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U.S. SECURITIES AND
EXCHANGE COMMISSION


Washington, D.C. 
20549





FORM
10-Q





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





For the Quarterly
Period Ended March 31, 2005





Commission File No.
000-24972





INKINE PHARMACEUTICAL
COMPANY, INC.


(Exact name of
Registrant as specified in its charter)





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




1787 Sentry Parkway
WestBuilding 18, Suite 440Blue 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      No





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





At May 5,
2005, the registrant had outstanding 49,111,055 shares of common stock, par
value $.0001 per share.





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INKINE PHARMACEUTICAL
COMPANY, INC.





INDEX





|                                     |                                                                                                            |                                                                                                       | Page
|------------------------------------ | ---------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ----
|                                     |                                                                                                            |                                                                                                       |     
|PART
      I - FINANCIAL INFORMATION |                                                                                                           
|                                     |                                                                                                            |                                                                                                       |     
|                                     | Item
      1.  Financial Statements                                                                        |                                                                                                      
|                                     |                                                                                                            |                                                                                                       |     
|                                     |                                                                                                            | BALANCE
      SHEETS  as of March 31, 2005 (unaudited) and December 31, 2004                         | 3   
|                                     |                                                                                                            |                                                                                                       |     
|                                     |                                                                                                            | STATEMENTS
      OF OPERATIONS (unaudited)  for the Three-Months Ended March 31, 2005 and
      2004 | 4   
|                                     |                                                                                                            |                                                                                                       |     
|                                     |                                                                                                            | STATEMENTS
      OF CASH FLOWS (unaudited)  for the Three-Months Ended March 31, 2005 and
      2004 | 5   
|                                     |                                                                                                            |                                                                                                       |     
|                                     |                                                                                                            | NOTES
      TO FINANCIAL STATEMENTS (unaudited)                                                       | 6   
|                                     |                                                                                                            |                                                                                                       |     
|                                     | Item
      2.  Managements Discussion and Analysis of Financial Condition and
      Results of Operations | 8                                                                                                    
|                                     |                                                                                                            |                                                                                                       |     
|                                     | Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risks                           | 19                                                                                                   
|                                     |                                                                                                            |                                                                                                       |     
|                                     | Item
      4.  Controls and Procedures                                                                     | 20                                                                                                   
|                                     |                                                                                                            |                                                                                                       |     
|PART
      II - OTHER INFORMATION    | 20                                                                                                        
|                                     |                                                                                                            |                                                                                                       |     
|                                     | Item
      1.  Legal Proceedings                                                                           | 20                                                                                                   
|                                     |                                                                                                            |                                                                                                       |     
|                                     | Item
      6.  Exhibits                                                                                    | 21                                                                                                   
|                                     |                                                                                                            |                                                                                                       |     
|SIGNATURES                           | 22                                                                                                        
|                                     |                                                                                                            |                                                                                                       |     
|EXHIBITS
      INDEX                 | 23                                                                                                        
|                                     |                                                                                                           




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PART I -- FINANCIAL
INFORMATION





Item 1.  Financial
Statements





INKINE PHARMACEUTICAL
COMPANY, INC.





BALANCE
SHEETS





(in thousands, except
share and per share amounts)





|                                                                                                                                |  | March 31,
      2005 |         | December 31,
      2004 |  
|------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | ----------------------- | -
|                                                                                                                                |  |                      |         |                         |  
|                                                                                                                                |  | (unaudited)          |         |                         |  
|ASSETS                                                                                                                          |  |                      |         |                         |  
|Current assets:                                                                                                                 |  |                      |         |                         |  
|Cash and
      cash equivalents                                                                                                 |  | $                    | 6,369   |                         | $
|Short
      term investments                                                                                                    |  |                      | 4,193   |                         |  
|Accounts
      receivable                                                                                                       |  |                      | 4,196   |                         |  
|Inventory                                                                                                                       |  |                      | 1,905   |                         |  
|Prepaid
      expenses and other current assets                                                                                 |  |                      | 589     |                         |  
|                                                                                                                                |  |                      |         |                         |  
|Total
      current assets                                                                                                      |  |                      | 17,252  |                         |  
|                                                                                                                                |  |                      |         |                         |  
|Fixed assets                                                                                                                    |  |                      | 296     |                         |  
|Deposits                                                                                                                        |  |                      | 26      |                         |  
|                                                                                                                                |  |                      |         |                         |  
|Total
      assets                                                                                                              |  | $                    | 17,574  |                         | $
|                                                                                                                                |  |                      |         |                         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                            |  |                      |         |                         |  
|Current liabilities:                                                                                                            |  |                      |         |                         |  
|Accounts
      payable                                                                                                          |  | $                    | 1,274   |                         | $
|Accrued
      expenses                                                                                                          |  |                      | 1,502   |                         |  
|                                                                                                                                |  |                      |         |                         |  
|Total
      current liabilities                                                                                                 |  |                      | 2,776   |                         |  
|                                                                                                                                |  |                      |         |                         |  
|Shareholders equity:                                                                                                           |  |                      |         |                         |  
|Preferred stock, $0.0001 par value;
      authorized 5,000,000 shares; none issued and outstanding                              |  |                      |        |                         |  
|Common stock, $0.0001 par value; authorized
      75,000,000shares; issued 49,124,882 and 49,098,882 shares,
      respectively |  |                      | 5       |                         |  
|Less
      common stock held in treasury (16,515 shares)                                                                        |  |                      | (37     | )                       |  
|Additional paid-in capital                                                                                                      |  |                      | 83,956  |                         |  
|Deferred
      compensation                                                                                                     |  |                      | (615    | )                       |  
|Unrealized loss on investments                                                                                                  |  |                      | (5      | )                       |  
|Accumulated deficit                                                                                                             |  |                      | (68,506 | )                       |  
|                                                                                                                                |  |                      |         |                         |  
|Total
      shareholders equity                                                                                                |  |                      | 14,798  |                         |  
|                                                                                                                                |  |                      |         |                         |  
|Total
      liabilities and shareholders equity                                                                                |  | $                    | 17,574  |                         | $
|                                                                                                                                |  |                      |         |                         |  




See accompanying notes to
unaudited financial statements.





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INKINE PHARMACEUTICAL
COMPANY, INC.





