<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-Q


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


                  For the Quarterly Period Ended June 30, 2003


                           Commission File No. 0-24972



                       INKINE PHARMACEUTICAL COMPANY, INC.
             (Exact name of Registrant as specified in its charter)


                       New York                     13-3754005
       (State or other jurisdiction of      (I.R.S. Employer Identification No.)
        incorporation or organization)


                            1787 Sentry Parkway West
                             Building 18, Suite 440
                               Blue Bell, PA 19422
                    (Address of principal executive offices)

                                  215-283-6850
                         (Registrant's telephone number)


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X  No
   ---   ---
         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).  YES X  NO
                                           ---   ---

         At August 14, 2003, the registrant had outstanding 46,722,662 shares of
common stock, par value $.0001 per share.


<PAGE>

                       INKINE PHARMACEUTICAL COMPANY, INC.

                                      INDEX





PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
                                                                                                         Page
      Item 1.  Financial Statements                                                                      ----
<S>           <C>                                                                                       <C>

            BALANCE SHEETS - as of June 30, 2003 (unaudited) and
            December 31, 2002...............................................................................3

            STATEMENTS OF OPERATIONS (unaudited) - for the Three and Six-Months
            Ended June 30, 2003 and 2002....................................................................4

            STATEMENTS OF CASH FLOWS (unaudited) - for the Six-Months Ended June 30, 2003 and 2002..........5

            STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (unaudited)
            - for the Six-Months Ended June 30, 2003 .......................................................6

            NOTES TO FINANCIAL STATEMENTS (unaudited).......................................................7

         Item 2.  Management's Discussion and Analysis of Financial
                   Condition and Results of Operations......................................................9

         Item 3.  Quantitative and Qualitative Disclosures About Market Risks..............................19

         Item 4.  Controls and Procedures..................................................................19

PART II - OTHER INFORMATION................................................................................20

         Item 4.  Submission of Matters to a Vote of Security Holders......................................20

         Item 6.  Exhibits and Reports on Form 8-K.........................................................20

SIGNATURES.................................................................................................22

EXHIBITS INDEX.............................................................................................23
</TABLE>

<PAGE>


PART I -- FINANCIAL INFORMATION

Item 1.  Financial Statements

                       INKINE PHARMACEUTICAL COMPANY, INC.

                                 BALANCE SHEETS

               (in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                                June 30, 2003          December 31, 2002
                                                                                -------------          -----------------
     ASSETS                                                                      (unaudited)

<S>                                                                             <C>                   <C>
Current assets:
     Cash and cash equivalents........................................          $      10,896            $     12,151
     Accounts receivable..............................................                  1,274                     856
     Inventory........................................................                    972                     677
     Prepaid expenses and other current assets........................                    405                      87
                                                                                -------------            ------------
         Total current assets.........................................                 13,547                  13,771

Deposits .............................................................                     34                      34
Fixed assets..........................................................                    196                     274
                                                                                -------------           -------------
         Total assets.................................................          $      13,777            $     14,079
                                                                                =============           =============
     LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
     Accounts payable.................................................          $       1,874            $        967
     Accrued expenses.................................................                  1,530                   3,222
     Line of credit...................................................                  4,427                   4,444
                                                                                -------------            ------------
        Total current liabilities.....................................                  7,831                   8,633

Convertible subordinated notes (face value $13,000)...................                    ---                  11,657
                                                                                -------------            ------------
         Total liabilities............................................                  7,831                  20,290

Shareholders' equity (deficit):
     Preferred stock, $.0001 par value; authorized 5,000,000
         shares; none issued and outstanding .........................                    ---                     ---
     Common stock, $.0001 par value; authorized 75,000,000............
         shares; issued 46,214,662 and 37,795,943 shares,
         respectively ................................................                      5                       4
     Less common stock held in treasury (16,515 shares)...............                    (37)                    (37)
     Additional paid-in capital.......................................                 79,718                  64,222
     Deferred compensation............................................                    (35)                    ---
     Retained earnings (deficit)......................................                (73,705)                (70,400)
                                                                                -------------            ------------
         Total shareholders' equity (deficit).........................                  5,946                  (6,211)
                                                                                -------------            ------------
         Total liabilities and shareholders' equity (deficit).........          $      13,777            $     14,079
                                                                                =============            ============
</TABLE>

See accompanying notes to unaudited financial statements.

<PAGE>
                       INKINE PHARMACEUTICAL COMPANY, INC.

                            STATEMENTS OF OPERATIONS
                                   (unaudited)

                    (in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                            Three-Months Ended June 30,            Six-Months Ended June 30,
                                                             -------------------------            ---------------------------
                                                               2003             2002                2003               2002
                                                             --------         --------            --------           --------
<S>                                                             <C>          <C>                   <C>                <C>

Product revenue..........................................    $  3,339         $  1,963            $  5,875           $  2,921
Other revenue............................................          49               44                  49                 63
                                                             --------         --------            --------           --------
   Revenue...............................................       3,388            2,007               5,924              2,984

Cost of goods sold.......................................        (472)            (504)               (861)              (789)
                                                             --------         --------            --------           --------
   Gross profit..........................................       2,916            1,503               5,063              2,195

Cost and expenses:
   Research and development..............................         448              870                 789              2,472
   Sales and marketing...................................       1,475            1,350               2,895              2,380
   General and administrative............................         735              577               1,248              1,170
                                                             --------         --------            --------           --------
     Operating expenses..................................       2,658            2,797               4,932              6,022
                                                             --------         --------            --------           --------

   Income (loss) from operations.........................         258           (1,294)                131             (3,827)

Interest income..........................................          16               33                  30                 64
Interest expense.........................................        (293)            (260)               (644)              (501)
Debt conversion inducement, non-cash accretion and
   non-cash premium......................................      (2,355)             (34)             (2,822)               (68)
                                                             --------         --------            --------           --------
   Net loss..............................................    $ (2,374)        $ (1,555)           $ (3,305)          $ (4,332)
                                                             ========         ========            ========           ========
   Net loss per share - basic and diluted................    $  (0.06)        $  (0.04)           $  (0.09)          $  (0.12)
                                                             ========         ========            ========           ========
   Weighted average shares outstanding - basic
      and  diluted.......................................      38,323           34,899              38,050             34,867
</TABLE>

See accompanying notes to unaudited financial statements.

                                       4
<PAGE>
                       INKINE PHARMACEUTICAL COMPANY, INC.

