000 and $496,000 for the three and six months
ended June 30, 2002. The decrease in interest income during the first six
months of 2003 compared to the same period in 2002 was the result of lower cash
and investment balances for the majority of the period, combined with a
decrease in market interest rates on investments.

14



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Interest expense was $230,000 and $231,000 for the three and six months
ended June 30, 2003 and $4,000 and $6,000 for the three and six months ended
June 30, 2002. The increase in interest expense during the first six months of
2003 compared to the same period in 2002 was directly related to the interest
expense associated with the convertible senior notes issued in the second
quarter of 2003.

Other income, net, was $33,000 and $87,000 for the three and six months ended
June 30, 2003 and $93,000 and $171,000 for the three and six months ended June
30, 2002. The decrease in other income during the six months ended June 30,
2003 compared to the same period in 2002 is directly related to the decrease in
income related to a facility sublease, which ended in January 2003.

Income Taxes

We recognized income tax expense of $1.2 million for the three months
ended June 30, 2003 and $1.3 million for the six months ended June 30, 2003,
related to a foreign tax provision recorded by Connetics Australia. We
recognized income tax expense of $161,000 and a net income tax benefit of
$63,000 for the three and six months ended June 30, 2002. The net income tax
benefit reflects a U.S. tax benefit of $540,000 partially reduced by a foreign
tax provision recorded by Connetics Australia of $477,000. The U.S. tax
benefit arose principally because of the provisions of the U.S. Job Creation
and Worker Assistance Act of 2002 enacted on March 9, 2002, which allows
taxpayers to carry back net operating losses generated in 2001 and 2002 to
offset alternative minimum tax paid in the last five years.

Liquidity and Capital Resources

Sources and Use of Cash.We have financed our operations to date
primarily through proceeds from equity and debt financings, collaborative
arrangements with corporate partners, bank loans, and product revenues. At
June 30, 2003, cash, cash equivalents and short-term investments totaled $113.5
million compared to $33.1 million at December 31, 2002. Our cash balances are
held in a variety of interest-bearing instruments including high-grade
corporate bonds, commercial paper, U.S. Government agencies papers, and money
market accounts.

Cash
used in operating activities.Cash used in operations for the six
months ended June 30, 2003 was $7.9 million compared to $7.5 million
for the six month period ended June 30, 2002. Net loss of $7.2
million for the six months ended June 30, 2003 was affected by
non-cash charges of $1.1 million of depreciation and amortization
expense and $2.2 million of increased reserves related to product
returns, chargebacks, rebates and coupon programs. Cash usage was
primarily offset by a decrease in accounts receivable of
approximately of $1.9 million related to the timing of sales and
collection of outstanding amounts, an increase in other assets of
$2.4 million primarily related to various prepaid activities, a
decrease in accounts payable and other accrued and current
liabilities of $3.4 million primarily related to the timing of
payments and activities related to development and other business
activity.

Net loss
of $8.5 million for the six-month period ending June 30, 2002 was
affected by non-cash charges of $1.0 million of depreciation and
amortization expense and a $1.6 million gain on the sale of
investments. Cash usage was partially offset by a decrease in
accounts receivable of $840,000 relating to the timing of sales and
collection of outstanding amounts, an increase in reserves related to
product returns, chargebacks, and rebates of $448,000, an increase of
$778,000 in various prepaid activities, and an increase in accounts
payable and other accrued and current liabilities of $1.4 million
related to increased business and development activities.

Cash flows provided by (used in) investing activities.Cash flows used in
investing activities was $42.7 million for the six month period ended June 30,
2003, compared to cash flows provided by investing activities of $8.5 million
for the six months ended June 30, 2002. The increase in cash used in investing
activities is due primarily to the net result of an increase in purchasing activity of
short-term investments of $40.6 million primarily related to the proceeds from
the convertible debt financing in the second quarter of 2003, as well
as a decrease in sales activity of short-term investments of
$12.5 million. We had only moderate
increases in operating expenses in the six month period ended June 30, 2003
compared to the same period in 2002, but our property and equipment
expenditures decreased by $2.0 million for the six month period
ended June 30,
2003 compared to the same period last year. Of the $2.0 million, $1.5 million
is related to the DPT facility build-out which occurred in 2002, $185,000
related to leasehold improvements and other costs in connection with moving our
offices to 3290 West Bayshore in 2002, and the balance represented higher
regular business equipment and property purchases in the first six months of
2002 compared to the same period in 2003.