STATEMENTS OF
OPERATIONS


(unaudited)





(in thousands, except per
share amounts)





|                                               |  | Three-Months
      Ended March 31, |       
|---------------------------------------------- |  | ---------------------------------- | ------
|                                               |  |                                    |       
|                                               |  | 2005                               |       
|                                               |  |                                    |       
|Product revenue                                |  | $                                  | 5,218 
|Other revenue                                  |  |                                    | 818   
|                                               |  |                                    |       
|Revenue                                        |  |                                    | 6,036 
|                                               |  |                                    |       
|Cost of goods sold                             |  |                                    | (848  
|                                               |  |                                    |       
|Gross
      profit                             |  |                                    | 5,188 
|                                               |  |                                    |       
|Cost and expenses:                             |  |                                    |       
|Research
      and development                 |  |                                    | 1,769 
|Sales and
      marketing                      |  |                                    | 2,288 
|General
      and administrative               |  |                                    | 877   
|Withdrawn
      public offering and litigation |  |                                    |      
|                                               |  |                                    |       
|Operating expenses                             |  |                                    | 4,934 
|                                               |  |                                    |       
|Income
      (loss) from operations            |  |                                    | 254   
|                                               |  |                                    |       
|Interest income                                |  |                                    | 60    
|Interest expense                               |  |                                    |      
|                                               |  |                                    |       
|Net
      income (loss)                        |  | $                                  | 314   
|                                               |  |                                    |       
|Earnings per share - Basic and diluted         |  | $                                  | 0.01  
|                                               |  |                                    |       
|Weighted average shares outstanding:           |  |                                    |       
|Basic                                          |  |                                    | 49,095
|Diluted                                        |  |                                    | 53,459




See accompanying notes to
unaudited financial statements.





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INKINE PHARMACEUTICAL
COMPANY, INC.





STATEMENTS OF CASH
FLOWS


(unaudited)





(in
thousands)





|                                                                                           |  | Three-Months
      Ended March 31, |       
|------------------------------------------------------------------------------------------ |  | ---------------------------------- | ------
|                                                                                           |  |                                    |       
|                                                                                           |  | 2005                               |       
|                                                                                           |  |                                    |       
|Operating activities:                                                                      |  |                                    |       
|Net
      income (loss)                                                                    |  | $                                  | 314   
|Adjustments to reconcile net income (loss) to net cash used in
      operating activities: |  |                                    |       
|Depreciation                                                                               |  |                                    | 31    
|Amortization of deferred compensation                                                      |  |                                    | 58    
|Changes
      in operating assets and liabilities:                                         |  |                                    |       
|(Increase) in accounts receivable                                                          |  |                                    | (1,932
|(Increase) in inventory                                                                    |  |                                    | (460  
|(Increase) decrease in prepaid expenses and other
      assets                             |  |                                    | (304  
|Increase
      (decrease) in accounts payable and accrued expenses                         |  |                                    | (240  
|                                                                                           |  |                                    |       
|Net cash used in operating
      activities                                                |  |                                    | (2,533
|                                                                                           |  |                                    |       
|Investing activities:                                                                      |  |                                    |       
|Purchase
      of short-term investments                                                   |  |                                    | (1,999
|Proceeds
      from maturities and sale of investments                                     |  |                                    | 3,000 
|Capital
      expenditures                                                                 |  |                                    | (16   
|                                                                                           |  |                                    |       
|Net cash provided by (used in) investing
      activities                                  |  |                                    | 985   
|                                                                                           |  |                                    |       
|Financing activities:                                                                      |  |                                    |       
|Proceeds
      from exercise of options and warrants - net of expenses                     |  |                                    | 58    
|Repayments, net of borrowings on line of credit                                            |  |                                    |      
|                                                                                           |  |                                    |       
|Net cash provided by financing
      activities                                            |  |                                    | 58    
|                                                                                           |  |                                    |       
|Net decrease in cash and cash
      equivalents                                            |  |                                    | (1,490
|                                                                                           |  |                                    |       
|Cash and cash equivalents - beginning of
      period                                      |  |                                    | 7,859 
|                                                                                           |  |                                    |       
|Cash and cash equivalents - end of
      period                                            |  | $                                  | 6,369 
|                                                                                           |  |                                    |       




See accompanying notes to
unaudited financial statements.





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INKINE PHARMACEUTICAL
COMPANY, INC.





NOTES TO FINANCIAL
STATEMENTS


(unaudited)





In this
Quarterly Report, InKine, we, us and our refer to InKine Pharmaceutical
Company, Inc. and Common Stock refers to InKines common stock, par value
$0.0001 per share.





1.   Organization and
Business Activities





We are a
specialty pharmaceutical company focused on acquiring, developing and
commercializing pharmaceutical products for use to diagnose and treat
gastrointestinal disorders.  Our development strategy has been to acquire
late-stage drug candidates with short expected time lines to commercialization.
We currently market and sell two pharmaceutical products, Visicol® and IB-Stat®.
We are also studying Visicol® for the treatment of constipation.  In
addition to our marketed products, we are studying INKP-102 as a new generation
purgative product.





2.   Basis of
Presentation





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





Certain
information and footnote disclosures normally included in our audited annual
financial statements have been condensed or omitted in our interim financial
statements.  We believe that 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, 2004, which are contained in our most recent
Annual Report on Form 10-K.





3.   Use of
Estimates





The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires us 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.





4.   Allowance for
Sales Returns





We maintain
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 March 31, 2005, we had a
sales returns allowance of $81,000 that was included in accrued expenses on the
balance sheet.  The following is an analysis of the sales returns allowance
for the three-month period ended March 31, 2005:





|Allowance at December 31,
    2004          |  | $ | 66,000   |  
|------------------------------------------- |  | - | -------- | -
|Provision for estimated sales
      returns |  |   | 124,000  |  
|Actual sales returns                        |  |   | (109,000 | )
|                                            |  |   |          |  
|Allowance at March 31, 2005                 |  | $ | 81,000   |  
|                                            |  |   |          |  




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5.   Deferred
Revenue





For IB-Stat®,
we recognize 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, we have recorded deferred
revenue of $102,000 that was included in accrued expenses on the balance sheet
as of March 31, 2005.





6.   Line of
Credit





We have a
$5,000,000 line of credit with a financial institution.  Under the terms of
this arrangement, we make monthly interest-only payments at a variable per annum
rate of 2.20%, plus the 30-day Dealer Commercial Paper Rate, with principal due
on January 31, 2006.  As collateral, we maintain cash and investments of
$3,000,000 with the balance of the amount outstanding on the line of credit not
to exceed 80% of our less than 90-day accounts receivable balance.  There
was no outstanding balance on this line of credit at March 31,
2005.





