<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(MARK ONE)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002

                                       OR

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

                         COMMISSION FILE NUMBER 0-27854

                          BONE CARE INTERNATIONAL, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

               Wisconsin                              39-1527471
     (State or other jurisdiction of                 (IRS Employer
      incorporation or organization)               Identification No.)

            1600 Aspen Commons                           53562
           Middleton, Wisconsin                       (Zip Code)
 (Address of principal executive offices)

       Registrant's telephone number, including area code: (608) 662-7800

          Securities registered pursuant to Section 12(b) of the Act:

                                      None

          Securities registered pursuant to Section 12(g) of the Act:

                         Common Stock, without par value
                         Preferred Stock Purchase Rights
                                (Title of class)

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

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

         As of August 1, 2002, there were issued and outstanding 14,156,772
shares of Common Stock. The aggregate market value of the voting and non-voting
common equity held by nonaffiliates of the registrant was $84,657,497 as of
September 26, 2002, assuming solely for purposes of this calculation that all
directors and executive officers of the registrant are "affiliates." This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Bone Care International, Inc., Proxy Statement for its
2002 Shareholders Meeting to be held on November 15, 2002 (Part III).


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                          BONE CARE INTERNATIONAL, INC.

                                    INDEX TO
                           ANNUAL REPORT ON FORM 10-K
                        FOR THE YEAR ENDED JUNE 30, 2002

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PART I

Item 1       Business...................................................................................        4

Item 2       Properties.................................................................................       20

Item 3       Legal Proceedings..........................................................................       20

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

PART II

Item 5       Market for Registrant's Common Equity and Related Stockholder Matters......................       22

Item 6       Selected Financial Data....................................................................       23

Item 7       Management's Discussion and Analysis of Financial Condition and Results of Operations......       24

Item 7A      Quantitative and Qualitative Disclosures about Market Risk.................................       28

Item 8       Financial Statements and Supplementary Data................................................       29

Item 9       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......       45

PART III

Item 10      Directors and Executive Officers of the Registrant.........................................       45

Item 11      Executive Compensation.....................................................................       45

Item 12      Security Ownership of Certain Beneficial Owners and Management and Related
               Stockholder Matters......................................................................       45

Item 13      Certain Relationships and Related Transactions.............................................       45

PART IV

Item 14      Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................       45

Signatures. ............................................................................................       46

Sarbanes-Oxley Certifications...........................................................................       47

Index to Exhibits.......................................................................................       48
</TABLE>

         In this Annual Report on Form 10-K, "Bone Care," "we," "us" and "our"
refer to Bone Care International, Inc., unless the context suggests otherwise.

         Bone Care(R) and Hectorol(R) are registered trademarks of Bone Care
International, Inc., in the United States. A community trademark application for
Hectorol is pending in the European Community Trademark Office, Japan, and
selected other countries. Hectorol is the brand name for the active drug
substance, doxercalciferol. This filing also includes trademarks of other
companies.


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                           FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-K includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. We have based these forward-looking
statements largely on our current expectations and projections about future
events and financial trends affecting the financial condition of our business.
These forward-looking statements are subject to a number of risks, uncertainties
and assumptions about Bone Care, including, among other things:

         -        general economic and business conditions, both nationally and
                  in our markets;

         -        our expectations and estimates concerning future financial
                  performance, financing plans and the impact of competition;

         -        anticipated trends in our business;

         -        existing and future regulations affecting our business;

         -        our early stage of development;

         -        the uncertainty of our future profitability;

         -        our ability to satisfy the FDA's conditions for marketing
                  approval for Hectorol;

         -        our ability to commercialize Hectorol;

         -        our ability to avoid or minimize delays in or interruption of
                  the manufacture and supply of our products; and

         -        other risk factors set forth under "Risk Factors" and
                  "Management's Discussion and Analysis of Financial Condition
                  and Results of Operations" in this Annual Report.

         In addition, in this Annual Report, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to Bone Care, our business or our management, are
intended to identify forward-looking statements.

         Unless otherwise required by law, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise after the date of this filing.
However, we acknowledge our obligation to disclose material developments related
to previously disclosed information. In light of these risks and uncertainties,
the forward-looking events and circumstances discussed in the filing may not
occur, and actual results could differ materially from those anticipated or
implied in the forward-looking statements.


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<PAGE>
ITEM 1. BUSINESS

OVERVIEW

         Bone Care is a pharmaceutical company engaged in discovering,
developing and commercializing improved vitamin D-hormone therapies to treat
secondary hyperparathyroidism in patients with kidney (or renal) disease,
osteoporosis and other diseases, including psoriasis and cancers where vitamin D
therapy may be of benefit such as cancers of the prostate, breast and colon. We
were founded in 1984 as a subsidiary of Lunar Corporation, located in Madison,
Wisconsin, and we were spun off from Lunar in 1996.

         We licensed our first product, doxercalciferol or Hectorol, as it is
known commercially, in 1987 from the University of Wisconsin, a leading vitamin
D research center. Hectorol is a vitamin D-hormone replacement therapy approved
by the FDA in two formulations to treat secondary hyperparathyroidism in
patients with end-stage renal disease, or ESRD. Hectorol is a safe and effective
therapy for reducing elevated levels of parathyroid hormone (PTH) in blood in
the management of secondary hyperparathyroidism, a disease characterized by
excessive secretion of PTH. Hyperparathyroidism, if left untreated, can
eventually result in cardiovascular compromise, reduced immunity, muscle
weakness, bone loss and fractures. Virtually all ESRD patients suffer from
secondary hyperparathyroidism. We obtained FDA approval for Hectorol Capsules in
June 1999, and we began selling this orally administered product in the United
States in October 1999. We filed a supplemental New Drug Application with the
FDA in December 2001 to treat secondary hyperparathyroidism in chronic kidney
disease (CKD) patients. If approved, this would expand the approved indications
for Hectorol Capsules. We obtained FDA approval for Hectorol Injection in April
2000, we launched this intravenous product in the United States in August 2000,
and we received a national Medicare reimbursement code for Hectorol Injection in
January 2002. We are also developing doxercalciferol and other vitamin
D-hormones to treat several other diseases.

BACKGROUND

         D-hormones are produced in the body from vitamin D that is either
ingested or generated in the skin from sunlight exposure. D-hormones have
essential roles in human health; they regulate (1) parathyroid hormone (PTH)
secretion by the parathyroid glands, (2) the absorption of calcium by the small
intestine, (3) muscle function, and (4) the proliferation and maturation of
several types of normal and abnormal cells. D-hormone deficiency in CKD occurs
when the kidneys are unable to produce D-hormones. Without sufficient D-hormone
levels, PTH secretion is increased and calcium absorption in the small intestine
is reduced, leading to hypocalcemia and eventually to bone disease.

         Hyperparathyroidism is a disease characterized by excessive secretion
of PTH by the parathyroid glands. The medical community classifies
hyperparathyroidism as either "primary" or "secondary," depending on the
underlying cause. Primary hyperparathyroidism is less common and is caused by a
disorder in one or more of the parathyroid glands, usually a tumor. Surgical
removal of the affected parathyroid glands is the only effective treatment.
Secondary hyperparathyroidism is the more common type of hyperparathyroidism and
is caused by diseases unrelated to the parathyroid glands. It is seen in varying
severity in virtually all ESRD patients, in whom normal kidney function is lost
and dialysis is required for survival. Secondary hyperparathyroidism in renal
disease continues and worsens unless treated with D-hormone therapy.

         The goals of D-hormone therapy in this setting are to decrease blood
PTH levels and to normalize blood calcium, thereby treating or preventing bone
disease, and other adverse effects of elevated PTH. There are other vitamin
D-hormones on the market which have been approved for the treatment of secondary
hyperparathyroidism and are competing with Hectorol. The three key competing
products are calcitriol, paricalcitol and alfacalcidol. The challenge in
administering vitamin D hormone therapy is to deliver a sufficiently high dose
to be effective without causing toxic side effects, including:

         -        Excessive phosphorus and/or calcium in the blood, which
                  increases the risk that mineral deposits will develop in soft
                  tissues, such as in the heart and arteries, contributing to
                  cardiac disease, or in the kidneys, accelerating kidney
                  failure in CKD patients.