                            STATEMENTS OF CASH FLOWS
                                   (unaudited)

                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                       Six-Months Ended June 30,
                                                                                  ----------------------------------
                                                                                    2003                     2002
                                                                                  ---------                ---------
<S>                                                                              <C>                      <C>
Operating activities:
   Net loss ..........................................................            $  (3,305)               $  (4,332)
   Adjustments to reconcile net loss to net cash used in
         operating activities:
     Depreciation.....................................................                   78                       82
     Amortization of deferred compensation............................                   35                       57
     Stock issued for interest earned on convertible notes............                  ---                      275
     Non-cash accretion and premium...................................                2,047                       68
   Changes in operating assets and liabilities:
     (Increase) in accounts receivable................................                 (418)                    (451)
     (Increase) in inventory .........................................                 (295)                    (710)
     (Increase) decrease in prepaid expenses and other assets ........                 (318)                      56
     Increase (decrease) in accounts payable and accrued expenses ....                 (785)                     317
                                                                                  ---------                ---------
Net cash used in operating activities.................................               (2,961)                  (4,638)

Investing activities:
     Capital expenditures.............................................                  ---                      (29)
     Proceeds from maturities and sales of investments................                  ---                    4,787
                                                                                  ---------                ---------
Net cash provided by investing activities.............................                  ---                    4,758

Financing activities:
     Proceeds from exercise of options and warrants - net of expenses.                1,723                      190
     Borrowings, net of repayments on line of credit .................                  (17)                       1
                                                                                  ---------                ---------
Net cash provided by financing activities ............................                1,706                      191

Net increase (decrease) in cash and cash equivalents .................               (1,255)                     311

Cash and cash equivalents - beginning of period ......................               12,151                    7,379
                                                                                  ---------                ---------
Cash and cash equivalents - end of period ............................            $  10,896                $   7,690
                                                                                  =========                =========
</TABLE>



See accompanying notes to unaudited financial statements.

                                       5
<PAGE>
                      INKINE PHARMACEUTICAL COMPANY, INC.

             STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

                                 (in thousands)
<TABLE>
<CAPTION>


                                                                                                                       Total
                                      Common Stock      Additional                   Treasury Stock                 Shareholder's
                                   ------------------    Paid-In      Deferred     -----------------    Accumulated    Equity
                                   Shares      Amount     Capital   Compensation   Shares     Amount      Deficit    (Deficit)
                                   ------      ------     -------   ------------   ------     ------      -------    ---------
<S>                               <C>          <C>      <C>          <C>            <C>       <C>       <C>           <C>
Balance - December 31, 2002......  37,796       $   4    $ 64,222     $    ---       (17)      $ (37)    $(70,400)    $ (6,211)
Common stock issued pursuant
    to conversion of convertible
    notes........................   7,027           1      12,999          ---       ---         ---         ---        13,000
Value of consultant options
    granted  ....................     ---         ---          70          (70)      ---         ---         ---           ---
Proceeds from options and
    warrants.....................   1,392         ---       1,723          ---       ---         ---         ---         1,723
Amortization of deferred
   compensation..................     ---         ---         ---           35       ---         ---         ---           35
Unrealized debt premium on
    converted notes..............     ---         ---         704          ---       ---         ---         ---           704
Net loss.........................     ---         ---         ---          ---       ---         ---       (3,305)      (3,305)
                                   ------       -----    --------     --------      ----       -----     --------       -------
Balance - June 30, 2003..........  46,215       $   5    $ 79,718     $    (35)      (17)      $ (37)    $(73,705)      $ 5,946
                                   ======       =====    ========     ========      ====       =====     ========       =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       6
<PAGE>
                       INKINE PHARMACEUTICAL COMPANY, INC.

                          NOTES TO FINANCIAL STATEMENTS
                                   (unaudited)

1. Organization and Business Activities

         InKine Pharmaceutical Company, Inc. (the "Company") is a
biopharmaceutical company that was incorporated in May 1993. The Company's
portfolio of product and product candidates includes Visicol(R), a
bowel-cleansing agent currently marketed for use prior to colonoscopy. The
Company's portfolio also includes IB-Stat(R), an antispasmodic product currently
marketed to gastroenterologists and others for use as an immediately available
acute care product for a variety of indications. The Company is also developing
Colirest(TM), a steroid molecule for the treatment of inflammatory bowel disease
("IBD"). The Company is focused on the diagnosis and treatment of
gastrointestinal disorders and has the additional strategy of acquiring drug
candidates that are close to commercialization.

2. Basis of Presentation

         The accompanying financial statements are unaudited and have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America.

         Certain information and footnote disclosures normally included in the
Company's audited annual financial statements have been condensed or omitted in
the Company's interim financial statements. In the opinion of management, the
interim financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair representation of the results for
the interim periods presented.

         The results of operations for the interim periods may not necessarily
be indicative of the results of operations expected for the full year. These
interim financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 2002, which are contained
in the Company's most recent Annual Report on Form 10-K.


3. Recently Issued Accounting Pronouncements

         In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standard No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends Statement of Financial Accounting Standard No. 133 "Accounting for
Derivative Instruments and Hedging Activities" and Statement of Financial
Accounting Standard No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" and is related to certain derivatives embedded in
other contracts and for hedging activities under Statement of Financial
Accounting Standard 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and is to be applied prospectively. SFAS No. 149
currently has not had an impact on the Company's financial position, results of
operations or cash flows.

          In May 2003, the FASB issued Statement of Financial Accounting
Standard No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150
establishes standards for how companies classify and measure, in their statement
of financial position, certain financial instruments with characteristics of
both liabilities and equities. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. SFAS No. 150 currently has not had an impact on the Company's financial
position, results of operations or cash flows.

                                       7
<PAGE>

4. Use of Estimates

         The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date(s) of the financial statements and the reported amounts
of revenues and expenses during the reporting period(s). Actual results could
differ from those estimates.

5. Reclassifications

         Certain prior year amounts have been reclassified to conform to current
year presentation.

6. Allowance for Sales Returns

         The Company maintains an allowance for potential future sales returns.
This allowance is evaluated on a quarterly basis based on product
characteristics, wholesaler stocking patterns, and prescription trends. At June
30, 2003, the Company had a $160,000 returns allowance that was included in
accrued expenses on the balance sheet. The following is an analysis of the sales
returns allowance for the six-months ended June 30, 2003:

Allowance at December 31, 2002                        $149,000
Provision for estimated sales returns                  125,000
Actual sales returns                                  (114,000)
                                                      --------
     Allowance at June 30, 2003                       $160,000
                                                      ========

7. Deferred Revenue

         For IB-Stat(R), the Company recognizes revenue based on prescription
data. This practice will continue until such time as data becomes available that
indicates that the product has achieved adequate market acceptance and that
future product returns can be reasonably estimated. As a result, the Company has
recorded deferred revenue of $511,000 and $524,000 that were included in accrued
expenses on the balance sheet as of June 30, 2003 and December 31, 2002,
respectively.

8. Line of Credit

         The Company maintains a $7,500,000 line of credit with a financial
institution, which expires January 31, 2004. Monthly interest-only payments are
made at a variable per annum rate of 2.20% plus the 30-day Dealer Commercial
Paper Rate. Amounts outstanding under this credit line were $4,427,000 and
$4,444,000 at June 30, 2003 and December 31, 2002, respectively. Average
interest rates for the six and twelve-month periods ended June 30, 2003 and
December 31, 2002 were 3.40% and 3.88%, respectively.