7.   Withdrawn Public
Offering and Preemptive Rights Class Action Litigation





On March 15,
2004, we withdrew a public offering of six million shares of our common
stock.  The decision to withdraw the offering was made when it came to our
attention that our certificate of incorporation did not contain any provision
exempting us from providing preemptive rights in connection with certain
securities offerings.  On March 19, 2004, a purported class action lawsuit,
naming us as the defendant, was filed in the Court of Common Pleas, Philadelphia
County, on behalf of a putative class of holders of InKine equity shares who
allege that they were denied certain claimed preemptive rights during the last
six years.  As of March 31, 2005, we have incurred $341,000 in expenses
related to the withdrawn offering and $590,000 in legal costs related to
preemptive rights and the related lawsuit. To date, we have received a $500,000
payment from a third-party as reimbursement for a portion of these costs. 
On October 12, 2004, we entered into an agreement with an undisclosed
third-party who will fund our settlement of damages and costs incurred in
connection with the class action lawsuit.  We have also entered into, and
filed with the Court of Common Pleas, Philadelphia County, a settlement
agreement with the class of InKine shareholders.  We do not anticipate that
we or our insurance carriers will bear any costs in connection with the
settlement arrangement.  Our settlement and the agreement with the
undisclosed third-party is subject to a number of conditions, including final
court approval.  At this time, there can be no assurance that those
conditions will be met and that the settlement will receive final court
approval.  Accordingly, we have recognized a $200,000 charge for the year
ended December 31, 2004 for unreimbursed legal costs incurred up to our
insurance deductible.





8.   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 on the
grant date exceeds the exercise price per share.  We generally grant our
stock options with exercise prices equal to fair market value on the grant date.





We have
elected to adopt the disclosure only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure (SFAS No.
148).  The following table illustrates the effect on our net income (loss)
and basic and diluted income (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:





|                                                      |  | Three-Months
      Ended |     
|----------------------------------------------------- |  | ------------------------ | ----
|                                                      |  |                          |     
|                                                      |  | March 31,
      2005     |     
|                                                      |  |                          |     
|Net income (loss)  as
    reported                   |  | $                        | 314 
|Deduct: Total stock-based employee
      compensation |  |                          | (393
|                                                      |  |                          |     
|Net loss  pro forma                                  |  | $                        | (79 
|                                                      |  |                          |     
|Earnings (loss) per share:                            |  |                          |     
|Basic and diluted  as
    reported                   |  | $                        | 0.01
|                                                      |  |                          |     
|Basic and diluted  pro
forma                         |  | $                        | 0.00
|                                                      |  |                          |     




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





You should
read the following discussion in conjunction with Certain Risks Related to Our
Business and our unaudited condensed financial statements included elsewhere in
this report. Some of the statements in the following discussion are
forward-looking statements. See Special Note Regarding Forward-Looking
Statements.





Special Note Regarding
Forward-Looking Statements





This report
contains forward-looking statements within the meaning of Section 27A of
the Securities Act, Section 21E of the Securities Exchange Act of 1934, as
amended and the Private Securities Litigation Reform Act of 1995 that are
subject to risks and uncertainties. You should not place undue reliance on those
statements because they are subject to numerous uncertainties and factors
relating to our operations and business environment, all of which are difficult
to predict and many of which are beyond our control. Forward-looking statements
included in this report relate to our beliefs regarding litigation exposure, our
settlement and our agreement with the undisclosed third-party, our ability to
market INKP-102 in the United States, our strategy with respect to in-licensing
or acquiring additional pharmaceutical products or businesses, the timing and
types of clinical trials we will need to conduct for our products and product
candidates, our reimbursement strategy, our expectation for gross profits for
Visicol for 2005, the adequacy of our financial resources, our capital
expenditures for 2005, our product development expenses, our investment
portfolio, market risk exposure and other statements regarding matters that are
not historical facts.  These statements often include words such as may,
believe, expect, anticipate, intend, plan, estimate or similar
expressions. These statements are based on assumptions that we have made in
light of our industry experience as well as our perceptions of historical
trends, current conditions, expected future developments and other factors we
believe are appropriate under the circumstances. As you read and consider this
report, you should understand that these statements are not guarantees of
performance or results. They involve risks, uncertainties and assumptions.
Although we believe that these forward-looking statements are based on
reasonable assumptions, you should be aware that many factors could affect our
actual financial results or results of operations and could cause actual results
to differ materially from those in the forward-looking statements. These factors
include but are not limited to:





| |  | our limited history of
      profitability;                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                
| |  | our dependence on
      Visicol;                                                                                                               
| |   |                                                                                                                                                
| |  | our ability to manage rapid
      growth;                                                                                                      
| |   |                                                                                                                                                
| |  | the high cost and uncertainties
      relating to clinical trials;                                                                             
| |   |                                                                                                                                                
| |  | market conditions and
      technological innovation;                                                                                          
| |   |                                                                                                                                                
| |  | the unpredictability of the
      duration and results of clinical trials and regulatory review;                                               
| |   |                                                                                                                                                
| |  | other risks and uncertainties
      discussed under the caption Certain Risks Related to Our Business and
      elsewhere in this report; and
| |   |                                                                                                                                                
| |  | other risks and uncertainties as
      may be detailed from time to time in our public announcements and SEC
      filings.                    




You should
keep in mind that any forward-looking statement made by us in this report speaks
only as of the date of this report.  We have no duty to, and do not intend
to, update or revise the forward-looking statements in this report after the
date of this report.





General





We are a
specialty pharmaceutical company focused on acquiring, developing and
commercializing pharmaceutical products for use to diagnose and treat
gastrointestinal disorders.  Our development strategy has been to acquire
late-stage drug candidates with short expected time lines to commercialization.
We currently market and sell two pharmaceutical products, Visicol® and IB-Stat®.
We are also studying Visicol® for the treatment of constipation.  In addition to our
marketed products, we are studying INKP-102 as a new generation purgative
product.