         -        Excessive phosphorus in the blood, which stimulates secretion
                  of PTH by the parathyroid glands and exacerbates secondary
                  hyperparathyroidism.

         -        Excessive calcium in the urine, which increases the risk that
                  calcium-rich deposits will develop in the kidneys and
                  accelerate kidney failure in CKD patients.


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Due to the risks of these side effects, D-hormones are customarily administered
at low dosages. Starting dosages are increased cautiously, to minimize the
chance of these toxic side effects and optimize therapeutic response. The
pharmacokinetic profiles of calcitriol and paricalcitol typically demonstrate
supraphysiological spikes occurring rapidly after administration, followed by
trough levels at concentrations below the physiologic range of activated vitamin
D. This is in contrast to the relatively constant blood levels of D-hormones
that are maintained in individuals with normal kidney function without side
effects, yielding consistent, efficient regulation of PTH secretion.

         Currently United States physicians and dialysis providers favor
intravenous products because of several factors: (1) Medicare reimbursement is
only available for intravenous products; (2) repeated oral delivery of active
D-hormones promotes their breakdown in the intestine, thereby increasing
intestinal absorption of calcium and reducing the amount delivered to the
parathyroid glands; and (3) healthcare professionals can assure patient
compliance with drug administration at the time of dialysis.

THE BONE CARE SOLUTION

         We have two FDA approved products to treat secondary
hyperparathyroidism in ESRD patients: Hectorol Injection and Hectorol Capsules.
Hectorol offers:

         -        Safe and Effective Treatment. Data obtained from our clinical
                  trials have demonstrated that Hectorol is a safe and effective
                  therapy for treating secondary hyperparathyroidism in ESRD
                  patients. In these trials, Hectorol reduced blood levels of
                  PTH in more than 90% of the treated patients with minimal side
                  effects. Based on these and other trials, we believe that
                  Hectorol compares favorably to competitive D-hormones,
                  including calcitriol, paricalcitol and alfacalcidol; however,
                  we have not performed comparative trials to demonstrate these
                  conclusions.

         -        Oral Delivery that Expands Market Opportunities. Hectorol
                  Capsules provide a safe, convenient and effective oral vitamin
                  D therapy for the management of PTH levels in patients with
                  CKD. Oral Hectorol has the potential to be used in other
                  clinical settings besides CKD. Intravenous D-hormone products
                  are used only in hemodialysis patients under medical
                  supervision. Competitive intravenous D-hormones may be less
                  well suited for oral delivery because they are fully active on
                  delivery, which can cause certain cells lining the small
                  intestine to absorb too much calcium and phosphorus, leading
                  to side effects. Hectorol, on the other hand, is an inactive
                  pro-hormone that, after oral delivery, is not available to
                  these intestinal cells.

         -        A Pro-Hormone that Provides Consistent Levels of Natural
                  D-Hormones. Hectorol is a vitamin D pro-hormone, an inactive
                  vitamin D analog that is metabolized by the liver into two
                  active and naturally occurring D-hormones. Activated Hectorol
                  is released into the bloodstream at a rate which mimics the
                  normal physiologic production of active D-hormones by normal
                  kidneys. Normal physiologic blood levels of D-hormones allow
                  efficient regulation of PTH secretion by the parathyroid
                  glands with few side effects.

         -        A Potentially Wider Therapeutic Window. We believe that there
                  is indirect evidence that Hectorol has a wider range, or
                  therapeutic window, between a minimum effective dose and a
                  dose with significant side effects as compared to other
                  D-hormone therapies. Animal studies have demonstrated that
                  Hectorol has fewer side effects than calcitriol or
                  alfacalcidol when delivered at doses of equivalent potency. No
                  clinical trials directly comparing Hectorol to any other
                  D-hormone therapy in ESRD patients have been conducted. We
                  have not conducted any comparative trials of D-hormones in any
                  human subjects. A wider therapeutic window would improve
                  safety and facilitate patient management.

OUR STRATEGY

         Our strategy is to develop new D-hormone products and commercialize our
two approved products, Hectorol Injection and Hectorol Capsules, by:

         -        Expanding Our Sales and Marketing Infrastructure. We will
                  continue to develop our internal sales and marketing
                  capabilities to address the over $500 million D-hormone market
                  in the United States for ESRD patients and for related markets
                  that could be effectively addressed with a small, highly
                  targeted sales and marketing effort. We will seek to establish
                  mutually beneficial alliances or marketing agreements with
                  partners who can rapidly penetrate geographic markets and
                  therapeutic areas where we have no current or planned sales
                  presence.

         -        Competitively Pricing Hectorol. Hectorol Injection is priced
                  in the United States at a modest premium to the older
                  D-hormone, calcitriol, but below the more recently launched
                  D-hormone, paricalcitol. We believe Hectorol's competitive
                  pricing will create interest by third-party payors and
                  facilitate its acceptance in the United States market.
                  Hectorol


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                  Capsules also represent an attractive cost-effective
                  alternative to intravenous D-hormone therapies. While oral
                  D-hormone therapies are not reimbursed by Medicare, they are
                  favored outside of the United States. We are the only company
                  with both an oral and intravenous D-hormone product approved
                  for treatment of dialysis patients in the United States, and
                  we believe we are well positioned to take advantage of changes
                  in preference for the method of delivery.

         -        Expanding the Approved Indications for Hectorol Capsules. We
                  filed a supplemental New Drug Application with the FDA in
                  December 2001 to treat secondary hyperparathyroidism in CKD
                  patients. We do not have plans to request FDA approvals for
                  other new indications in the next two years.

         -        Developing Additional Product Offerings. We will continue to
                  use our research, clinical and regulatory expertise to seek to
                  develop our other patented D-hormones for targeted diseases,
                  such as osteoporosis in elderly patients, as well as for
                  psoriasis and cancers where vitamin D therapy may be of
                  benefit, such as cancers of the prostate, breast and colon.

OUR PRODUCTS

         Our objective is to discover, develop and commercialize vitamin
D-hormone therapies with improved safety and efficacy profiles to treat a
variety of diseases where current treatments are either unavailable or
inadequate. Comparative studies in several animal species have demonstrated that
our vitamin D technologies potentially have an improved therapeutic index as
compared to other vitamin D analogs. In pre-clinical models, Hectorol and/or
LR-103 are 3 to 30 times less toxic when administered at doses with equivalent
potency as compared to calcitriol and/or alfacalcidol. Additional animal studies
have shown that, unlike Hectorol and LR-103, competitive D-hormone therapies
cause significant calcium deposits in the kidneys when delivered in doses
equivalent to those used to treat patients. We cannot be certain, however, that
additional clinical studies will support our conclusion that Hectorol has a
wider therapeutic window than other D-hormone therapies.

HECTOROL INJECTION

We developed Hectorol Injection for use in the approximately 315,000 ESRD
patients in the United States who undergo hemodialysis three times per week. Our
FDA submission included data from two Phase III trials which included a total of
70 patients and consisted of an eight-week monitoring period in which no
D-hormone therapies were given, followed by a 12-week period in which patients
received open-label treatment with Hectorol Injection at hemodialysis. The study
endpoint for effectiveness was the observed reduction in blood PTH levels, and
the endpoints for safety were the observed rates of hypercalcemia and
hyperphosphatemia. In both trials, after 12 weeks of open-label treatment, mean
blood PTH levels were reduced 40 to 50%. These reductions were statistically
significant (p<0.01). In both studies, blood PTH reached a predetermined optimal
range in more than 70% of treated patients. Hectorol Injection normalized blood
calcium but also caused infrequent episodes of hypercalcemia and
hyperphosphatemia. We obtained FDA approval for Hectorol Injection in April
2000, and we began selling the product in August 2000. We must complete and
submit a post-approval Phase IV trial in pediatric patients with ESRD by August
2004. The FDA allowed us to market Hectorol Injection to ESRD patients, but
requires us to complete a post-approval Phase IV trial in pediatric patients
with ESRD by August 2004. We plan to commence these trials by March 2003,
although the actual start date is contingent on receiving additional supply of
Hectorol Injection from either the current supplier or an additional supplier.
Any further delay in receiving product for this clinical trial could cause us to
miss the deadline for completion. If we fail to timely satisfy this requirement,
the FDA could withdraw its existing approval.