9. Convertible Subordinated Notes

         In December 2002, the Company completed a $13,000,000 private placement
of June 2005 convertible notes together with 2,459,460 warrants. Proceeds from
the placement were used to redeem the Company's then outstanding June 2003
convertible notes. The June 2005 notes were convertible into the Company's
common stock at a conversion price of $1.85 per share and the warrants, which
are not exercisable until December 2003, also have an exercise price of $1.85
per share. On June 30, 2003, the then holders of the June 2005 convertible notes
executed a Conversion Agreement to convert all of the outstanding notes into
common stock. The Company paid a fee of $750,000 to induce the execution of the
conversion agreement. In addition to the inducement fee, the Company incurred
$1,605,000 in non-cash charges associated with the previously outstanding
convertible notes. The Company also reclassified to additional paid-in capital
$704,000 in charges that were taken in prior periods related to the amortization
of the maturity premium associated with the previously outstanding convertible
notes.

                                       8
<PAGE>
10. Stock-Based Compensation

         We apply the intrinsic method of accounting for all stock-based
employee compensation in accordance with APB No. 25 "Accounting for Stock Issued
to Employees," and related interpretations. We record deferred compensation for
option grants to employees for the amount, if any, by which the market price per
share exceeds the exercise price per share. The Company generally grants its
derivative securities at market on the grant date.

         We have elected to adopt the disclosure only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." The
following table illustrates the effect on our net loss and basic and diluted
loss per share if we had recorded compensation expense for the estimated fair
value of our stock-based employee compensation, consistent with SFAS No. 123:
<TABLE>
<CAPTION>
                                                                 Three-Months Ended                 Six-Months Ended
                                                             June 30,         June 30,         June 30,         June 30,
                                                               2003            2002              2003            2002
                                                               ----            ----              ----            ----
<S>                                                          <C>             <C>               <C>             <C>
Net loss - as reported..................................     $ (2,374)       $ (1,555)         $ (3,305)       $ (4,332)
Deduct: Total stock based employee compensation.........         (774)           (802)           (1,583)         (1,583)
                                                             --------        --------          --------        --------
Net loss - pro forma....................................     $ (3,148)       $ (2,357)         $ (4,888)       $ (5,915)
                                                             ========        ========          ========        ========

Basis and diluted loss per share - as reported..........     $  (0.06)       $  (0.04)         $  (0.09)       $  (0.12)
                                                             ========        ========          ========        ========
Basis and diluted loss per share - pro forma............     $  (0.08)       $  (0.07)         $  (0.13)       $  (0.17)
                                                             ========        ========          ========        ========
</TABLE>

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

         In addition to historical facts or statements of current condition,
this report contains some forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
provide our current expectations or forecasts of future events. These may
include statements regarding anticipated scientific progress on our research
programs, development of potential pharmaceutical products, interpretation of
clinical results, prospects for regulatory approval, manufacturing development
and capabilities, market prospects for our products, sales and earnings
projections, and other statements regarding matters that are not historical
facts. You may identify some of these forward-looking statements by the use of
words in the statements such as "anticipate," "estimate," "expect," "project,"
"intend," "plan," "believe" or other words and terms of similar meaning. Our
performance and financial results could differ materially from those reflected
in these forward-looking statements due to general financial, economic,
regulatory and political conditions affecting the biotechnology and
pharmaceutical industries as well as more specific risks and uncertainties such
as those listed below under "Certain Risks Related to Our Business." Given these
risks and uncertainties, any or all of these forward-looking statements may
prove to be incorrect. Therefore, you should not rely on any such factors or
forward-looking statements. Furthermore, we do not intend (and we are not
obligated) to update publicly any forward-looking statements.

General

         We are a biopharmaceutical company focused on the diagnosis and
treatment of gastrointestinal disorders, including: colon cancer, irritable
bowel syndrome, or IBS, and inflammatory bowel disease, or IBD. Our development
strategy has been to acquire late-stage drug candidates with short time lines to
commercialization. We currently market and sell two pharmaceutical products,
Visicol(R) and IB-Stat(R). In addition to our marketed products, we have
identified two product candidates, Colirest(TM) and Hematrol(TM).

                                       9
<PAGE>

         The following table outlines our product pipeline from which we intend
to focus the majority of our research, development, marketing and sales efforts
at least through calendar year 2003 and also sets forth the current development
status of our products and product candidates in each targeted therapeutic
indication:
<TABLE>
<CAPTION>
     PRODUCT                              THERAPEUTIC INDICATIONS                         DEVELOPMENT STATUS
     -------                              -----------------------                         ------------------
---------------------------------------------------------------------------------------------------------------------
<S>                       <C>                                                   <C>
Visicol(R)                o      Cleansing of colon prior to colonoscopy        FDA approved; marketed product
                                                                                FDA approved SNDA for new
                                                                                formulation
---------------------------------------------------------------------------------------------------------------------
                          o      Constipation                                   Post marketing study completed
                                                                                Phase IV ongoing
---------------------------------------------------------------------------------------------------------------------
                          o      Pre-operative colonic surgical procedures      Phase IV will commence in 2003
---------------------------------------------------------------------------------------------------------------------
IB-Stat(R)                o      Acute antispasmodic product immediately        Marketed product
                                 available for a variety of indications,
                                 including spasm of the colon
---------------------------------------------------------------------------------------------------------------------
Colirest(TM)              o      Crohn's and Ulcerative Colitis,                Phase II Crohn's disease complete
                                 collectively IBD                               Phase II ulcerative colitis complete
                                                                                Phase IIb Crohn's disease ongoing
---------------------------------------------------------------------------------------------------------------------
Hematrol(TM)              o      Idiopathic Thrombocytopenic Purpura, or ITP    Phase II complete
                                                                                Phase III on hold
---------------------------------------------------------------------------------------------------------------------
</TABLE>

         We began generating sales revenue in January 2001 with the commercial
introduction of our lead product, Visicol(R), and during the quarter ended June
30, 2002, we launched IB-Stat(R), our second commercial product. Operations were
previously funded primarily from the proceeds of public and private placements
of securities. We have incurred net losses in each year since our inception.
Prospectively, we expect to be profitable for the remainder of the calendar year
2003 and beyond. At June 30, 2003, our accumulated deficit was approximately
$73,704,000.