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The following
table outlines our current product pipeline, on which we have focused the
majority of our research, development, marketing and sales efforts since
inception. The table also sets forth the current development status of our
products and product candidates in each targeted therapeutic
indication:





|Product                                   |  | Therapeutic
      Indications |                                                                        | Development
      Status
|----------------------------------------- |  | ----------------------------- | ---------------------------------------------------------------------- | ------------------------
|                                          |  |                               |                                                                        |                         
|Visicol                                   |  |                              | Colon cleansing prior to
      colonoscopy                             |                         
|                                          |  |                              | Constipation                                                           |                         
|                                          |  |                               |                                                                        |                         
|                                          |  |                               |                                                                        |                         
|INKP-102(next generation
      purgative) |  |                              | Colon cleansing prior to
      colonoscopy                             |                         
|                                          |  |                               |                                                                        |                         
|IB-Stat                                   |  |                              | Symptoms associated with
      Irritable Bowel Syndrome (IBS)          |                         
|                                          |  |                              | Reduction of bowel motility
      during certain diagnostic procedures |                         




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:





| |  | Revenue recognition. 
      Revenue from sales of Visicol is recognized when, pursuant to Staff
      Accounting Bulletin No. 104, Revenue Recognition, all four of the
      following criteria are met: (i) we have persuasive evidence that an
      arrangement exists, (ii) the price is fixed and determinable, (iii) title
      has passed and (iv) collection is reasonably assured. Product demand from
      our customers during a given period may not correlate with prescription
      demand for the product in that period. As a result, we periodically
      evaluate inventory positions in the distribution channel. If we believe
      these levels are too high based on prescription demand, we may not accept
      purchase orders from or may not ship additional product to our customers
      until these levels are reduced. Provisions for sales discounts, and
      estimates for chargebacks, rebates and product returns are established as
      a reduction of product sales revenues at the time such revenues are
      recognized. We establish these revenue reductions as our best estimate at
      the time of sale based on historical experience, adjusted to reflect known
      changes in the factors that impact such reserves. For IB-Stat, we
      recognize revenue based on prescription data, net of estimated cash
      discounts. This practice will continue until such time data becomes
      available that indicates that the product has achieved adequate market
      acceptance and future product returns can be reasonably estimated. Revenue
      from service obligations is recognized when the services have been
      performed.  Additionally, in accordance with SAB No. 104,
      non-refundable, up-front payments where the Company has continuing
      involvement, are deferred and recognized over the estimated performance
      period.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | 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.
      148, Accounting for Stock-Based Compensation  Transition and
      Disclosure. Had we applied SFAS No. 148, our net income for the
      three-month period ended March 31, 2005, would have been a net loss. 
      Our net loss for the three-month period ended March 31, 2004 would have
      been greater.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             




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| |  | Product returns.  It
      is our policy to estimate and record an allowance for future product
      returns in connection with our sales of Visicol. 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. The product return rate is periodically
      updated to reflect actual experience and changes to other factors
      affecting future product returns.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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| |  | Deferred taxes.  In
      assessing the realizability of deferred tax assets, we consider 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. We
      consider 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. The Tax
      Reform Act of 1986 contains provisions that may limit the net operating
      loss (NOL) and research and experimentation credit carryforwards available
      to be used in any given year upon the occurrence of certain events,
      including significant changes in ownership interest. Generally, a change
      in ownership of a company of greater than 50% within a three-year period
      results in an annual limitation on that companys ability to utilize its
      NOL carryforwards and tax credits from the tax periods prior to the
      ownership change.  We have conducted a study and based on that study
      we believe that we have undergone an ownership change.  We believe
      that the annual limitation resulting from the ownership change will not
      limit on an overall basis our ability to utilize our NOL carryforwards in
      the future if we were to generate sufficient taxable income. Our NOL
      carryforwards and temporary differences represent a previously
      unrecognized tax benefit. Recognition of these benefits requires future
      income.  Because the attainment of future income is uncertain, we
      have established a valuation allowance for the entire amount of the net
      deferred tax asset.
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| |  | Contingencies. 
      During the year ended December 31, 2004, we have incurred costs and
      received reimbursement related to our withdrawn public offering and our
      ongoing litigation (See Note 7 of accompanying financial
      statements).  We recognize liabilities for loss contingencies in
      accordance with Statement on Financial Accounting Standards No. 5,
      Accounting for Contingencies.  This statement requires accrual by a
      charge to income (and disclosure) for an estimated loss from a loss
      contingency if two conditions are met: (a) information available prior to
      issuance of the financial statements indicates that it is probable that an
      asset had been impaired or a liability had been incurred at the date of
      the financial statements, and (b) the amount of loss can be reasonably
      estimated. Gain contingencies (third-party reimbursement) are recognized
      when realized in accordance with Accounting Research Bulletin No. 50,
      Contingencies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       




Results of
Operations





We generated
net income of $314,000 or $0.01 per share for the three-months ended March 31,
2005, compared to a net loss of $78,000 or $0.00 per share for the same period a
year ago.





Product
revenue was $5,218,000 for the three-month period ended March 31, 2005, compared
to $4,350,000 for the same period a year ago.   We estimate that
Visicol prescriptions grew by 27% from the same quarter a year ago. We believe
the increased prescription levels are driven by the increased market awareness
and acceptance of Visicol.  In addition to our product revenue, we realized
$818,000 in other revenue for the three-month period ended March 31, 2005, which
was mostly attributable to a milestone payment earned from Zeria Pharmaceutical
Company, net of royalty payable to ALW Partnership, the inventors of
Visicol.





Our gross
profit was $5,188,000 and $4,142,000 for the three-month periods ended March 31,
2005 and 2004, respectively.  Gross profit as a percentage of sales for
product revenue was 84% and 89% for the three-month periods ended March 31, 2005
and 2004, respectively.  The decrease in gross profit as a percentage of
product sales is the result of increased royalty expense recognized along with
distribution costs payable to wholesalers.  We expect that gross profit as
a percent of product revenue will be approximately 84% to 86% for the 2005
year.





We incurred
research and development expenses of $1,769,000 for the three-month period ended
March 31, 2005, compared to $922,000 for the same period a year ago.  The
increase was the result of higher development costs associated with the MCC-free new
generation purgative tablet, INKP-102, along with higher costs related to an
increased scale of development activity.





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Sales and
marketing costs of $2,288,000 were incurred for the three-month period ended
March 31, 2005, compared to $1,949,000 for the same period a year ago.  The
increases were a result of continued growth in the size of our sales force,
along with increased marketing campaigns related to Visicol.  As of March
31, 2005, our sales force covered 48 territories with five district managers,
compared to 45 territories and four district managers as of March 31,
2004.





General and
administrative expenses were $877,000 for the three-month period ended March 31,
2005, compared to $785,000 for the same period a year ago.  The increases
were the result of higher personnel, patent and insurance costs, along with an
increase in legal and accounting fees associated with compliance with the
Sarbanes-Oxley Act of 2002.