HECTOROL CAPSULES

         Hectorol Capsules are approved for use in the approximately 315,000
ESRD patients in the United States. In addition, we have completed clinical
trials of Hectorol Capsules to gain FDA approval for use in CKD patients, which
is a larger disease population. The FDA approved Hectorol Capsules in June 1999
based on the results of two Phase III trials involving a total of 211 subjects,
of which 138 were dosed with Hectorol Capsules. Each trial consisted of an
eight-week monitoring period in which no D-hormone therapies were given,
followed by a 16-week period in which patients received open-label treatment
with Hectorol Capsules at hemodialysis, and an eight-week period in which
patients received, in a double-blinded randomized fashion, continuing treatment
with either Hectorol Capsules or a matching placebo. The study endpoint for
effectiveness was the observed reduction in blood PTH levels, and the endpoints
for safety were the observed rates of hypercalcemia and hyperphosphatemia. In
both trials, after 16 weeks of open-label treatment, mean blood PTH levels were
reduced more than 50%. These reductions were statistically significant (p<0.01).
In addition, blood PTH reached a pre-determined optimal range in 83% of the
treated patients. At the end of the eight additional weeks of blinded treatment,
mean blood PTH levels in patients receiving Hectorol Capsules remained
approximately 50% below those receiving a matching placebo. Differences in mean
blood PTH levels between patients receiving Hectorol Capsules and those
receiving placebo treatments were clinically and statistically significant.
Hectorol Capsules normalized blood calcium levels but caused infrequent episodes
of hypercalcemia and hyperphosphatemia.


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<PAGE>
         Hectorol Capsules compete with calcitriol (brand name Rocaltrol(R))
sold by Roche Pharmaceuticals and the generic form of calcitriol sold by TEVA
Pharmaceuticals. The total annual sales of these two competitive products in the
United States are approximately $34 million. The competitive products are
approved in the United States for the treatment of elevated PTH in both ESRD and
CKD patients, while Hectorol is not yet approved for the treatment of CKD
patients.

                  SECONDARY HYPERPARATHYROIDISM IN CKD PATIENTS. Secondary
         hyperparathyroidism begins to develop in patients with modest
         reductions in kidney function and becomes more severe as CKD
         progresses. Evidence from published clinical research suggests that
         early intervention with D-hormone replacement therapy can slow the
         progression and enhance the treatment of secondary hyperparathyroidism
         in CKD patients. Calcitriol is approved in the United States, and we
         believe oral alfacalcidol is used in certain foreign markets to treat
         CKD patients. As with their use in dialysis patients, however, these
         competitive oral products can cause toxic side effects at the doses
         required for effective treatment and can hasten the onset of dialysis.

                  We have completed two randomized, double-blind,
         placebo-controlled Phase III trials for Hectorol Capsules to treat
         secondary hyperparathyroidism in CKD patients. The trials consisted of
         an eight-week monitoring period in which no D-hormone therapies were
         given, followed by a 24-week period in which patients were treated with
         either Hectorol Capsules or a matching placebo. The study endpoint for
         effectiveness was the observed reduction in blood PTH levels, and the
         endpoints for safety were the observed rates of hypercalcemia,
         hyperphosphatemia and hypercalciuria, and significant decreases in
         kidney function. In both studies, Hectorol significantly reduced blood
         PTH levels relative to a matching placebo without significant side
         effects. We used the results from these two trials as the basis for
         filing a supplemental New Drug Application with the FDA in December
         2001, requesting approval to market Hectorol Capsules for secondary
         hyperparathyroidism in CKD patients.

                  The National Kidney Foundation (NKF) published the Clinical
         Practice Guideline for Chronic Kidney Disease (CKD); Evaluation,
         Classification and Stratification through their Dialysis Outcomes
         Quality Initiative Program (DOQI or K-DOQI) in February 2002. This
         guideline stratifies patients with kidney disease into five ranges
         based on kidney function as measured by the Glomerular Filtration Rate
         (GFR) of the patient. GFR is widely accepted as the best overall
         measure of kidney function. The K-DOQI Guideline recommends the
         treatment of bone disease and disorders of calcium and phosphorus
         metabolism when the GFR is <60 ml/min. This recommendation may
         encourage a shift in clinical practice to include patients in three of
         the five stratifications. The NKF estimates that there are
         approximately 7,600,000 stage three patients and 400,000 stage four
         patients. Stage five consists of the 315,000 dialysis-dependent patient
         population, of which approximately 55% to 65% are treated with vitamin
         D hormone therapy. This potential shift in practice could positively
         influence our market potential in the CKD patient population.

                  Congressman Fortney ("Pete") Stark (D-CA) has introduced a new
         bill - H.R.4729, the Medicare Chronic Kidney Disease Act. If enacted
         into law, this bill would provide full Medicare coverage and End Stage
         Renal Disease (ESRD) prevention services to uninsured patients
         suffering from CKD but who have not as yet progressed to ESRD. Medicare
         coverage for treatment of the CKD patient population would promote
         wider acceptance of treatment and enhance the shift in the practice to
         earlier treatment. There can be no assurance that this bill will be
         enacted or, if enacted, that it will remain in its current form.

                  SECONDARY HYPERPARATHYROIDISM IN ELDERLY OSTEOPOROSIS
         PATIENTS. We plan to further investigate the use of Hectorol Capsules
         to treat secondary hyperparathyroidism in elderly osteoporosis
         patients. Of the 16 million people in the United States over the age of
         75 years, we estimate that two to four million have secondary
         hyperparathyroidism associated with osteoporosis. In many elderly
         individuals, there is reduced responsiveness of the parathyroid glands,
         the small intestine and muscles to D-hormones. Higher D-hormone levels
         are needed in the blood of these individuals to control PTH secretion
         and to maintain both intestinal calcium absorption and muscle strength.
         Often these individuals develop secondary hyper-parathyroidism. Left
         untreated, the elevated level of PTH in the blood causes bone loss
         which increases the risk of debilitating fractures. In addition,
         decreased muscle strength increases the risk of falling, which in turn
         further increases the risk of fractures. Fractures often result in
         disfigurement, decreased mobility and, in some cases, extensive
         hospitalization and chronic nursing home care.

                  There are currently no FDA-approved D-hormone therapies to
         treat patients in the United States with osteoporosis; however,
         D-hormone therapies are approved in Europe, Asia, Australia and other
         markets. Controlled clinical trials conducted in these markets using
         oral calcitriol or oral alfacalcidol demonstrated increased or
         stabilized bone mass and reduced rates of fractures. However, other
         trials conducted in the United States have produced mixed results,
         possibly due to the use of inconsistent doses. Higher doses of oral
         calcitriol produced increases in spinal and total body bone mass,
         whereas lower doses showed little effect. Lower doses were used in
         several trials due to the unacceptable frequency of hypercalcemia and
         hypercalciuria. These results suggest that D-hormone therapies with
         improved safety profiles may enable more


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<PAGE>
         consistent delivery of higher doses for improved therapeutic effects in
         elderly osteoporosis patients with secondary hyperparathyroidism.

                  We completed a Phase II trial in 1992 in the United States to
         evaluate Hectorol Capsules to treat postmenopausal osteoporosis. We and
         our corporate collaborators concluded that the data from the trial did
         not provide a sufficient basis for initiating pivotal Phase III trials
         with Hectorol Capsules to treat postmenopausal osteoporosis. Based on
         published reports that D-hormones have efficacy in patients with
         secondary hyperparathyroidism, we plan to initiate an additional Phase
         II trial of Hectorol Capsules in elderly osteoporosis patients to treat
         secondary hyperparathyroidism. We plan to conduct a six month proof of
         principle study beginning in 2003, and if successful, we will present
         the design of a potential Phase III trial to the FDA. We would initiate
         the Phase III trial in 2004 if a satisfactory design can be agreed upon
         with the FDA.