Critical Accounting Policies and Practices

         In "Cautionary Advice Regarding Disclosures about Critical Accounting
Policies" (SEC Release No. 33-8040, December 12, 2001), the SEC advised
Companies to provide more information about a company's most critical accounting
policies, i.e., the specific accounting policies that have the most impact on a
company's results and require the most difficult, subjective or complex
judgments by management. We have identified the following accounting policies
that may constitute "critical accounting policies," under the guidance provided
by the release.

         o    Stock based compensation. It is our policy, which is consistent
              with most public company policies, to apply Accounting Principles
              Board Opinion No. 25, "Accounting for Stock Issued to Employees",
              to account for our stock option plans rather than Statement of
              Financial Accounting Standards No. 123, "Accounting for Stock
              Based Compensation." Had we applied SFAS No. 123, our net loss for
              the three and six-months ended June 30, 2003 and 2002 would have
              been larger (see financial statement note 10).

         o    Product returns. It is our policy to estimate and record an
              allowance for future product returns in connection with our sales
              of Visicol(R). We have applied a return rate to our unit sales to
              provide this allowance under our product return policy. This
              return rate is calculated based on actual return experience and
              our monitoring of distribution channels taking into account the
              expiration dating of Visicol(R). The product return rate is
              periodically updated to reflect actual experience and changes to
              other factors affecting future product returns.

         o    Deferred taxes. In assessing the reliability of deferred tax
              assets, management considers whether it is more likely than not
              that some portion or all of the deferred tax assets will not be
              realized. The ultimate realization of the deferred tax assets is
              dependent upon the generation of future taxable income during the
              period in which those temporary differences become deductible.
              Management considers the scheduled reversal of deferred tax
              liabilities, projected future taxable income and projections for
              future taxable income over the periods in which the deferred tax
              asset items are deductible. At June 30, 2003, management has
              concluded that a full valuation allowance is necessary for
              deferred tax assets.

                                       10
<PAGE>
Results of Operations

         We incurred losses of $2,374,000 and $3,305,000 or $0.06 and $0.09 per
basic and diluted share for the three and six-month periods ended June 30, 2003,
compared to losses of $1,555,000 and $4,332,000 or $0.04 and $0.12 per basic and
diluted share for the same periods a year ago. The current period losses include
one-time non-cash charges related to our previously outstanding June 2005
convertible notes. Non-cash charges related to these notes were $2,355,000 and
$2,822,000 for the three and six-month periods ended June 30, 2003, compared to
similar charges during the same periods a year ago for our previously
outstanding June 2003 convertible of $34,000 and $68,000. These charges appear
on our income statement below income (loss) from operations as a separate line
item described as non-cash accretion and premium. We will not incur any future
charges related to any of our previously outstanding convertible notes beyond
June 30, 2003, the date of our executed conversion agreement with the previous
noteholders. Prospectively, we expect to have net income for each of the
quarters in the second half of 2003 as a result of increased revenues from the
sale of Visicol(R) and decreased expenses as a result of the elimination of our
long-term debt.

         Product revenue was $3,339,000 and $5,875,000 for the three and
six-month periods ended June 30, 2003, compared to $1,963,000 and $2,921,000 for
the same periods a year ago. Prescription levels continue to increase, resulting
in increased orders from wholesalers and large retail chains. We believe the
increased prescription levels have been fueled by increased market awareness and
acceptance of Visicol(R). Approximately 89,000 prescriptions were filled for
Visicol(R) during the second quarter of 2003 as compared to approximately
80,000, 69,000, 61,000, and 48,000 during the four preceding quarters. We
anticipate that product revenues for the 2003-year will be in the range of
$12,000,000 to $14,000,000.

         Our gross profit was $2,916,000 and $5,063,000 for the three and
six-month periods ended June 30, 2003, compared to $1,503,000 and $2,195,000 for
the same periods a year ago. Gross profit as a percentage of sales for product
revenue was 86% and 85% for the three and six-month periods ended June 30, 2003,
compared to 74% and 73% for the same periods a year ago. Increases in gross
profit and gross profit as a percent of sales for product revenue were the
result of increased order volume, increased sales price per unit, decreased
manufacturing cost per unit, and decreased distribution costs for Visicol(R). We
expect that gross profit and gross profit as a percent of sales for product
revenue will increase as our sales volume increases, allowing us to spread
further our fixed cost of goods and the opportunity to more strongly negotiate
our future agreements with suppliers and manufacturers.

         We incurred research and development expenses of $448,000 and $789,000
for the three and six-month periods ended June 30, 2003, compared to $870,000
and $2,472,000 for the same periods a year ago. The decreases were the result of
less development costs associated with Visicol(R) and the internalized
management of previously outsourced functions related to the ongoing
Colirest(TM) clinical trial. We expect that research and development costs will
be in the range of $1,200,000 and $1,500,000 for the 2003-year.

         Sales and marketing costs of $1,475,000 and $2,895,000 were incurred
for the three and six-months ended June 30, 2003, compared to $1,350,000 and
$2,380,000 for the same periods a year ago. Sales and marketing costs included
expenses associated with our sales force, which currently stands at 36 sales
representatives and three district managers, along with marketing campaigns
related to Visicol(R) and IB-Stat(R). We expect that sales and marketing costs
will be in the range of $5,400,000 and $6,000,000 for the 2003-year.

         General and administrative expenses were $735,000 and $1,248,000 for
the three and six-months ended June 30, 2003, compared to $577,000 and
$1,170,000 for the same periods a year ago. We expect that general and
administrative costs will be in the range of $2,000,000 and $2,500,000 for the
2003-year.

         Decreased interest income was the result of significantly reduced
interest rates and decreased average cash and investment balances for the three
and six-months ended June 30, 2003 compared to the same period a year ago.
Increased interest expense compared to the same period a year ago was the result
of interest related to our previously outstanding convertible notes.

                                       11
<PAGE>
Liquidity and Capital Resources

         At June 30, 2003, we had cash and cash equivalents of $10,896,000. The
cash and cash equivalents balance at June 30, 2003 included net proceeds from
second quarter warrant and option exercises of $1,723,000.

         We believe that our financial resources are adequate for our operations
for at least the next 12 months and, if we meet our sales objectives, we will
not require additional capital to fund our operations. Our line of credit is due
to expire in January 2004. While it is our intention to renew the credit
facility for an additional one-year term, we believe that the combination of our
current cash balance along with anticipated cash flows from operations would be
adequate to pay in full our outstanding borrowings on this credit line if it
were not renewed in January 2004.

         Our future short and long-term capital requirements will depend on
numerous factors, including marketplace acceptance of our products. In addition
to marketplace acceptance of our products, other factors which cannot be
quantified and many of which we cannot control will also impact our short and
long-term capital requirements, including: continued commercial costs of
Visicol(R), continued progress in our research and development activities,
progress with pre-clinical studies and clinical trials, prosecuting and
enforcing patent claims, technological and market developments, the ability to
establish product development arrangements, the cost of manufacturing
development, effective marketing activities and arrangements, and licensing or
acquisition activity.