Cash flows from financing activities.Financing activities provided $89.5
million and $4.3 million for the six month periods ended June 30, 2003 and
2002, respectively. This increase is primarily due to the $86.5 million of

15



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##### Table of Contents



net proceeds from the issuance of convertible senior notes in the second
quarter of 2003. The increase due to the financing was partially offset by the
decrease of $1.1 million in restricted cash activity in 2003 compared to the
same time frame in 2002. During the first six months of 2002, $1.4 million of
previously restricted certificates of deposits related to our controlled
disbursements account, security deposit on facility, and collateral on certain
officers personal bank loans were released. For the same period in 2003,
$312,000 of a previously restricted certificate of deposit related to a
security deposit on our facility was released.

Working Capital.Working capital increased by $81.1 million to $106.3
million at June 30, 2003 from $25.2 million at December 31, 2002, primarily due
to the convertible debt financing which we completed in the second quarter of
2003.

Contractual Obligations and Commercial Commitments.There have been no
material changes in our contractual obligations and commercial commitments
since December 31, 2002. Our commitments, including those disclosed in the
Annual Report on Form 10-K/A for the year ended December 31, 2002, consist
primarily of operating lease agreements for our facilities as well as minimum
purchase commitments under one of our contract manufacturing agreements.

Restricted Cash and Cash Equivalents.In the six months ended June 30,
2003, $312,000 was released from previously restricted certificates of deposit
related to security for our facilities rent. As of June 30, 2003, $411,000 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 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. A key element of our strategy is to in-license or acquire
additional marketed or late-stage development products. A portion of the funds
needed to acquire, develop and market any new products may come from our
existing cash, which will result in fewer resources available to our current
products and clinical programs. We continually evaluate various 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 raising additional funds through equity or debt financings in connection
with the transaction.

Factors that May Affect Future Results, Financial Condition and the Market
Price of Securities

Please also read Item 1 in our 2002 Annual Report on Form 10-K/A where we have
described our business and the challenges and risks we may face in the future.

There are many factors that affect our business and results of operations,
some of which are beyond our control. In our Annual Report on Form 10-K/A for
the year ended December 31, 2002 we list 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/A for the year ended December 31,
2002, 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.

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:

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| |  |  | 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, and                                                                                                                       
|
| |  |  | fluctuations in royalties paid by
third parties.                                                                                                              




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 from those reported under
Item 7A, Quantitative and Qualitative Disclosures About Market
Risk in our annual report on Form 10-K/A for the year ended December 31, 2002.




Item 4.Controls and Procedures

Our management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, performed an evaluation of
the effectiveness of the design and operation of Connetics disclosure controls
and procedures. This evaluation was performed as of June 30, 2003. Our
disclosure controls and procedures are designed with the objective of ensuring
that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. Based on their
evaluation, the CEO and CFO concluded that our disclosure controls and
procedures were effective in timely alerting them to material information
required to be included in our periodic SEC reports. In addition, our
CEO and CFO concluded that during the quarter ended June 30,
2003, there has been no change in our internal controls over
financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial
reporting.