HYPERPROLIFERATIVE DISEASES

         In addition to having a role in parathyroid function and calcium and
phosphorus metabolism, D-hormones have an important role in regulating skin,
prostate, breast and colon cells. We are investigating the use of Hectorol
Capsules or our other improved D-hormone therapies in diseases associated with
hyperproliferative or neoplastic cell growth such as psoriasis and cancers of
the prostate, breast and colon. Data from preclinical models suggest that
vitamin D analogs inhibit the growth of cancer cells expressing the vitamin D
receptor.

                  PSORIASIS. We may develop LR-103 as an oral D-hormone therapy
         for psoriasis, a chronic disease that most often affects the skin.
         Psoriatic lesions are characterized by an abnormal thickening or growth
         of the skin, usually on the scalp, elbows, knees and shins. Microscopic
         examination of these lesions reveals an increased rate of skin cell
         division, together with a decrease in the time required for these cells
         to migrate to the skin surface, resulting in thickening or growth of
         the skin.

                  According to the National Psoriasis Foundation, psoriasis
         affects more than seven million individuals in the United States of
         which approximately 1.5 million are being treated by a physician. A
         similar prevalence rate is observed in Europe. Psoriasis affects people
         of all ages, with most exhibiting mild or moderate lesions. No cure for
         psoriasis exists. Dovonex(R) (topical calcipotriol marketed by
         Bristol-Myers Squibb Company) is a synthetic D-hormone analog of
         calcitriol and is approved to treat psoriasis in the United States.
         Dovonex and tacalcitol, another D-hormone analog, are approved to
         topically treat psoriasis in many countries outside of the United
         States. Currently, no oral D-hormones are approved to treat psoriasis
         in the United States.

                  Clinical studies have demonstrated that orally administered
         D-hormones can cause significant improvement in psoriatic lesions
         reducing, in particular, skin redness, scaling and thickness. In many
         patients, complete clearing of psoriatic lesions is observed during the
         course of D-hormone treatment.

                  PROSTATE, BREAST AND COLON CANCERS. We intend to develop
         Hectorol Capsules or another of our vitamin D analogs to treat cancers
         which have the potential to respond to vitamin D therapy, such as
         prostate, breast and colon cancers. These cancer cells contain specific
         D-hormone receptors, and pre-clinical models have demonstrated that
         vitamin D analogs inhibition of growth of prostate, breast and colon
         tumor cells in vitro and in vivo. Oncologists consider D-hormones to be
         a potentially promising treatment for cancers expressing the vitamin D
         receptor. The challenge with vitamin D-hormones in the treatment of
         cancer is to achieve positive effects without inducing the frequently
         observed side effects associated with high doses of D-hormones,
         typically hypercalcemia. We believe that no D-hormone has received
         marketing approval for cancer anywhere in the world.

                  Prostate cancer has become the most commonly diagnosed tumor
         in American men. The American Cancer Society (ACS) estimates that in
         the year 2002, 189,000 men will be diagnosed with, and 30,200 men will
         die from, prostate cancer. Breast cancer is the second leading cause of
         death among women in the United States. According to ACS estimates, in
         the year 2002, 203,500 women will be diagnosed with, and 39,600 women
         will die from, invasive breast cancer. Colon cancer is the third most
         common cancer in American men and women. The ACS estimates that in the
         year 2002, 148,300 men and women will be diagnosed with, and 56,600
         people will die from, colon cancer. The major known risk factors for
         prostate cancer, namely old age, race and residence at northern
         latitudes, are all associated with low blood levels of vitamin D, the
         natural precursor for D-hormones. Incidence rates for breast and colon
         cancers also correlate with residence in northern latitudes. Mortality
         rates for these three cancers increase as exposure to ultraviolet
         radiation, the principal source of vitamin D in the human body,
         decreases.

                  We have completed a Phase I, dose escalation trial of daily,
         oral Hectorol in patients with hormone refractory prostate cancer. The
         results of this study have been recently reported (Clinical Cancer
         Research 9:2820-2827, September 2002). A total of 25 patients were
         enrolled in this study. Oral doses of Hectorol ranging from 5 to 15
         ug/day were administered. Patients were closely followed for side
         effects in order to determine the maximally tolerated dose of daily,
         oral Hectorol. Patients were monitored for response by objective
         imaging techniques. Two patients had radiographically confirmed partial
         responses while five other patients maintained stable disease for at
         least 6 months. The most common toxicity observed during this trial
         was reversible hypercalcemia. Based on the results of this study, a
         maximum daily dose of 12.5 ug was recommended for further evaluation in
         Phase II clinical trials in cancer patients. PSA is a commonly used
         biomarker used to determine disease progression in patients with
         prostate cancer. In vitro studies with vitamin D analogs demonstrate
         stimulation of PSA production despite growth inhibitory effects on the
         cancer cells. Not surprisingly during the Phase I trial, no concordance
         between PSA response and objective response was observed. Results from
         the Phase I trial were sufficiently encouraging that we continue to
         evaluate Hectorol in Phase II clinical trials in Hormone Refractory
         Prostate Cancer. The results of a Phase II trial are being evaluated.
         Collaborations with the University of Wisconsin and other institutions
         to further explore the use of Hectorol in prostate cancer and other
         oncology settings are ongoing.

                                       8
<PAGE>
LR-103 AND BCI-202

         We are investigating the use of LR-103, BCI-202 and other research
compounds in pre-clinical studies to evaluate them to treat psoriasis and
cancers.

         Hectorol's chemical structure differs from that of calcitriol and
alfacalcidol. Results from animal studies indicate that Hectorol shows a 3-
to-15-fold lower incidence of toxic side effects compared to calcitriol and
alfacalcidol at doses having equivalent potency. Consequently, we synthesized
and evaluated a series of compounds with chemical structures related to
Hectorol. From this research, we determined that Hectorol is activated, in part,
to LR-103, whereas calcitriol and alfacalcidol cannot be so activated.

         We have since synthesized LR-103 and closely related analogs and have
studied their pharmacological properties in biological models in collaboration
with the USDA. LR-103 is as potent as Hectorol, calcitriol and alfacalcidol, but
is 30 times less likely than calcitriol and alfacalcidol to cause toxic side
effects. In addition, we have observed that LR-103 inhibits growth of skin cells
as well as breast and colon cancer cells. LR-103 is readily absorbed after oral
delivery and circulates through the bloodstream to tissues which respond to
D-hormones. LR-103 currently is in the late stages of pre-clinical research, and
we plan to begin Phase I clinical studies with LR-103 in 2003.

         BCI-202 is a novel pro-hormone in an early stage of pre-clinical
development. We cannot be certain that future studies will yield safe and
effective results that warrant continued development.

SALES AND MARKETING

         We commercially introduced Hectorol Capsules in October 1999 and
Hectorol Injection in August 2000. Both products are currently marketed for ESRD
patients in the United States by our direct sales force. We believe that the
ESRD market in the United States is well defined and, therefore, is suitable for
a highly focused, direct sales and marketing effort. In addition, we believe
that our pricing strategy balances the physicians' focus on patient care with
dialysis clinics' desire for greater profit and third-party payors' desire to
control treatment costs.

         We are directing our marketing efforts to the following key decision
makers:

         -        Nephrologists. The nephrologist is the physician responsible
                  for the care of patients diagnosed with early and end-stage
                  renal disease. This care includes delivering D-hormone
                  replacement therapy, which may be administered based on
                  protocols developed in conjunction with the dialysis clinics.
                  We estimate that in the United States there are approximately
                  6,300 nephrologists caring for 315,000 dialysis patients and
                  over 1,000,000 CKD patients.

         -        Dialysis Clinics. The nephrologist is generally associated
                  with a clinic that performs dialysis procedures. In the United
                  States, a limited number of large corporations control the
                  majority of these clinics with the largest eight corporations
                  controlling more than 66% of in-center dialysis facilities and
                  the largest three controlling over 50% of all in-center
                  dialysis facilities. Generally these clinics bill for services
                  provided to ESRD patients, including D-hormone therapy. These
                  clinics work with the nephrologist to maximize both the
                  quality of patient care and profits.