Interest
income was $60,000 and $10,000 for the three-month period ended March 31, 2005
and 2004, respectively.  The increase in interest income was a result of
increased average cash and short-term investment balances along with higher
interest rates compared to the same quarter a year ago.  Interest and other
expenses was minimal for the three-months ended March 31, 2005 and 2004 due to
the elimination of our outstanding convertible notes, along with the decreased
average line of credit borrowings.





Liquidity and Capital
Resources





At March 31, 2005, we had cash and cash equivalents of $6,369,000 and short-term
investments of $4,193,000.  Short-term investments are defined as
investments purchased with a maturity of more than three months, and which
mature less than twelve months from the balance sheet date.  At March 31,
2005, we had no balance outstanding on our line of credit.





We believe
that our financial resources are adequate for our operations for at least the
next 12 months.  However, from time to time we may seek additional capital
to fund the possible acquisition or the in-licensing of additional products; the
possible acquisition of businesses related to gastrointestinal pharmaceuticals;
the marketing and, if necessary, continued development of acquired products; the
development and commercialization of new indications for Visicol; research and
development related to enhancements of existing products; and general corporate
purposes, including working capital.





Our future
short and long-term capital requirements will depend on numerous factors,
including continued marketplace acceptance of our products. To achieve operating
profits, we, alone or with others, must successfully market and sell our
products. In addition to continued 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, continued progress in our research and development
activities, progress with pre-clinical studies and clinical trials, defending
shareholder claims related to alleged violations of preemptive rights,
prosecuting and enforcing patent claims, technological and market developments,
our ability to establish product development arrangements, the cost of
manufacturing development, effective marketing activities and arrangements, and
licensing or acquisition activity.





We are
currently developing INKP-102 for cleansing the colon prior to colonoscopy,
continuing to study the use of Visicol for constipation and continuing to market
and sell Visicol and IB-Stat to distributors and drug store chains. During 2005,
we expect to spend up to $3,400,000 on INKP-102 and $10,000,000 on Visicol 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. We may not be able
to obtain any additional financing 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 our research, drug discovery or development activities
or other aspects of our operations.  Our business could be materially and
adversely affected as a result.





Net
Cash Used in Operating Activities.  Our net use of cash from
operating activities for the three-month period ended March 31, 2005 resulted
primarily from our increased working capital.  Specifically, our accounts
receivable and inventory balances
increased compared to year-end as a result of the timing of customer payment of receivable balances and production of inventory for future sales to
customers.  Additionally, we incurred increased research and development
expenditures associated with our product candidates, including clinical
development and manufacturing costs for INKP-102, sales and marketing costs
related to Visicol, compensation of our employees and other administrative
costs.





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Net
Cash Provided by (Used in) Investing Activities.  Cash provided by
investing activities for the three-month period ended March 31, 2005 resulted
from the proceeds of the maturities of short-term investments, net of
purchases.  Cash used in investing activities related to the purchase of
computer equipment.





Net
Cash Provided By Financing Activities.  Cash provided by financing
activities for the three-month period ended March 31, 2005 related to net
proceeds from the exercise of stock options.  We have no immediate plans,
arrangements, commitments or understandings to raise capital and issue
stock.  From time to time however, we consider various methods to raise
capital in light of our expansion strategies, product opportunities and market
conditions.





Research and Development
Programs





We currently
have two significant research and development projects relating to Visicol and
INKP-102.





Visicol. 
We have focused our Visicol research and development on cleansing of the colon
prior to colonoscopy and are presently marketing Visicol for that
indication.  In addition, we have performed studies for Visicols use in
treating patients with constipation.  The current status of these projects
is as follows: (i) for cleansing of colon prior to colonoscopy, the FDA has
approved both our NDA as well as our SNDA for a reduced MCC formulation and (ii)
for treating constipation, we have completed a post marketing study and a Phase
IV study.  As of March 31, 2005 we have incurred total costs of
approximately $11,744,000 in connection with our Visicol research and
development.  During the quarter ended March 31, 2005, we did not incur
costs attributable to Visicol.





INKP-102. 
During 2003, we developed INKP-102, a next generation purgative for cleansing
the colon prior to colonoscopy.  Clinical batches of this new product have
been manufactured and formulated to yield smaller tablets that may be easier to
ingest. Additionally, the new product does not contain any MCC, which is a
common inert, but highly insoluble, substance. We have completed the Phase II
and Phase III studies.  We have submitted our NDA for FDA approval of this
new product using alternative dosing regimens that utilize fewer tablets. 
As of March 31, 2005, we have incurred total costs of approximately $4,514,000
in connection with our INKP-102 research and development.  During the
quarter ended March 31, 2005, we incurred an aggregate of $1,769,000 in research
and development expenses, approximately $1,322,000 of which was attributable to
INKP-102.





Indirect
Costs.  In addition to the direct costs related to the development
of our products and product candidates, 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 March 31, 2005, equaled approximately
$447,000.





Recently Issued Accounting
Pronouncements





In December
2004, the FASB issued SFAS No. 123R, Share-Based Payment, a revision to SFAS
No. 123, Accounting for Stock-Based Compensation. This statement supercedes
APB No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. This statement establishes standards for the accounting
for which an entity exchanges its equity instruments for goods or services. This
statement also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entitys
equity instruments or that may be settled by the issuance of those equity
instruments. This statement requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost shall be recognized over
the period during which an employee is required to provide service in exchange
for the award  the requisite service period (vesting period). The grant-date
fair value of employee share options will be estimated using option-pricing
models adjusted for the unique characteristics of those instruments. This
statement is effective as of the beginning of the first annual reporting period
that begins after June 15, 2005. We are currently evaluating various
implementation standards of  SFAS No. 123R, including adoption
methods and option pricing methodology. Based on the assumptions used in
determining disclosure in accordance with SFAS No. 148, our net income for the
three-months ended March 31, 2005 would have been a net loss of approximately
$79,000 and our net loss for the same period a year ago, would have been
approximately $560,000 had we adopted the provisions of SFAS No.
123R.





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Certain Risks Related to Our
Business





Risks related to our
operations





If we do not maintain our
profitability or if we incur losses in the future, then the value of our common
stock is likely to fall.