17



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##### Table of Contents






PART II. OTHER INFORMATION




Item 2.Changes in Securities and Use of Proceeds

On May 28, 2003, we sold, in a private placement pursuant to Rule 144A of
the Securities Act of 1933 as amended, $90 million of 2.25% convertible senior
notes due May 30, 2008. The offering was underwritten through a purchase
agreement with Goldman, Sachs & Co., C.E. Unterberg, Towbin, CIBC World Markets
Corp., Thomas Weisel Partners LLC, and U.S. Bancorp Piper Jaffray Inc., who
resold the note to qualified institutional investors. The notes are unsecured
and rank equal to all of our future unsecured and unsubordinated debts.
Holders of the notes may convert notes, in whole or in part, at any time prior
to maturity into shares of our common stock at a conversion price of $21.41 per
share subject to adjustment in certain circumstances. This conversion price is
higher than our stock price on the notes issuance date. We are required to
pay interest on May 30 and November 30 of each year, beginning November 30,
2003. We may redeem all or a portion of the notes at any time on or after May
30, 2005 upon payment of a redemption price equal to 100.45% of the principal
amount of the notes to be redeemed plus accrued and unpaid interest. Offering
expenses of $3.5 million related to the sale of these notes have been included
in other assets and are amortized to interest expense over the contractual term
of the notes. The amortization of these debt issuance costs will accelerate
upon early redemption or conversion of the notes. The offer and sale of the
notes was exempt from the registration requirements of the Securities
Act pursuant to the provisions of Section 5 of the Securities Act
provided by Rule 144A. During the quarter ended June 30, 2003, the net
proceeds of $86.5 million were invested in short-term, liquid, fixed
income securities. The net proceeds remain available for general
working capital purposes, including potential acquisitions. As of June 30,
2003, the fair value of these notes approximated $85.6 million.




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

On May 14, 2003, we held our annual meeting of stockholders. At the
meeting, the stockholders approved the following matters by the following
votes:



| | 1) |  | Election of the following directors:
| | -- |  | ------------------------------------

|                        |  |     |            |          |  |  |            | 
|----------------------- |  | --- | ---------- | -------- |  |  | ---------- | 
|                        |  | For |            | Withheld
|                        |  |     |            |         
|Alexander E. Barkas, MD |  |     | 19,528,972 |          |  |  | 7,167,011  | 
|Eugene Bauer, MD        |  |     | 19,147,072 |          |  |  | 7,548,911  | 
|Andrew Eckert           |  |     | 25,257,187 |          |  |  | 1,438,796  | 
|Denise Gilbert          |  |     | 25,465,337 |          |  |  | 1,230,646  | 
|John C. Kane            |  |     | 25,267,487 |          |  |  | 1,428,496  | 
|Thomas D. Kiley         |  |     | 25,467,187 |          |  |  | 1,228,796  | 
|Leon E. Panetta         |  |     | 16,287,328 |          |  |  | 10,408,655 | 
|G. Kirk Raab            |  |     | 25,479,098 |          |  |  | 1,225,885  | 
|Thomas G. Wiggans       |  |     | 25,651,387 |          |  |  | 1,044,596  | 



| | 2) |  | Approval of an amendment to the 1995 Directors Stock Option Plan to
increase the number of shares of common stock reserved for issuance
under the plan by 250,000 shares.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|           |  |         |           |         |  |  |        | 
|---------- |  | ------- | --------- | ------- |  |  | ------ | 
|For        |  | Against |           | Abstain
|           |  |         |           |        
|23,811,459 |  |         | 4,010,733 |         |  |  | 10,859 | 



| | 3) |  | Approval of an amendment to the 2002 Employee Stock Plan to increase
the number of shares of common stock reserved for issuance under the
plan by 750,000 shares.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|           |  |         |           |         |  |  |        | 
|---------- |  | ------- | --------- | ------- |  |  | ------ | 
|For        |  | Against |           | Abstain
|           |  |         |           |        
|22,907,284 |  |         | 4,912,398 |         |  |  | 13,369 | 

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##### Table of Contents





| | 4) |  | Approval of an amendment under the 2002 Employee Stock Plan to permit
the issuance of options under the plan to non-executive officers of the
Company.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|           |  |         |           |         |  |  |        | 
|---------- |  | ------- | --------- | ------- |  |  | ------ | 
|For        |  | Against |           | Abstain
|           |  |         |           |        
|23,396,117 |  |         | 4,423,164 |         |  |  | 13,770 | 



| | 5) |  | Ratification of the appointment of Ernst & Young LLP to serve as the
Companys independent auditors for the fiscal year ended December 31,
2003.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|           |  |         |         |         |  |  |        | 
|---------- |  | ------- | ------- | ------- |  |  | ------ | 
|For        |  | Against |         | Abstain
|           |  |         |         |        
|27,149,805 |  |         | 669,730 |         |  |  | 13,516 | 