         -        Third-Party Payors. Dialysis clinics who administer
                  intravenous D-hormones seek reimbursement from third-party
                  payors who generally are either insurance companies or
                  governmental agencies, including Medicare and Medicaid. These
                  payors set reimbursement levels for products and services
                  which the clinics provide to dialysis patients. Payors,
                  including the United States government, have increasingly
                  focused on containing costs, which has impacted the
                  reimbursement of various products and, in turn, affected
                  clinical use of certain products. We are positioning both
                  Hectorol Capsules and Hectorol Injection as safe, effective
                  and attractively priced products, and our strategy is to
                  establish Hectorol products as preferred D-hormone therapies.
                  Currently, oral D-hormone products are not reimbursed for use
                  by hemodialysis patients.

         During the last six months, we increased our headcount of direct sales
and clinical support specialists. As of September 26, 2002, the sales and
marketing department consisted of 53 people, including a Vice President - Sales,
Vice President - Marketing, 7 marketing positions, 39 direct sales people and 5
clinical support specialists. Additionally, we may seek to establish mutually
beneficial alliances or marketing agreements with partners who can access
geographic markets and therapeutic areas where we have no current or planned
sales presence.


                                       9
<PAGE>
         Hectorol is distributed to patients and dialysis centers through both
direct and traditional wholesale and retail channels. We have contracted for
selected administrative and distribution services from a third-party company
having a proven record of providing services to wholesale and retail customers
in the continental United States, Hawaii and Puerto Rico.

COMPETITION

         We operate in a field in which new discoveries occur at a rapid pace.
Competitors may succeed in developing technologies or products that are more
effective than ours or in obtaining regulatory approvals for their drugs more
rapidly than us, which could render our products obsolete or noncompetitive.
Competition is intense and is expected to continue to increase. Many
competitors, including biotechnology and pharmaceutical companies, are actively
engaged in the research and development of products in similar areas, including
the fields of hyperparathyroidism, osteoporosis, and prostate, breast and colon
cancer.

         A number of pharmaceutical and biotechnology companies are developing
new products for the treatment of the same diseases we have targeted. Abbott
Laboratories, Inc., markets intravenous calcitriol (Calcijex(R)) and intravenous
paricalcitol (Zemplar(R)). These drugs are approved to manage secondary
hyperparathyroidism in ESRD patients in the United States and in European
countries. Roche Pharmaceuticals markets oral calcitriol (Rocaltrol) and TEVA
Pharmaceuticals markets generic calcitriol in the United States to manage
secondary hyperparathyroidism in CKD patients. A number of companies, including
Leo Pharmaceutical Products A/S, TEVA Pharmaceuticals and Chugai Pharmaceutical
Company Co., Ltd., market oral or intravenous alfacalcidol, a synthetic analog
of calcitriol, in Europe and Asia under various trade names for both secondary
hyperparathyroidism and osteoporosis. Other companies, including Amgen, Inc.,
and NPS Pharmaceuticals, Inc., also are developing new therapies to manage
secondary hyperparathyroidism in ESRD patients in the United States and foreign
markets. Several companies, including Leo Pharmaceutical Products A/S, ILEX
Oncology, Inc., and Chugai Pharmaceutical Co. LTD, are developing D-hormone
therapies to treat cancers. Leo Pharmaceutical Products A/S, Bristol-Myers
Squibb Company and other companies are marketing a topical D-hormone (Dovonex)
in major markets of the world to treat psoriasis. Teijin Limited is marketing
topical tacalcitol to treat psoriasis outside the United States.

INTELLECTUAL PROPERTY

         Our success will depend in part on our ability to develop patentable
products and technologies and obtain patent protection for our products and
technologies both in the United States and other countries. We currently have
over 60 issued patents and over 90 pending applications worldwide. We have
several United States patents covering the use of Hectorol for the prevention
and treatment of secondary hyperparathyroidism and metabolic bone disease,
including renal osteodystrophy. Patents covering secondary hyperparathyroidism
begin to expire in 2010. Patents covering metabolic bone disease begin to expire
in 2009.

         A corresponding patent for the use of Hectorol to prevent and manage
secondary hyperparathyroidism in kidney dialysis patients has been allowed by
the European patent office, issued in Australia and Canada, and is pending in
the Japanese patent office. All of these patents expire in 2016. A corresponding
patent for the use of Hectorol to prevent and treat metabolic bone disease has
been issued by the European Patent Office and expires in 2009.

         We also own United States patents for the use of Hectorol for treating
prostate cancer that expire in 2013. We have filed counterpart patent
applications in Europe and other geographic markets, including Japan, that
expire in 2017. We own United States and European patents for delayed sustained
release formulations of Hectorol as a treatment for psoriasis. Foreign
counterpart applications are also pending in Japan and other major markets. The
psoriasis-related patents expire in 2013.

         The issued composition-of-matter patent covering Hectorol has expired.
Our issued patents and pending patent applications relating to Hectorol are
method-of-use patents. A method-of-use patent encompasses the use of a compound
or composition to treat a specified condition but does not encompass the
compound itself, the active ingredient used in the composition or composition
itself, or the method of making the composition or the compound used in the
composition. Method-of-use patents provide less protection than
composition-of-matter patents because of the possibility of off-label or
authorized uses if other companies market or make the compound for other uses.

         We have a license from the Wisconsin Alumni Research Foundation to
practice several of their process patents for the synthesis of Hectorol. Under
this license, which extends at least through July 2, 2013 and terminates upon
the expiration of the last licensed patent, the Wisconsin Alumni Research
Foundation has agreed not to license to other parties the patents to manufacture
Hectorol for use or sale anywhere in the world as long as the license agreement
is in effect and we pay royalties based on Hectorol sales.

         We have granted Draxis Health Inc. a license to use and sell Hectorol
in Canada for secondary hyperparathyroidism, osteoporosis and other metabolic
bone diseases. We also have granted Draxis a license in Canada to all know-how
developed by


                                       10
<PAGE>
or on behalf of us relating to the use of Hectorol for those indications. Draxis
entered into the license agreement in 1990 and paid Bone Care $100,000 for the
rights to treat secondary hyperparathyroidism and metabolic bone disease with
Hectorol in Canada. The agreement does not include royalty payments and expires
upon the expiration date of the last to expire of the Canadian patents. Draxis
received marketing approval for Hectorol Capsules in Canada in May 2001 and
plans to launch the product in the near future.

         We own issued patents and have pending patent applications in the
United States and other countries relating to other D-hormones. Our patents and
pending applications include claims to compounds, compositions, methods of
synthesizing the compounds and compositions, methods of use and methods of
delivery of active D-hormone and D-hormone analogs.

         We and the USDA jointly own rights to LR-103 under issued patents and
pending patent applications. The USDA has granted to us an exclusive worldwide
license to make, use and sell products covered under their rights. This
agreement, as amended in March 2002, calls for us to commercialize LR-103 by
December 31, 2006, or the USDA may modify or terminate the license. In any
circumstance, however, we would retain marketing rights under these patents. The
USDA license terminates upon the expiration of the last licensed patent.

         In addition to patent protection, we also rely on proprietary
information and trade secrets. We require our employees, consultants and
advisors to execute confidentiality agreements upon commencement of an
employment or a consulting relationship with us.

MANUFACTURING

         We currently have no internal manufacturing capabilities. We rely on
third party contractors to produce our active pharmaceutical ingredient and for
the subsequent manufacturing and packaging of finished drug products.