Our first
sale of Visicol occurred in January 2001 and our first sale of IB-Stat occurred
in June 2002. We have a significant accumulated deficit and have incurred losses
and negative cash flow from operations in each year from our inception on July
1, 1993 through December 31, 2003. We achieved profitability and positive cash
flow from operations for the first time for the year ended December 31, 2004 and
were profitable for the three-months ended March 31, 2005, however, Visicol,
INKP-102 and IB-Stat are in various stages of marketing or development and
require significant research, development and testing and we may not continue to
be profitable. Visicol provides substantially all of our revenues. Our continued
success and growth is primarily dependent on the performance of Visicol and
secondarily on our ability to acquire or develop new products. If we are
unsuccessful in achieving increased revenues through the sale of Visicol or
through the sale of newly acquired or developed products, we will not be able to
operate profitably in the future. Our common stock is likely to decrease in
value if we fail to maintain profits or if the market believes that we are
unable to maintain profits.





Our success and revenue currently
depend on Visicol and if we do not continue to successfully market Visicol, our
revenue might not grow, which could cause our stock price to
decline.





We market
sodium phosphate tablets in the United States under the brand name Visicol, and
if approved by the FDA, we intend to market INKP-102 in the United States. Our
prospects over the next three to five years are substantially dependent on the
successful commercialization of Visicol and INKP-102. We expect to engage in
expensive advertising, educational programs and other means to market our
current and future products. The degree of market acceptance of our products
among physicians, patients, healthcare payors and the medical community will
depend upon a number of factors including:





| |  | demonstration of their clinical
      efficacy and safety;          
| | - | --------------------------------------------------------------------
| |   |                                                                     
| |  | successful introduction for new
      indications;                  
| |   |                                                                     
| |  | their
      cost-effectiveness;                                     
| |   |                                                                     
| |  | their potential advantages over
      alternative treatment methods;
| |   |                                                                     
| |  | new product introductions by our
      competitors;                 
| |   |                                                                     
| |  | the marketing and distribution
      support they receive; and      
| |   |                                                                     
| |  | reimbursement policies of
      government and third-party payors.  




Virtually all
of our revenue to date has come from Visicol. Our ability to increase revenue in
the future will depend in part on our success in in-licensing or acquiring
additional pharmaceutical products. We currently intend to in-license or acquire
pharmaceutical products that have been developed beyond the initial discovery
phase and for which late-stage human clinical data is already available or that
have already received regulatory approval. These kinds of pharmaceutical
products might not be available to us on attractive terms or at all. To the
extent we acquire rights to additional products, we might incur significant
additional expense in connection with the development and, if approved by the
FDA, marketing of these products.





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Failure to manage our growth could
increase our expenses faster than our revenue.





We have
experienced significant growth in the number of our employees and the scope of
our operations.  Since the May 2002 re-launch of Visicol in the United
States, we have grown from 13 employees on May 31, 2002 to approximately 74 on
March 31, 2005. This growth has placed a significant strain on our management
and operations. Our continued growth might place further strains on our
management and operations. Our ability to manage growth effectively will depend
upon our ability to broaden our management team and our ability to attract, hire
and retain skilled employees. Our success will also depend on the ability of our
officers and key employees to continue to implement and improve our operational,
management information and financial control systems and to expand, train and
manage our employee base.





If we make any acquisitions, we will
incur a variety of costs and might never successfully integrate the acquired
product or business into ours.





We might
attempt to acquire products or businesses that we believe are a strategic
complement to our business model. We might encounter operating difficulties and
expenditures relating to integrating an acquired product or business. These
acquisitions might require significant management attention that would otherwise
be available for ongoing development of our business. In addition, we might
never realize the anticipated benefits of any acquisition. We might also make
dilutive issuances of equity securities, incur debt or experience a decrease in
cash available for our operations, or incur contingent liabilities and/or
amortization expenses relating to goodwill and other intangible assets, in
connection with future acquisitions.





If third-party payors do not provide
coverage or reimburse patients for our products, 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 part of the cost of covered pharmaceutical products. In
fact, the majority of prescription drugs prescribed to patients are ultimately
paid for at the retail level by these organizations and not by the patient.
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 plan to 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 provide rebates to
help offset the cost of covered medication. Visicol and IB-Stat are premium
priced compared to their competitors and we have not specifically contracted
with any third party to date to give rebates for their use. We do not know what
impact, if any at all, this will have on the coverage of Visicol or IB-Stat by
these third party payors, particularly if Visicol continues to gain market
share, thus increasing the cost to third party payors.





If we do not have adequate insurance
for product liability claims, then 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:





| |  | our products could cause
      undesirable side effects or injury;                                               
| | - | -----------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                  
| |  | our product candidate could cause
      undesirable side effects or injury during clinical trials;
    and       
| |   |                                                                                                                  
| |  | we may agree to reimburse others
      that incur liability relating to our products and product
      candidate.




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. Moreover, actual or
alleged undesirable side effects or injuries related to our products or product
candidate may interfere with the commercialization of our products and the
development of our product candidate.





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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,
INKP-102 or IB-Stat. We must contract with manufacturers to produce Visicol,
INKP-102 and IB-Stat according to government regulations. Our future development
and delivery of our marketed products and our product candidate 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 candidate. 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. Our manufacturers must obtain FDA approval for their
manufacturing processes, and we have no control over this approval
process.





We have
contracted with Mallinckrodt, Inc. to supply us with active pharmaceutical
ingredients for Visicol. A significant portion of the Visicol 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.





We have
contracted with Pharmaceutical Manufacturing Research Services, Inc. (PMRS), a
manufacturing development company, to supply commercial quantities of Visicol in
a manner that meets FDA requirements. Our contract with PMRS will expire at the
end of 2005. The FDA has approved the manufacturing processes of PMRS. Any
failure by PMRS to maintain compliance with FDA standards could result in its
loss of approved status and could significantly harm our business since we do
not have an approved secondary manufacturer for Visicol.





We have
contracted with Cardinal Health Packaging Services to package Visicol in a
manner that meets FDA requirements. The FDA has approved this facility for the
packaging of Visicol. In the event that Cardinal Health Packaging Services were
unable to package Visicol for us, the FDA has also approved Fisher Clinical
Services, Inc. for packaging of Visicol.  Any failure by our packagers to
maintain compliance with FDA standards could result in a supply interruption,
which could significantly harm our business





We are
currently working with Wellspring Pharmaceutical Corporation (Wellspring) to
manufacture and package INKP-102 in a manner that meets FDA requirements. The
FDA has not yet approved the manufacturing processes and facility for packaging
at Wellspring. If the FDA does not approve the manufacturing processes and
facility for packaging at Wellspring we will not be able to market and sell
INKP-102.