Item 6.Exhibits and Reports on Form 8-K






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



| | 4.1  |  | Indenture, dated as
of May 28, 2003, between the Company and J.P. Morgan Trust
Company, National Association, including therein the forms of the
notes.                                                                                                                        
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 4.2  |  | Registration Rights
Agreement, dated as of May 28, 2003, between the Company and
Goldman, Sachs & Co., C.E. Unterberg, Towbin (a California Limited
Partnership), CIBC World Markets Corp., Thomas Weisel
Partners LLC and U.S. Bancorp Piper Jaffray Inc., as
representatives.
|
| | 31.1 |  | Certification by Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                            
|
| | 31.2 |  | Certification by Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                            
|
| | 32.1 |  | Certification by Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                            
|
| | 32.2 |  | Certification by Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                            






|(b) |  | Reports on Form 8-K. We filed
or furnished the following Current Reports on Form 8-K
during the quarter ended June 30, 2003. The information
furnished under Item 9, Regulation FD Disclosure and Item 12, Results
of Operations and Financial Condition is not deemed to be
filed for purposes of Section 18 of the Securities Exchange
Act of 1934.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i)    |  | Current Report on Form 8-K dated April 23, 2003, filed
with the Securities and Exchange Commission on April 25,
2003, under Item 5, Other Events, and Item 7, Financial
Statements, Pro Forma Financial Information and Exhibits.                                                                                  
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)   |  | Current Report on Form 8-K dated April 28, 2003, filed
with the Securities and Exchange Commission on April 28,
2003, under Item 9, Regulation FD Disclosure, Item 12,
Disclosure of Results of Operations and Financial
Condition, and Item 7, Financial
Statements, Pro Forma Financial Information and Exhibits.
|
| | (iii)  |  | Current Report on Form 8-K dated May 1, 2003, filed with
the Securities and Exchange Commission on May 2, 2003,
under Item 5, Other Events.                                                                                                                                                                        
|
| | (iv)   |  | Current Report on Form 8-K dated May 6, 2003, filed with
the Securities and Exchange Commission on May 7, 2003,
under Item 5, Other Events.                                                                                                                                                                        
|
| | (v)    |  | Current Report on Form 8-K dated May 20, 2003, filed with
the Securities and Exchange Commission on May 21, 2003,
under Item 5, Other Events.                                                                                                                                                                      
|
| | (vi)   |  | Current Report on Form 8-K dated May 21, 2003, filed with
the Securities and Exchange Commission on May 22, 2003,
under Item 5, Other Events, and Item 7, Financial
Statements, Pro Forma Financial Information and Exhibits.                                                                                      
|
| | (vii)  |  | Current Report on Form 8-K dated June 5, 2003, filed with
the Securities and Exchange Commission on June 6, 2003,
under Item 5, Other Events, and Item 7, Financial
Statements, Pro Forma Financial Information and Exhibits.                                                                                      
|
| | (viii) |  | Current Report on Form 8-K dated June 19, 2003, filed with
the Securities and Exchange Commission on June 20, 2003,
under Item 9, Regulation FD Disclosure, Item 12,
Disclosure of Results of Operations and Financial
Condition and Item 7, Financial Statements, Pro Forma Financial
Information and Exhibits.   

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##### Table of Contents





| | (ix) |  | Current Report on Form 8-K dated June 30, 2003, filed with
the Securities and Exchange Commission on July 1, 2003,
under Item 5, Other Events, and Item 7, Financial
Statements, Pro Forma Financial Information and 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: August 13, 2003 |  |                       |  |                                                                                                              |  | 

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##### Table of Contents



INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                
|Number  |  | Description                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                
|4.1     |  | Indenture, dated as
of May 28, 2003, between the Company and J.P. Morgan Trust
Company, National Association, including therein the forms of the
notes.                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                
|4.2     |  | Registration Rights
Agreement, dated as of May 28, 2003, between the Company and
Goldman, Sachs & Co., C.E. Unterberg, Towbin (a California Limited
Partnership), CIBC World Markets Corp., Thomas Weisel
Partners LLC and U.S. Bancorp Piper Jaffray Inc., as
representatives.
|        |  |                                                                                                                                                                                                                                                                                
|31.1    |  | Certification by Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                
|31.2    |  | Certification by Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                
|32.1    |  | Certification by Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                
|32.2    |  | Certification by Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                                            

22