         The sole manufacturer of Hectorol Injection received a warning letter
from the FDA in September 2000 identifying general deviations from the FDA's
current Good Manufacturing Practices (c-GMP) regarding manufacturing procedures,
records and training. Our supplier received another letter from the FDA in
December 2001 identifying additional deviations from c-GMP pursuant to a
follow-up inspection of their facility. In response to this second FDA letter,
our supplier agreed to halt production of Hectorol Injection until such time as
these deviations could be remediated. Our supplier is scheduled to produce
validation lots during late October and early November that could ultimately be
used as commercial product. If our manufacturer completes the validation lots by
early November and passes the FDA site inspection and the FDA accelerates their
review of our submission, we do not anticipate a reduction in revenue as a
result of a reduced supply of product. If our manufacturer does not meet this
timetable, we could experience a reduction in revenue. There can be no assurance
that the FDA will find that our manufacturer's responses and corrective actions
are adequate or that the FDA will not take further action. If the FDA is not
satisfied with our manufacturer's responses and corrective actions, the FDA
could take regulatory actions against our manufacturer, including seizure of
products, injunction against further manufacture, recall or other actions that
could interrupt production of Hectorol Injection. Any such action would have a
material adverse effect on us. We are managing the inventory levels of the
supplier channels to attempt to ensure that the end-users of our product,
clinics and patients, do not experience any shortage of product. In addition, we
have been working on contingency plans, including an additional source of
supply. We anticipate that an additional source would be available during the
second quarter of calendar year 2003.

         We purchase our active pharmaceutical ingredient from a sole supplier,
although we are currently in the process of obtaining regulatory approval for an
additional supplier. In addition, Bone Care relies on one supplier to formulate
capsules and another supplier to package both Hectorol Capsules and Hectorol
Injection. Although other suppliers, formulators and vendors are available and
could provide these goods and services to Bone Care on comparable terms, any
change in suppliers could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.

         All of our suppliers have FDA-inspected facilities that are required to
operate under current Good Manufacturing Practices regulations established by
the FDA. These regulations govern all stages of the drug manufacturing process
and are intended to assure that drugs produced will have the identity, strength,
quality and purity represented in their labeling for all intended uses. If we
were to establish our own manufacturing facility, we would need additional funds
and would have to hire and train additional personnel and comply with the
extensive regulations applicable to the facility. We believe our relationships
with our suppliers are good.

GOVERNMENT REGULATION

         Pharmaceutical products are subject to extensive regulation under the
Federal Food, Drug and Cosmetic Act by the FDA in the United States and similar
health authorities in foreign countries. This rigorous regulation governs, among
other things, testing for safety and effectiveness, manufacturing, labeling,
storage, recordkeeping, import, export, advertising, marketing and distribution
of pharmaceutical products. Any new drug candidate must undergo lengthy,
rigorous and costly pre-clinical testing,


                                       11
<PAGE>
clinical trials and other procedures mandated by the FDA and foreign regulatory
authorities prior to approval for sale. Before testing agents with potential
therapeutic value in healthy human test subjects, stringent government
requirements for pre-clinical data must be satisfied. The data, obtained from
studies in several animal species, as well as from laboratory studies, are
submitted in an investigational New Drug Application to the FDA or its
equivalent in countries outside the United States where clinical studies are to
be conducted. Pre-clinical data must provide an adequate basis for evaluating
both the safety and the scientific rationale for the initiation of clinical
trials.

         Clinical trials are typically conducted in three sequential phases,
although these phases may overlap. Phase I frequently begins with initial
introduction of the compound into healthy human subjects. Prior to patient
introduction, the product is tested for safety, adverse affects, dosage,
tolerance, absorption, metabolism, excretion and clinical pharmacology. Phase II
typically involves studies in a small sample of the intended patient population
to assess the efficacy of the compound for a specific indication to determine
dose tolerance and the optimal dose range as well as to gather additional
information relating to safety and potential adverse effects. Phase III trials
are undertaken to further evaluate clinical safety and efficacy in an expanded
patient population which suffers from the targeted illness at geographically
dispersed study sites to determine the overall risk-benefit ratio of the
compound and to provide an adequate basis for product labeling. Each trial is
conducted in accordance with certain standards under protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the investigational New Drug Application.

         Data from pre-clinical and clinical trials are submitted to the FDA as
a New Drug Application for marketing approval and to other health authorities as
a marketing authorization application. The process of completing clinical trials
for a new drug is likely to take a number of years and requires the expenditure
of substantial resources. Preparing a New Drug Application or marketing
authorization application involves considerable data collection, verification,
analysis and expense. There can be no assurance that the FDA, or any other
health authority, will grant approval on a timely basis, if at all. The approval
process is affected by a number of factors, primarily the risks and benefits
demonstrated in clinical trials as well as the severity of the disease and the
availability of alternative treatments. The FDA or other health authorities may
deny a New Drug Application or marketing authorization application if the
authority's regulatory criteria are not satisfied or may require additional
testing or information.

         Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety. Additional studies will be
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested and may
be required for Hectorol Injection and Hectorol Capsules. Also, the FDA or other
regulatory authorities require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand
marketing of the products. Further, if there are any modifications to the drug,
including changes in indication, manufacturing process or labeling or a change
in manufacturing facility, an application seeking approval of such changes will
be required to be submitted to the FDA or other regulatory authority.

         The manufacture and marketing of Hectorol is subject to ongoing
regulation, including compliance with the FDA's current Good Manufacturing
Practices, adverse event reporting requirements and the FDA's general
prohibitions against promoting products for "off-label" uses, or uses not listed
on the FDA-approved labeling. We also are subject to inspection and market
surveillance by the FDA for compliance with these and other requirements. Any
enforcement action resulting from failure to comply with these requirements
could affect the manufacture and marketing of Hectorol. In addition, the FDA
could withdraw a previously approved product from the market upon receipt of new
information.

         Before our products can be marketed outside of the United States, they
are subject to regulatory approval similar to FDA requirements in the United
States, although the requirements governing the conduct of clinical trials and
other premarket approval requirements vary widely from country to country, and
the time spent in gaining approval varies from that required for FDA approval.
FDA approval does not assure approval by other regulatory authorities, and we
cannot predict whether foreign regulatory approvals will be granted. In some
countries, the sales price of a drug product must also be approved. The pricing
review period often begins after market approval is granted. Even if a foreign
regulatory authority approves any of our products, we cannot predict whether
satisfactory prices for our products will be approved.

         We must also comply with numerous federal, state and local laws,
regulations and recommendations relating to safe working conditions, current
Good Laboratory Practices, current Good Manufacturing Practices and the
experimental use of animals. We cannot predict the extent of governmental
regulation or the impact of new governmental regulations which might have an
adverse effect on the discovery, development, production and marketing of our
products and require us to incur significant costs to comply with the
regulations.

         Our research and development processes involve the controlled use of
hazardous materials, chemicals and radioactive materials and produce waste
products. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such materials
and waste products. Although we believe that our safety procedures for handling
and disposing of such materials comply with the standards prescribed by such
laws and regulations, the risk of


                                       12
<PAGE>
accidental contamination or injury from these materials cannot be eliminated
completely. In the event of such an accident, we could be held liable for any
damages that result, and any such liability could exceed our financial
resources. We believe we comply in all material respects with applicable
environmental laws and regulations.

         Completing the multitude of steps necessary before marketing a new drug
or obtaining a new indication for Hectorol requires the expenditure of
considerable resources and a lengthy period of time. Delay or failure in
obtaining the required approvals, clearances or permits by us, our corporate
partners or our licensees would have a material adverse effect on our ability to
generate sales or royalty revenue. The impact of new or changed laws or
regulations cannot be predicted with any accuracy.

EMPLOYEES

         As of September 26, 2002, we had 102 full-time employees, including 15
in research and development, 19 in compliance, quality and regulatory affairs,
53 in sales and marketing and 15 in administration. Five of our employees have
Ph.D. degrees. None of our employees are represented by a union, and we consider
our employee relations to be good.

RISK FACTORS

         Investors and prospective investors in Bone Care should consider
carefully the risks described below, in addition to other information in this
filing. Each of these risk factors could adversely affect Bone Care's business,
financial condition and results of operations as well as adversely affect the
value of an investment in our common stock.

         RISKS RELATED TO OUR BUSINESS

         OUR BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT AND WE DO NOT HAVE A
SIGNIFICANT HISTORY FOR YOU TO EVALUATE US ON.