         We are currently conducting a clinical trial of Colirest(TM) in Crohn's
disease, recently commenced a study for the use of Visicol(R) for constipation,
anticipate commencing a study for the use of Visicol(R) in pre-operative colonic
surgical procedures, and continue to market and sell Visicol(R) and IB-Stat(R)
to distributors and drug store chains. During 2003, we expect to spend
approximately $250,000 on the Visicol(R) studies and Visicol(R) product
development, $500,000 on the Colirest(TM) study, and $6,000,000 on Visicol(R)
sales and marketing costs. These activities will be funded by our current cash
balance and future product sales. If product sales fall short of current
expectations or other factors negatively impact our cash balance, we may seek to
obtain additional funds through equity or debt financing, collaborative or other
arrangements with corporate partners, and from other sources. No assurance can
be given that necessary additional financing will be available on terms
acceptable to us, if at all. If adequate additional funds are not available when
required, we may have to delay, scale-back or eliminate certain of our research,
drug discovery or development activities or certain other aspects of our
operations and our business will be materially and adversely affected.

         We anticipate reaching net income next quarter and expect to be
profitable for the remainder of 2003. To achieve operating profits, we, alone or
with others, must successfully market and sell our products. In addition,
revenues from product sales must be greater than the sum of cost of goods sold,
research and development costs, sales and marketing costs and general and
administrative costs. While we expect to realize net income for the remainder of
2003, we cannot provide any assurance that we will be able to reach and/or
sustain any level of profitability.

Research and Development Programs

         We currently have two significant research and development projects
relating to: (i) Visicol(R)and (ii) Colirest(TM).

         Visicol(R). We have focused our Visicol(R) research and development on
cleansing of the colon prior to colonoscopy and are presently marketing
Visicol(R) for that indication. In addition, we expect to develop Visicol(R) for
cleansing the colon prior to pre-operative colonic surgical procedures and for
treating constipation. The current status of these projects are as follows: (i)
for cleansing of the colon prior to colonoscopy, the FDA has approved both our
NDA as well as our SNDA; (ii) for cleansing the colon prior to pre-operative
colonic surgical procedures we intend to commence a Phase IV study; (iii) for
treating constipation, we have completed a post marketing study and have
commenced a Phase IV study during the second quarter of 2003. As of June 30,
2003, we have incurred cumulative total costs of approximately $11,447,000 in
connection with our Visicol(R) research and development. During the quarter
ended June 30, 2003, we incurred an aggregate of $448,000 in research and
development expenses, approximately $103,000 of which was attributable to
Visicol(R).

                                       12
<PAGE>
         Colirest(TM). We are developing Colirest(TM) for treatment of IBD and
have completed a Phase II study in Crohn's disease patients and a Phase II study
in ulcerative colitis patients. In June 2001, we began a Colirest(TM) clinical
Phase IIb study of Crohn's disease patients. We anticipate an interim analysis
during 2004. As of June 30, 2003, we have incurred cumulative total costs of
approximately $6,616,000 in connection with the development of Colirest(TM) and
related compounds. During the quarter ended June 30, 2003, we incurred an
aggregate of $448,000 in research and development expenses, approximately
$68,000 of which was attributable to Colirest(TM).

         Indirect Costs. In addition to the direct costs related to the
development of our technologies, we incurred indirect non-technology specific
overhead costs. These expenses include the salaries and administrative costs of
managing our research and development projects, which for the quarter ended June
30, 2003 equaled approximately $277,000.

Recently Issued Accounting Pronouncements

         In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standard No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends Statement of Financial Accounting Standard No. 133 "Accounting for
Derivative Instruments and Hedging Activities," and Statement of Financial
Accounting Standard No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," and is related to certain derivatives embedded in
other contracts and for hedging activities under Statement of Financial
Accounting Standard No. 133. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003 and is to be applied prospectively. SFAS
No. 149 currently has not had an impact on our financial position, results of
operations or cash flows.

         In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 establishes
standards for how companies classify and measure, in their statement of
financial position, certain financial instruments with characteristics of both
liabilities and equities. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. SFAS No.
150 currently has not had an impact on our financial position, results of
operations or cash flows.

Certain Risks Related to Our Business

Risks Related To Our Operations

We have generated significant losses to date. If we incur substantial losses in
the future, then the value of our common stock is likely to be reduced. Also, we
may never maintain a profitable level of operations.

         Our first sale of Visicol(R) occurred in January 2001 and our first
shipment of IB-Stat(R) occurred in June 2002. We have a significant accumulated
deficit and have incurred losses in each year since our inception on July 1,
1993. Visicol(R), IB-Stat(R) and our product candidates are in various stages of
marketing or development and require significant research, development and
testing. If our sales, marketing, and research spending in the foreseeable
future are greater than product sales, we may never conduct our operations at a
profit. Our common stock is likely to decrease in value if we fail to generate
profits or if the market believes that we are unable to generate profits.

         We have granted or committed to grant shares to a founding scientist
and others when we achieve agreed upon product development goals for
Colirest(TM) and Hematrol(TM). These goals relate to our filing applications
with the FDA and achieving agreed upon sales targets. As a result, our potential
earnings per share will decrease because of the necessary accounting treatment
of these shares and options.

                                       13
<PAGE>

If we do not receive adequate reimbursement from the government, managed care
organizations and private insurance plans, then some patients may be unable or
unwilling to purchase our products and we will achieve less revenue from product
sales.

         Successful sales of our products in the United States and other
countries depend on the availability of adequate reimbursement from the
government, managed care organizations and private insurance plans.
Pharmaceutical companies often rely on reimbursement from third parties as the
basis for the sales of their products. In the pharmaceutical industry, unlike
other consumer product industries, insurance companies, including managed care
organizations, often pay drug stores directly for pharmaceutical products. In
fact, pharmaceutical companies make a majority of their sales to covered
individuals of health insurance companies and not to consumers. These
organizations provide for reimbursement only after considering a number of
factors, including product features such as safety, medical necessity, cost and
the experimental nature of the product. We will spend significant amounts of
time and other resources to obtain reimbursement for our products. The
organizations that provide reimbursement routinely limit reimbursement and
attempt to exert significant pressure on medical suppliers to lower their
prices. Visicol(R) is premium priced compared to its competitors and we have not
specifically contracted with any third party to date to give rebates for its
use. We do not know what impact, if any at all, this will have on the coverage
of Visicol(R) by these third party payers.

Visicol(R) and IB-Stat(R) may not be accepted by doctors, hospitals, insurers or
patients.

         If Visicol(R) and IB-Stat(R) fail to achieve market acceptance, our
ability to become profitable in the future will be adversely affected. We
believe that market acceptance will depend on our ability to provide acceptable
evidence of safety, efficacy and cost effectiveness. In addition, market
acceptance depends on the effectiveness of our marketing strategy and the
availability of reimbursement for such products.

If we do not have adequate insurance for product liability claims, we may be
subject to significant expenses relating to these claims.

         We are subject to significant product liability risks relating to the
sale, manufacturing and further testing of the products on the market and the
ones we are developing. These risks include:

     o   our products could cause undesirable side effects or injury when sold;
     o   our product candidates could cause undesirable side effects or injury
         during clinical trials; and
     o   we may agree to reimburse others that incur liability relating to our
         product and product candidates.