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





Our license
with the ALW Partnership, entered into February 1997, which covers Visicol and
INKP-102, may be terminated by the licensor if we fail to pay, commencing in
February 2003, minimum royalties of $100,000 per year whether or not any sales
have occurred.  In addition, our rights under the ALW License will no
longer be exclusive, and the minimum royalty payment will no longer be due
(although decreased actual royalty payments will be due) if there is no valid or
enforceable patent on Visicol, INKP-102 or any other product under the ALW
License.





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





We have
products that compete in two very competitive segments of the pharmaceutical
industry. Our products and product candidate include: (i) purgative and laxative
agents for cleansing the colon or relieving constipation, which includes Visicol
and, if approved, INKP-102; and (ii) antispasmodics, which include
IB-Stat.  We are likely to encounter significant competition with respect
to Visicol, INKP-102, if approved, and IB-Stat, including such competitors as:





| |  | Braintree Laboratories, Inc.,
      Schwarz Pharma Inc., C.B. Fleet Company, Inc. and Novartis Pharmaceuticals
      Corporation with respect to Visicol and INKP-102, and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                           
| |  | Schwarz Pharma Inc., Eli Lily and
      Company and Bedford Laboratories with respect to IB-Stat.                                                                         




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Most of these
entities have substantially greater financial, technical, manufacturing, sales,
marketing, distribution and other resources. 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 maintain a profitable
level of product sales.





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.





In 1997, the
U.S. Patent and Trademark Office issued a patent covering the use of Visicol for
inducing purgation of the colon. Patents claiming the use of Visicol to induce
purgation of the colon have been granted in Europe and Canada. In December 2000,
the U.S. Patent and Trademark Office issued to us a patent for numerous
solid-dose colonic purgative agents.  A similar patent has also been
granted in Canada.





In 2004, we
filed a U.S. patent application for a new generation of purgative products. The
invention covers several highly soluble colonic purgative formulations in solid
dosage forms that can be used to soften stool, promote laxation and/or induce
complete purgation. There is no assurance that this patent will
issue.





IB-Stat is
not patentable.





We have
pending foreign applications, 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.





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.





Claims by others that we infringe
their intellectual property could be costly to us.





Our patent or
other proprietary rights related to our products might conflict with the current
or future intellectual property rights of others. We have not conducted a search
to determine if there are any other patents that could cover Visicol and 
INKP-102. Litigation or patent interference proceedings, either of which could
result in substantial cost to us, might be necessary to defend any patents to
which we have rights and our other proprietary rights or to determine the scope
and validity of other parties proprietary rights. The defense of patent and
intellectual property claims is both costly and time-consuming, even if the
outcome is favorable to us. Any adverse outcome could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require us to cease selling our product. We might not be able to
obtain a license to any third-party technology that we require to conduct our
business, or, if obtainable, that technology might not be available at a
reasonable cost.





Our actual financial results might
vary from what we anticipate.





Our actual
financial results might vary from what we anticipate, and these variations could
be material. Our annual and quarterly reports contain various forecasts. These
forecasts reflect numerous assumptions concerning our anticipated future
performance and with respect to the prevailing market and economic conditions
that are beyond  our control and which might not turn
out to have been correct. Although  we believe that the assumptions underlying the projections are reasonable, actual results could be materially different. Our revenues and expenses are subject to numerous risks and uncertainties.
Financial results that are weaker than expectations may cause a significant and
sudden decline in our stock price.





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Risks related to regulatory
matters





Regulatory approval of our products
is time-consuming, expensive and uncertain, and could result in unexpectedly
high expenses and delay our ability to sell our products.





Development,
manufacture and marketing of our products are subject to extensive regulation by
governmental authorities in the United States and other countries. This
regulation could require us to incur significant unexpected expenses or delay or
limit our ability to sell our products. Our clinical studies of Visicol for
constipation, INKP-102 for colon cleansing prior to colonoscopy, or any other
product or product candidate might be delayed or halted for various reasons,
including:





| |  | the drug is not
      effective;                                            
| | - | ----------------------------------------------------------------------------
| |   |                                                                             
| |  | patients experience severe side
      effects during treatment;             
| |   |                                                                             
| |  | patients do not enroll in the
      studies at the rate we expect;          
| |   |                                                                             
| |  | drug supplies are not sufficient
      to treat the patients in the studies;
| |   |                                                                             
| |  | we decide to modify the drug
      during testing; or                       
| |   |                                                                             
| |  | we do not have adequate funds to
      continue the testing.                




If the FDA
approves new indications for Visicol, its approval will be limited to those
indications for which the product has been shown to be safe and effective, as
demonstrated to the FDAs satisfaction through clinical studies. Approval might
entail ongoing requirements for post-marketing studies. Even if we obtain
regulatory approval, labeling and promotional activities are subject to
continual scrutiny by the FDA, the Office of the Proprietor General and state
regulatory agencies and, in some circumstances, the Federal Trade Commission.
FDA enforcement policy prohibits the marketing of approved products for
unapproved, or off-label, uses. Marketing an approved product for a new use
requires a separate approval by the FDA. These regulations and the FDAs
interpretation of them might impair our ability to effectively market our
products.





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 an NDA. 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 detailed records of manufacturing processes. Among other
things, drug manufacturers must demonstrate that:





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




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





| |  | do not continue to consistently
      manufacture appropriate amounts of Visicol and IB-Stat;
  or                    
| | - | ----------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                       
| |  | cannot continue to repeat the
      manufacturing process used to manufacture the validation batches of
      Visicol.




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Since we
currently have only one approved manufacturer of Visicol and one manufacturer
for IB-Stat, if we are unable to manufacture our products at those manufacturers
our financial results could be negatively impacted.





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.





Both Visicol
and IB-Stat are products used in highly competitive diagnostic and disease
indications where substitution of competitive products is common.  Although
both products have a good safety profile and history, any negative change in our
safety labeling could adversely affect the sale of our products.





The FDA could prevent us from
marketing IB-Stat.





IB-Stat is
the combination of a marketed drug (hyoscyamine sulfate) and a widely used
delivery system. Hyoscyamine sulfate was a marketed product prior to 1962.
Although we have not obtained FDA approval for IB-Stat, the FDA allows certain
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 any 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 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 most pharmaceutical products. In addition, the FDA must confirm that drug
manufacturers comply with applicable federal regulations. The process to obtain
government approval 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 the product.   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:





| |  | warning
  letters;                             
| | - | -----------------------------------------------
| |   |                                                
| |  | fines;                                         
| |   |                                                
| |  | withdrawal of regulatory
      approval;       
| |   |                                                
| |  | product recalls and
      suspensions;         
| |   |                                                
| |  | operating restrictions;                        
| |   |                                                
| |  | injunctions;
    and/or                        
| |   |                                                
| |  | civil penalties and criminal
      prosecution.