         Our business is at an early stage of development, and we currently do
not have significant revenues or positive cash flow. We face many obstacles
before we can generate enough revenue to achieve positive cash flow and finance
our operations. In June 1999, we received FDA approval to market Hectorol
Capsules in the United States to manage secondary hyperpara-thyroidism in kidney
dialysis patients and began selling Hectorol Capsules in October 1999. In April
2000, we received FDA approval to market Hectorol Injection to manage secondary
hyperparathyroidism in dialysis patients and began selling Hectorol Injection in
the United States in August 2000. We do not have FDA approval to market Hectorol
for other indications or to market any other products. All of our other product
candidates require extensive research and development and clinical testing
before we can submit a New Drug Application to the FDA.

         WE HAVE A HISTORY OF LOSSES AND EXPECT OUR LOSSES TO CONTINUE.

         We have incurred losses since we began operating. As of June 30, 2002,
our accumulated deficit was approximately $41.5 million. To date, we have spent
our funds primarily on product development and more recently on sales and
marketing expenses incurred to launch Hectorol Injection and Hectorol Capsules.
In fiscal year 2003 and subsequent fiscal years, we plan to make large
expenditures to expand clinical indications for Hectorol Capsules and to develop
other new products, which may result in losses in future periods. These
expenditures include costs associated with performing clinical trials for new
products, continuing our research and development and seeking foreign regulatory
approvals for Hectorol. The amount of these expenditures is difficult to
forecast accurately and cost overruns may occur. We expect our operating losses
to continue and increase. It is possible, depending on the rate at which our
revenues increase and our marketing and research and development activities
expand, that our losses will continue at least through 2003. Our ability to
generate revenues in the near future will depend primarily on our success in
marketing and selling Hectorol Injection and Hectorol Capsules. We do not know
whether we will achieve profitability or, if we do, whether we will be able to
sustain profitability. We believe that we have sufficient cash and investments
to allow us to continue operating our business for at least the next two years.

         WE MAY FAIL TO SATISFY THE FDA'S CONDITIONS FOR MARKETING APPROVAL FOR
HECTOROL INJECTION, AND FOR HECTOROL CAPSULES, SLOWING THE PROGRESS OF OUR
BUSINESS.

         The FDA allowed us to market Hectorol Injection to ESRD patients, but
requires us to complete a post-approval Phase IV trial in pediatric patients
with ESRD by August 2004. We plan to commence these trials by March 2003,
although the actual start date is contingent on receiving additional supply of
Hectorol Injection from either the current supplier or an additional supplier.
Any further delay in receiving product for this clinical trial could cause us to
miss the deadline for completion. If we fail to timely satisfy this requirement,
the FDA could withdraw its existing approval.


                                       13
<PAGE>
         The FDA also allowed us to market Hectorol Capsules to ESRD patients,
but required us to complete post-approval Phase IV research and development
pertaining to the analysis of this product and its active ingredients by July
2000. We have already completed and submitted the results of our Phase IV
commitments for Hectorol Capsules to the FDA, but we do not yet know if the FDA
will be fully satisfied or will require additional Phase IV commitments.

         Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety. Additional studies will be
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested and may
be required for Hectorol Injection and Hectorol Capsules. Also, the FDA or other
regulatory authorities may require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand
marketing of the products. Further, if there are any modifications to the drug,
including changes in indication, manufacturing process or labeling or a change
in manufacturing facility, the FDA or other regulatory authorities may require
an application seeking approval of such changes.

         If we experience delays or are unable to receive approval of our Phase
IV commitments for Hectorol Injection and Hectorol Capsules from the FDA, our
operating results and business will be substantially impaired.

         WE MAY NOT BE ABLE TO COMMERCIALIZE HECTOROL IN FOREIGN MARKETS OR FOR
OTHER INDICATIONS IF WE DO NOT ENTER INTO STRATEGIC ALLIANCES OR OTHER MARKETING
ARRANGEMENTS.

         If we do not find corporate partners for Hectorol in foreign markets or
for other indications, we may have to reduce our rate of product development or
increase our capital expenditures. Our strategy for the development, testing,
manufacturing and commercialization of our products is to enter into various
collaborations with partners, licensors, licensees and others. We have been in
discussions with several potential collaborators in foreign markets but have not
entered into any agreements. We may not be able to negotiate collaborative
arrangements on acceptable terms, if at all. If we are not able to establish
collaborative arrangements, we will have to either delay further development of
some of our programs or increase our capital expenditures and undertake the
development activities at our own expense. We may encounter significant delays
in commercializing our products or find that the development, manufacture or
sale of our products is hindered by the absence of collaborative agreements.

         WE DO NOT HAVE EXPERIENCE COMMERCIALIZING PRODUCTS AND MAY NOT BE ABLE
TO SUCCESSFULLY DO SO.

         We began selling Hectorol Capsules in the United States in October
1999, and we began selling Hectorol Injection in the United States in August
2000. As of September 26, 2002, we have hired 44 of the 55 full-time direct
sales people and clinical support specialists we intend to hire. We will need to
invest a significant amount of money to complete the development of our sales
and marketing resources.

         We cannot assure you that we will be able to sell and market Hectorol
successfully. We have a sales and marketing force that is limited in number,
experience and training, which we are seeking to expand. We may not be able to
establish and maintain an internal sales and marketing force with technical
expertise and supporting distribution capabilities. If we are unable to
successfully commercialize our Hectorol products, our growth prospects will be
diminished.

         ADDITIONAL CLINICAL TRIALS MAY NOT PROVE THAT HECTOROL IS SAFER OR MORE
EFFICACIOUS THAN COMPETING D-HORMONE THERAPIES WHICH MAY LIMIT ITS MARKET
ACCEPTANCE OR LIMIT OUR EFFORTS TO COMMERCIALIZE HECTOROL.

         We have not conducted head-to-head clinical trials comparing Hectorol
and competitive D-hormone therapies in ESRD patients. We, and others not
affiliated with us, have compared the toxicity and efficacy of Hectorol to
competitive D-hormone therapies in several animal species. In animal studies,
Hectorol shows a 3- to 15-times lower incidence of toxic side effects when
delivered at doses with equivalent potency. We cannot be sure, however, that the
results of additional clinical trials will prove that our assumptions, based on
animal studies, are correct. Hectorol may not compare favorably to existing or
new D-hormone therapies. If Hectorol, or our follow-on products, do not prove to
be superior to competing products, we may face severe difficulties and may incur
greater expenses in marketing Hectorol. If additional clinical trials prove that
Hectorol is inferior to competitive D-hormone therapies, we may be forced to
suspend our efforts to commercialize Hectorol and to delay or suspend our
planned efforts to develop Hectorol and follow-on compounds for additional
indications.

         IF THE MEDICAL COMMUNITY DOES NOT ACCEPT HECTOROL, OUR BUSINESS WILL
SUFFER.

         The success of Hectorol depends on its acceptance by the medical
community. Similarly, the success of any products we develop in the future will
depend on the adoption of these products by our targeted markets. Existing and
future products, therapies and technological approaches will compete directly
with our products. Competing products may provide greater therapeutic benefits
for a specific problem or may offer comparable performance at a lower cost. If
doctors and patients do not use our products, we may not become profitable. We
cannot predict how quickly, if at all, the medical community will accept


                                       14
<PAGE>
Hectorol or our future products or the extent to which these products will be
used. If we encounter difficulties introducing Hectorol or future products into
our targeted markets, our operating results and business may be substantially
impaired. To facilitate Hectorol's acceptance in the United States market, we
have priced Hectorol at a modest premium to the older D-hormone, calcitriol, but
below the more recently launched D-hormone, paricalcitol.

         MEDICARE REIMBURSEMENT FOR HECTOROL INJECTION COULD BE REDUCED OR
MODIFIED.

         The Center for Medicare and Medicaid Services (CMS) controls Medicare
reimbursement for D-hormone therapies administered intravenously during
hemodialysis. CMS issued a nationwide reimbursement code for Hectorol Injection
in January 2002, which effectively provides for reimbursement to the dialysis
providers on a "fee-for-service" basis. CMS could decide to eliminate
"fee-for-service" coverage for intravenous D-hormone therapies and instead make
a fixed payment to dialysis providers for the total care of each patient,
otherwise known as capitation, which would include oral or intravenous D-hormone
therapy. Capitation will encourage use of lower cost oral D-hormone therapies
and may have an adverse effect on sales of intravenous D-hormones, including
Hectorol Injection. Also, some of the fiscal intermediaries which process
Medicare and Medicaid claims for reimbursement have proposed "oral first" or
"least cost alternative" pricing for injectible vitamin D therapies. Both types
of proposals are designed to reduce the current outlay for injectible therapies,
and could adversely affect the average selling price of all vitamin D injectible
therapies, including Hectorol Injection.