         We currently maintain insurance for product liability claims in the
amount of $10,000,000 per occurrence and $10,000,000 in the aggregate. We have
no way of knowing if these amounts will be adequate to cover any product
liability claims filed against us. If we do not or cannot maintain adequate
insurance coverage, we may incur a significant liability if a product liability
claim arises.

If we do not develop and maintain relationships with manufacturers, then we may
not successfully manufacture and sell our products.

         We do not possess the capabilities, resources or facilities to
manufacture Visicol(R), IB-Stat(R) and any of our product candidates. We must
contract with manufacturers to produce Visicol(R), IB-Stat(R) and our product
candidates according to government regulations. Our future development and
delivery of our marketed products and our product candidates depends on the
timely, profitable and competitive performance of these manufacturers. A limited
number of manufacturers exist which are capable of manufacturing our marketed
products and our product candidates. We may fail to contract with the necessary
manufacturers or we may contract with manufacturers on terms that may not be
entirely acceptable to us.

         We have contracted with Mallinckrodt, Inc. to supply us with active
pharmaceutical ingredients for Visicol(R). A significant portion of the
Visicol(R) tablet is monobasic and dibasic sodium phosphate. Mallinckrodt has
agreed to supply these ingredients in a manner that meets FDA requirements. The
FDA has approved the manufacturing process for these active ingredients, but the
Drug Master File for the sodium phosphate is only for one location at
Mallinckrodt. If this location were to shut down for any reason, a delay in the
delivery of our active pharmaceutical ingredients would occur and could impact
future sales of Visicol(R). We are currently working towards submitting a Drug
Master File with the FDA for another Mallinckrodt facility in order to minimize
this risk.

                                       14
<PAGE>

         We have contracted with Pharmaceutical Manufacturing Research Services,
Inc., a manufacturing development company, to supply commercial quantities of
Visicol(R), and Morton Grove Pharmaceutical, a generic drug manufacturer, to
supply IB-Stat(R) in a manner that meets FDA requirements. The FDA has approved
the manufacturing processes of Pharmaceutical Manufacturing Research Services
and Morton Grove. Pharmaceutical Manufacturing Research Services and Morton
Grove must maintain compliance with FDA standards regarding the manufacturing of
Visicol(R) and IB-Stat(R) at all times. The failure to maintain compliance with
FDA standards could result in the loss of "approved status" at Pharmaceutical
Manufacturing Research Services and Morton Grove. Any such loss would have a
significant negative impact on us since we do not have an approved secondary
manufacturer for Visicol(R) or IB-Stat(R). We are currently working with an
appropriate secondary manufacturer of Visicol(R), which has not yet been
approved by the FDA.

         We have contracted with PCI Services to package Visicol(R) in a manner
that meets FDA requirements. The FDA has approved this facility for the
packaging of Visicol(R). In the event that PCI were unable to package Visicol(R)
for us, the FDA has also approved Fisher Clinical Services, Inc. for packaging
of Visicol(R). IB-Stat(R) is packaged at Morton Grove(R), which has been
approved by the FDA.

If the owners of technology licensed to us terminate our license agreements,
then these owners could prevent us from developing, manufacturing or selling the
product covered by such license.

         We have acquired the worldwide exclusive right to market Visicol(R),
Colirest(TM) and Hematrol(TM) under various license agreements. Each of the
owners of the technology licensed to us may terminate the license prior to its
expiration date under certain circumstances, including our failure to comply
with commitments related to the development of the products specified in the
licenses. For example, some of our licensing agreements require us to spend
specific amounts for research and development of our products. If we do not
comply with the terms of these agreements, the owners of the licensed technology
could demand the return of all rights to the licensed technology, and force us
to cease developing, manufacturing or selling the products covered by that
license.

If we cannot develop and market our products as rapidly or cost-effectively as
our competitors, then we will not be able to conduct our operations at a profit.

         We have products and product candidates that compete in four very
competitive segments of the pharmaceutical industry. These include: (i)
purgative agents for cleansing the colon, which include Visicol(R); (ii)
antispasmodics, which include IB-Stat(R); and receptor based technologies which
includes product candidates (iii) Colirest(TM) and (iv) Hematrol(TM). We are
likely to encounter significant competition with respect to Visicol(R),
IB-Stat(R) and our product candidates currently under development, including,
but not limited to, competition from: (a) Braintree Laboratories, Inc., Schwarz
Pharma Inc. and C.B. Fleet Company, Inc. with respect to Visicol(R); (b) Schwarz
Pharma Inc. with respect to IB-Stat(R); (c) AstraZeneca plc, Salix
Pharmaceuticals, IDEC Pharmaceuticals Corporation, Procter & Gamble
Pharmaceuticals, Solvay S.A., Centocor, Inc. (Johnson & Johnson) and Shire
Pharmaceuticals Group plc with respect to Colirest(TM); and (d) Immune Response
Corporation, Autoimmune, Inc. and Nabi Biopharmaceuticals with respect to
Hematrol(TM).

         The financial strength of competitors is particularly important in the
pharmaceutical industry, where technological innovations occur rapidly. These
technological innovations can dramatically affect the price and effectiveness of
a product line and can render a competing product line obsolete. Our competitors
that have strong financial resources may develop competitive products that are
cheaper and more effective than our products. These competitive products may
render our products unmarketable or non-competitive. Even if our competitors do
not develop better and more cost effective products, they may manufacture and
market their products more successfully than us. Therefore, our competitors may
capture all or a large segment of our market, severely restricting our ability
to achieve a profitable level of product sales.

                                       15
<PAGE>

If we are unable to protect our intellectual property, then our competitors may
develop similar products that could render our products obsolete.

         Our success depends, in part, on our ability to develop and maintain a
strong patent position for our products and technologies both in the United
States and other countries. As with most biotechnology and pharmaceutical
companies, our patent position is highly uncertain and involves complex legal
and factual questions. Without patent and other protections, other companies
could offer substantially identical products for sale without incurring the
sizeable development and testing costs that we have incurred. Our ability to
recoup these expenditures and realize profits upon sale of product could be
diminished.

Visicol(R), IB-Stat(R) and our product candidates are in various stages of
patent protection as summarized below.

         In 1997, the U.S. Patent and Trademark Office issued a patent covering
the use of Visicol(R) as a colonic cleansing agent or as a laxative, and in
December 2000, the U.S. Patent and Trademark Office issued to us a patent for
numerous solid-dose colonic cleansing agents. Similar patents have been issued
in Canada and in Europe.

         IB-Stat(R)is not patentable.

         In April 2003, the U.S. Patent and Trademark Office granted a Notice of
Allowance for the patent covering the treatment IBD with Colirest(TM) and other
similar compounds.