Certain of
the foregoing penalties could have an immediate negative financial impact on our
business, significantly harm our reputation, have a material adverse effect on
our business operations and significantly reduce our future sales and
profits.





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We are
developing INKP-102 as a compound for colon cleansing prior to
colonoscopy.  We have completed our Phase II and Phase III studies and
applied for FDA approval in the second quarter of 2005. We may never receive FDA
approval for INKP-102 and without FDA approval, we cannot market or sell
INKP-102.





Risks related to our common stock
outstanding





If the holders of our outstanding
options and warrants exercise them and subsequently sell the common stock they
receive upon exercise, the market price of our common stock may
drop.





At March 31,
2005, we had approximately 8,944,000 options and warrants outstanding. Options
and warrants give the holder the right to purchase shares of our common stock in
the future for a predetermined price which may or may not be below the current
market value of our common stock at the time the option or warrant is exercised.
In addition, as of March 31, 2005, we had an additional 2,144,000 options
available for issuance to employees and consultants, pursuant to our option
plans. To date, option and warrant holders have exercised approximately
10,768,000 options and warrants in the aggregate at prices ranging from $0.50 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, 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 be able to sell their shares when
they desire because the stock price is highly volatile and the stock is not
widely traded. For example, as of March 31, 2005, the number of our shares
theoretically available for sale in any one day was approximately 49,108,000
shares and our average daily trading volume for the twelve-month period ended
March 31, 2005 was approximately 242,000 shares. If our stock continues to trade
thinly, our shareholders may not be able to sell their shares when
desired.





If our settlement agreement with the
class of InKine shareholders who have purportedly been denied preemptive rights
does not settle or reach final judgment for damages, or our agreement with a
third-party to fund the agreed upon settlement are insufficient to cover the
amount of any settlement payment or judgment for damages, then the market price
of our common stock may drop.





On March 15,
2004, we withdrew a public offering of six million shares of our common
stock.  The decision to withdraw the offering was made when it came to our
attention that our certificate of incorporation did not contain any provision
exempting us from providing preemptive rights in connection with certain
securities offerings.  On March 19, 2004, a purported class action lawsuit,
naming us as the defendant, was filed in the Court of Common Pleas, Philadelphia
County, on behalf of a putative class of holders of InKine equity shares who
allege that they were denied certain claimed preemptive rights during the last
six years.  As of March 31, 2005, we have incurred $341,000 in expenses
related to the withdrawn offering and $590,000 in legal costs related to
preemptive rights and the related lawsuit. To date, we have received a $500,000
payment from a third-party as reimbursement for a portion of these costs. 
On October 12, 2004, we entered into an agreement with an undisclosed
third-party who will fund our settlement of damages and costs incurred in
connection with the class action lawsuit.  We have also entered into, and
filed with the Court of Common Pleas, Philadelphia County, a settlement
agreement with the class of InKine shareholders.  We do not anticipate that
we or our insurance carriers will bear any costs in connection with the
settlement arrangement.  Our settlement and the agreement with the
undisclosed third-party is subject to a number of conditions, including final
court approval.  At this time, there can be no assurance that those
conditions will be met and that the settlement will receive final court
approval.  Accordingly, we have recognized a $200,000 charge for the year
ended December 31, 2004 for unreimbursed legal costs incurred up to our
insurance deductible.





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 2006. The interest rate on our line of credit
has fluctuated from 4.51% to 5.00% over the past three-months. There was no
outstanding balance on this line of credit at March 31, 2005.





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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 is 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 exposure in 2005. We
do not hold or issue any derivatives.





Item 4.  Controls and
Procedures





Evaluation
of disclosure controls and procedures.  Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report.  Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the period covered by this
report have been designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by us in 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. 
We believe that a controls system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the controls system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.





Changes
in internal controls.  No change in our internal control over
financial reporting occurred during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.





PART II -- OTHER
INFORMATION





Item 1.  Legal
Proceedings.





On March 15,
2004, we withdrew a public offering of six million shares of our common
stock.  The decision to withdraw the offering was made when it came to our
attention that our certificate of incorporation did not contain any provision
exempting us from providing preemptive rights in connection with certain
securities offerings.  On March 19, 2004, a purported class action lawsuit,
naming us as the defendant, was filed in the Court of Common Pleas, Philadelphia
County, on behalf of a putative class of holders of InKine equity shares who
allege that they were denied certain claimed preemptive rights during the last
six years.  As of March 31, 2005, we have incurred $341,000 in expenses
related to the withdrawn offering and $590,000 in legal costs related to
preemptive rights and the related lawsuit. To date, we have received a $500,000
payment from a third-party as reimbursement for a portion of these costs. 
On October 12, 2004, we entered into an agreement with an undisclosed
third-party who will fund our settlement of damages and costs incurred in
connection with the class action lawsuit.  We have also entered into, and
filed with the Court of Common Pleas, Philadelphia County, a settlement
agreement with the class of InKine shareholders.  We do not anticipate that
we or our insurance carriers will bear any costs in connection with the
settlement arrangement.  Our settlement and the agreement with the
undisclosed third-party is subject to a number of conditions, including final
court approval.  At this time, there can be no assurance that those
conditions will be met and that the settlement will receive final court
approval.  Accordingly, we have recognized a $200,000 charge for the year
ended December 31, 2004 for unreimbursed legal costs incurred up to our
insurance deductible.





Item 2.  Changes in
Securities and Use of Proceeds.





None.





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Item
6.  Exhibits.





| | (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                                                  
| |     |                                                                                                                                                                                                                   
| |     | 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                                                  
| |     |                                                                                                                                                                                                                   
|
| |     | * Filed
  herewith.                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                   




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Signatures





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





|                  | INKINE
    PHARMACEUTICAL
|----------------- | -------------------------
|                  | COMPANY, INC.            
|                  |                          
|                  |                          
|Date: May 5, 2005 | By:                      
|                  |                          
|                  |                          
|                  |                          
|                  |                          
|                  |                          
|                  |                          
|Date: May 5, 2005 | By:                      
|                  |                          
|                  |                          
|                  |                          
|                  |                          
|                  |                          




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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





---

* Filed herewith.





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