         Hematrol(TM) is not patentable for use in ITP. Instead of a patent, we
will receive protection based on the FDA designation of Orphan Drug Status for
ITP. Orphan Drug Status means the FDA has determined that the number of people
affected by the disease which the drug treats is less than 200,000, and that
having numerous companies compete for the market is unrealistic and likely to
harm, rather than help, prospective users of the product. Since we have received
this designation, we will have an exclusive right to sell Hematrol(TM) for ITP
for seven years after FDA approval if Hematrol(TM) is the first
medroxyprogesterone acetate product to be approved for this indication.

         We have also obtained the rights to foreign patents, and intend to
apply for additional foreign patents. Competitors could challenge or develop
around the patents, or the scope of the patents may not be adequate to protect
the patented product from competitors. The commercial success of our products
will also depend upon our ability to make sure the products do not infringe on
patents issued to competitors. We have not conducted a search to determine if
there are any patents similar to those covering Visicol(R) and Colirest(TM).

         Our employees or scientific consultants may develop inventions or
processes independently that may be related to our products. These employees or
consultants could claim ownership of these inventions or processes, and these
claims could succeed. We may need to enter into protracted and costly litigation
to enforce or determine the scope of our proprietary rights.

         Government agencies and academic institutions have funded the
development of some of our patented technologies. Although we have acquired the
rights to use such technology, these agencies or institutions may have rights to
the technology or inventions, including rights to the royalty-free use, but not
sale, of the invention or technology for their own purposes.

Risks Relating To Financing Our Business

We may need additional capital in the future in order to continue our
operations.

         We may need additional capital to further develop, manufacture and
market Visicol(R), IB-Stat(R) and our product candidates if the future revenues
from our marketed products fall short of current assumptions. Specifically, we
will spend funds for the following:

     o   conducting additional studies of Visicol(R)to increase the utilization
         of the product into other therapeutic areas;

                                       16
<PAGE>

     o   acquiring additional products and product candidates for our portfolio;
     o   researching and developing our product candidates, including
         participating in human clinical trials;
     o   seeking necessary approvals from the government;
     o   developing manufacturing capabilities; and
     o   funding our growth as a company.

         We believe that our current capital resources will continue to fund our
operations for at least the next 12 months, and if we meet our sales objectives,
we will not require additional capital to fund our operations. The success of
Visicol(R) and IB-Stat(R) directly impacts our need for additional capital. Our
future capital requirements will depend on a variety of factors. For example, if
we experience continued progress in our research and development activities, or
if we determine that it is necessary to prosecute and enforce our patents, we
may require additional capital. In addition, our current and future marketing
activities will affect our future capital requirements. If we inaccurately
predict our future capital requirements, we may be unable to continue our
operations.

         We regularly seek funding for our operations from a variety of sources,
including public and private securities offerings, loans and joint arrangements
with partners. We currently do not possess a commitment to obtain additional
funding, and we may never receive additional funding in the future. If we need
additional capital and we fail to obtain additional funding, we will delay,
scale back or eliminate our research and development activities or enter into
arrangements with others to develop and market certain product candidates that
we may otherwise have developed ourselves.

Risks Relating to Regulatory Matters

If we do not maintain required approvals from the government, then we may not
successfully manufacture, market or sell our marketed products.

FDA manufacturing approval:

         The FDA requires pharmaceutical companies to include detailed
manufacturing information in a new drug application. The FDA has mandated that
all manufacturing facilities and processes comply with good manufacturing
practices, commonly known as GMP. GMP is a body of federal regulations and
guidelines that govern the manufacture of drugs for human use. For example, all
manufacturers must pass manufacturing plant inspections and provide records of
detailed manufacturing processes. Among other things, drug manufacturers must
demonstrate that:

     o   the drug product can be consistently manufactured at the same quality
         standard;
     o   the drug product is stable over time; and
     o   the level of chemical impurities in the drug product is under a
         designated level.

         The FDA has inspected the manufacturing facilities for Visicol(R) and
IB-Stat(R). The FDA may still, however, prevent us from continuing to market
Visicol(R) or IB-Stat(R) if we:

     o   do not continue to consistently manufacture appropriate amounts of
         Visicol(R) and IB-Stat(R) or
     o   cannot continue to repeat the manufacturing process used to manufacture
         the validation batches of Visicol(R).

         We currently have only one approved manufacturer of Visicol(R) and one
manufacturer for IB-Stat(R). We have, however, initiated the process to obtain a
qualified secondary manufacturer of Visicol(R).

FDA oversight after product approval:

         After the FDA approves a product, the FDA continues to regulate the
product. In particular, the FDA may require post-marketing testing and
surveillance to monitor the effects of our marketed products or may require drug
label changes, which could hinder the marketability of our marketed products. In
addition, the FDA may place conditions on our marketed products that could
restrict the sale or use of our products.


                                       17
<PAGE>

The FDA could prevent us from marketing IB-Stat(R)

         IB-Stat(R) is the combination of an FDA approved generic drug
(hyoscyamine sulfate) and an FDA approved delivery system. Hyoscyamine sulfate
was a marketed product prior to 1962. The FDA allows products that were marketed
prior to 1962 to continue to be marketed without an approved NDA. There is no
guarantee that the FDA will continue to allow hyoscyamine sulfate or many other
pre-1962 marketed products to continue to be marketed. In addition, the FDA
could determine that hyoscyamine sulfate is unsafe or that additional data needs
to be submitted to the FDA in order to determine the drug's safety and efficacy.
The FDA could also determine that IB-Stat(R) is not similar enough to the
pre-1962 marketed hyoscyamine sulfate, and as a result cannot be marketed
without an FDA approved NDA.

If we do not obtain required approvals from the government, then we may not
successfully market or sell our product candidates.

         The FDA requires multiple stages of tests, known as Phase I, II and III
clinical trials, on all pharmaceutical products. In addition, the FDA must
confirm that drug manufacturers comply with applicable federal regulations. The
process to obtain government approvals of a pharmaceutical product takes many
years and requires substantial resources.

         The FDA may delay or halt the clinical development of our product
candidates at any stage, or may deny us approval to market a product. If the FDA
takes any of these adverse actions, we may delay or stop the development of a
product or may be unable to sell such product. We do not believe we are subject
to risks that are materially different than other pharmaceutical companies
seeking FDA approval. The process of obtaining FDA approval is expensive,
time-consuming and often filled with unexpected hurdles. Even if we receive
approval of a product candidate, the FDA may limit and restrict the drug's use
and may subject our products to continuous review. If we fail to comply with any
applicable regulatory requirement, the FDA could impose penalties on us,
including:

     o   warning letters;
     o   fines;
     o   withdrawal of regulatory approval;
     o   product recalls;
     o   operating restrictions; injunctions; and/or
     o   criminal prosecution.

         Our product candidates are in various stages of development and in
various stages of the FDA approval process, as set forth below:

     o   Colirest(TM). We are developing Colirest(TM) as a compound for the
         treatment of inflammatory bowel disease, commonly known as IBD. IBD is
         an autoimmune disease that causes inflammation and ulceration of the
         bowel. IBD includes both Crohn's disease and ulcerative colitis. In
         September 2000, we announced positive results of our Phase II study on
         Crohn's disease and in December 2000, we announced positive results of
         our Phase II study in ulcerative colitis. We have reached an agreement
         with the FDA for the advancement of Colirest(TM) to a Pivotal Phase IIb
         dose ranging study for Crohn's disease. We are currently enrolling
         patients in this study.

     o   Hematrol(TM). We are developing Hematrol(TM) as a compound for the
         treatment of ITP. ITP is an autoimmune disease that causes spontaneous
         bleeding. Hematrol(TM) is currently on hold in Phase III clinical
         trials for ITP.

     We may never receive FDA approval for any of these products and without FDA
approval, we cannot market or sell these products.

                                       18
<PAGE>
Risks Related To Our Common Stock Outstanding

If the holders of our outstanding options and warrants exercise such options and
warrants and subsequently sell the common stock issued through such exercise,
then the market price of the common stock may drop.

         At June 30, 2003, we had approximately 11,082,000 options and warrants
outstanding. Options and warrants give the holder the right to purchase shares
of a company's stock in the future for a predetermined price which may or may
not be below the current market value of such company's stock at the time the
option or warrant is exercised. In addition, as of June 30, 2003 we had an
additional 977,000 options available for issuance pursuant to our option
plans. To date, option and warrant holders have exercised approximately
7,383,000 options and warrants in the aggregate at prices ranging from $.50 to
$5.56. The exercise of these outstanding warrants and options and the sale of
the related shares may cause our common stock price to drop.

If our common stock continues to be volatile and thinly traded, then our
shareholders may not be able to sell their shares when desired.

         The market price of our common stock, similar to other public
pharmaceutical or biotechnology companies, has been volatile and may remain
volatile for the foreseeable future. Our shareholders may not sell their shares
when they desire because the stock price is highly volatile and the stock is not
widely traded. For example, the number of our shares theoretically available for
sale in any one day is approximately 46,215,000 shares and our average daily
trading volume for the twelve-month period ended June 30, 2003 has been
approximately 148,000 shares. If our stock continues to trade thinly, our
shareholders may not be able to sell their shares when desired.

Item 3.  Quantitative and Qualitative Disclosures About Market Risks

         We are exposed to market risk associated with changes in interest rates
on our line of credit and certain investments. We do not manage the risk of
fluctuations in interest rates associated with the line of credit, as it is a
short-term borrowing with a maturity date in 2004. The interest rate on our line
of credit has fluctuated from 3.20% to 3.42% over the past three-months and the
outstanding balance at June 30, 2003 was $4,427,000.

         Typically, a substantial portion of our assets are investment grade
debt instruments such as direct obligations of the U.S. Treasury, securities of
federal agencies which carry the direct or implied guarantee of the U.S.
government and bank certificates of deposit. The market value of such
investments fluctuates with current market interest rates. In general, as rates
increase, the market value of a debt instrument would be expected to decrease.
The opposite is also true. To minimize such market risk, we have in the past
and, to the extent possible, will continue in the future to hold such debt
instruments to maturity at which time the debt instrument will be redeemed at
its stated or face value. Due to the short duration and nature of these
instruments, we do not believe that we have a material exposure to interest rate
risk related to our investment portfolio.

         We do not anticipate any material changes in our primary market risk
exposures in 2003. We do not hold or issue any derivatives.

Item 4.  Controls and Procedures

         Evaluation of disclosure controls and procedures. We evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report (the
"Evaluation Date"). Our disclosure controls and procedures are designed to
ensure that information required to be disclosed by us in the reports that are
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Based on the evaluation,
our Chief Executive Officer and and Financial Officer have concluded that these
controls and procedures are effective as of the Evaluation Date.

         Changes in internal controls. There were no changes in our internal
control over financial reporting identified in connection with the evaluation of
such internal control over financial reporting that occurred during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

                                       19
<PAGE>

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings.

        Not applicable.

Item 2. Changes in Securities and Use of Proceeds.

        Not applicable.

Item 3. Defaults Upon Senior Securities.

        Not applicable.

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

        The Company's annual meeting of shareholders was held on June 2, 2003.
At this meeting, shareholders of the Company:

        (i) Approved the election of six (6) directors.

        The number of votes cast for, and withheld from, each nominee is set
forth below.

                                               For            Withheld
                                               ---            --------
         Leonard S. Jacob, M.D., Ph.D.      32,905,519         527,937
         J.R. LeShufy                       32,874,437         559,019
         Steven B. Ratoff                   32,975,440         458,016
         Norman D. Schellenger              33,187,014         246,442
         Thomas P. Stagnaro                 33,179,801         253,655
         Robert A. Vukovich, Ph.D.          33,204,046         229,410


        (ii) Ratified the election of KPMG, LLP as independent auditors of the
Company for the year ending December 31, 2003.

                                 For             Against         Abstain
                                 ---             -------         -------
                             33,281,992          80,539          70,925

Item 5. Other Information.

        None.

Item 6. Exhibits and Reports on Form 8-K.

        (a)  Exhibits.

             31.1 Chief Executive Officer Certification pursuant to Rule
             13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
             adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

             31.2 Chief Financial Officer Certification pursuant to Rule
             13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
             adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

             32.1 Chief Executive Officer Certification pursuant to 18 U.S.C.
             Section 1350, as adopted pursuant to Section 906 of the
             Sarbanes-Oxley Act of 2002

                                       20
<PAGE>

             32.2 Chief Financial Officer Certification pursuant to 18 U.S.C.
             Section 1350, as adopted pursuant to Section 906 of the
             Sarbanes-Oxley Act of 2002

        (b)  Reports on Form 8-K.

                 The following current reports on Form 8-K were filed with the
             Securities and Exchange Commission via EDGAR:

             1. Form 8-K filed on July 15, 2003 with respect to the execution of
                a conversion agreement where previous noteholders of the Company
                agreed to convert all $13,000,000 of their then outstanding 10%
                Senior Secured Convertible Notes due June 2005. The earliest
                event covered by this report occurred on June 30, 2003.

             2. Form 8-K filed on May 5, 2003 with respect to the earnings
                release for the quarter ended March 31, 2003. The earliest event
                covered by this report occurred on April 29, 2003.



                                       21
<PAGE>


                                   Signatures


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





                                    INKINE PHARMACEUTICAL
                                    COMPANY, INC.


Date: August 14, 2003               By:  /s/ Leonard S. Jacob, M.D., Ph.D.
                                         ---------------------------------
                                    Leonard S. Jacob, M.D., Ph.D.
                                    Chairman of the Board and
                                    Chief Executive Officer



Date: August 14, 2003               By:  /s/ Robert F. Apple
                                         ---------------------------------
                                    Robert F. Apple
                                    Chief Operating and Financial Officer,
                                    (Authorized Officer
                                    and Principal Financial Officer)



                                       22
<PAGE>

                                 Exhibits Index

31.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002

31.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002

32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

                                       23