         FAILURE TO RAISE ADDITIONAL FUNDS IN THE FUTURE MAY DELAY OR ELIMINATE
SOME OR ALL OF OUR EFFORTS TO DEVELOP, MANUFACTURE AND SELL HECTOROL AND ANY OF
OUR FUTURE PRODUCTS.

         In recent years we have significantly increased our sales and marketing
expenditures and we continue to spend significant amounts on research and
development. We cannot be sure that our estimates of capital expenditures for
Hectorol and the development of our other new products will be accurate. We
could have significant cost overruns that could reduce our ability to
commercialize new products.

         Based upon our current plans, we believe that we have sufficient funds
to meet our operating expenses and capital requirements for at least the next
two years. Thereafter, we may need to raise additional capital to fund our
operations. The scope and amount of our liquidity and capital requirements will
depend upon many factors, including the extent to which Hectorol Injection gains
market acceptance, the progress and success of our clinical trials, the timing
and cost involved in obtaining regulatory approvals, the timing and cost of
developing sales and marketing programs, our ability to enter into strategic
alliances, manufacturing and research and development activities and competitive
developments. Additional required financing may not be available on satisfactory
terms, if at all. If we are unable to obtain financing in the future, we may
have to seek alternative sources of capital or re-evaluate our operating plans,
or we may be required to delay, reduce or eliminate some or all of our research
and development activities or sales and marketing efforts, in which case our
operating results and business may be substantially impaired.

         WE LACK SUFFICIENT LONG-TERM DATA REGARDING THE SAFETY AND EFFICACY OF
OUR PRODUCTS AND WE COULD FIND THAT OUR LONG-TERM DATA DO NOT SUPPORT OUR
CURRENT CLINICAL RESULTS.

         Hectorol is supported by less than two years of patient follow-up, and
therefore, we could discover that our current clinical results cannot be
supported by actual clinical experience. If longer-term patient studies or
clinical experience indicate that treatments with our products do not provide
patients with sustained benefits, our sales could decline. If longer-term
patient studies or clinical experience indicate that our procedures cause tissue
or muscle damage, motor impairment or other negative effects, we could be
subject to significant liability. We are not certain how long it may take for
patients to show significant increases in side effects. Further, because some of
our data have been produced in studies that are not randomized and involved
small patient groups, our data may not be reproduced in wider patient
populations.

         WE HAVE NO EXPERIENCE MANUFACTURING PHARMACEUTICAL PRODUCTS SO WE MUST
RELY EXCLUSIVELY ON SUPPLIERS WHO ARE OUTSIDE OF OUR CONTROL TO MANUFACTURE OUR
PRODUCTS, INCLUDING HECTOROL.

         The manufacture of pharmaceutical products requires significant
expertise and capital investment. We do not have the internal capability to
manufacture pharmaceutical products, and we currently use others to manufacture
active pharmaceutical ingredients and to formulate and package Hectorol. Our
manufacturers are required to adhere to regulations enforced by the FDA. Our
dependence upon others to manufacture our products may adversely affect our
profit margins and our ability to develop and commercialize products on a timely
and competitive basis. Delays or difficulties with contract manufacturers in
producing, packaging or distributing our products would adversely affect the
sales of Hectorol or introduction of other products. If we have to seek
alternative sources of supply, we may be unable to enter into alternative supply
arrangements on commercially acceptable terms, if at all. We employ a small
number of employees and independent consultants to coordinate and manage the
actions of these parties. Any disruption of these activities could impede our
ability to sell Hectorol, which would result in reduced revenue.


                                       15
<PAGE>
         The sole manufacturer of Hectorol Injection received a warning letter
from the FDA in September 2000 identifying general deviations from the FDA's
current Good Manufacturing Practices (c-GMP) regarding manufacturing procedures,
records and training. Our supplier received another letter from the FDA in
December 2001 identifying additional deviations from c-GMP pursuant to a
follow-up inspection of their facility. In response to this second FDA letter,
our supplier agreed to halt production of Hectorol Injection until such time as
these deviations could be remediated. Our supplier is scheduled to produce
validation lots during late October and early November that could ultimately be
used as commercial product. If our manufacturer completes the validation lots by
early November and passes the FDA site inspection and the FDA accelerates their
review of our submission, we do not anticipate a reduction in revenue as a
result of a reduced supply of product. If our manufacturer does not meet this
timetable, we could experience a reduction in revenue. There can be no assurance
that the FDA will find that our manufacturer's responses and corrective actions
are adequate or that the FDA will not take further action. If the FDA is not
satisfied with our manufacturer's responses and corrective actions, the FDA
could take regulatory actions against our manufacturer, including seizure of
products, injunction against further manufacture, recall or other actions that
could interrupt production of Hectorol Injection. Any such action would have a
material adverse effect on us. We are managing the inventory levels of the
supplier channels to attempt to ensure that the end-users of our product,
clinics and patients, do not experience any shortage of product. In addition, we
have been working on contingency plans, including an additional source of
supply. We anticipate that an additional source would be available during the
second quarter of 2003.

         We purchase our active pharmaceutical ingredient from a sole supplier,
although we are currently in the process of obtaining regulatory approval for an
additional supplier. In addition, Bone Care relies on one supplier to formulate
capsules and another supplier to package both Hectorol Capsules and Hectorol
Injection. Although other suppliers, formulators and vendors are available and
could provide these goods and services to Bone Care on comparable terms, any
change in suppliers could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.

         While we currently do not intend to manufacture any products ourselves,
we may choose to do so in the future. If we were to manufacture products
ourselves, we would need substantial additional financing to build manufacturing
facilities. We also would be subject to additional regulatory requirements and
would be subject to risks associated with delays or difficulties encountered in
manufacturing a product. We may not be able to manufacture any products
successfully or in a cost-effective manner.

         WE CANNOT ASSURE YOU THAT WE WILL OBTAIN REGULATORY APPROVALS FOR ANY
OF OUR FUTURE PRODUCTS.

         Obtaining required regulatory approvals may take several years to
complete and consume substantial capital resources. There is no assurance that
the FDA or any other regulatory authority will act quickly or favorably on any
of our future requests for product approval, or that the FDA or any other
regulatory authority will not require us to provide additional data that we do
not currently anticipate to obtain product approvals. We cannot apply for FDA
approval to market our future products until each product successfully completes
its pre-clinical and clinical trials. We have filed a supplemental New Drug
Application with the FDA in December 2001, requesting approval to market
Hectorol Capsules for secondary hyperparathyroidism in CKD patients. Several
factors could prevent successful completion or cause significant delays of these
trials, including an inability to enroll the required number of patients or
failure to demonstrate adequately that the product is safe and effective for use
in humans. If safety problems develop, the FDA could stop our trials before
completion. If we are not able to obtain regulatory approvals for use of our
future products, or if the patient populations for which they are approved are
not sufficiently broad, the commercial success of these products could be
limited.

         OUR FAILURE TO OBTAIN REGULATORY APPROVALS IN FOREIGN JURISDICTIONS
WOULD PREVENT US FROM MARKETING HECTOROL ABROAD.

         We also intend to market our products in international markets,
including the European Union and Japan. We must obtain separate regulatory
approvals in order to market our products in the European Union, Japan and many
other foreign jurisdictions. The regulatory approval processes differ among
these jurisdictions. Approval in any one jurisdiction does not ensure approval
in a different jurisdiction. We intend to collaborate with others to pursue
foreign regulatory approvals and to sell our products in these markets. Hectorol
Injection and Hectorol Capsules have not been approved for marketing by any
governmental entity outside of the United States. We will require substantial
additional funds to develop the product, conduct clinical trials and gain the
necessary regulatory approvals for Hectorol Injection or Hectorol Capsules in
foreign countries. As a result, revenues from sales of Hectorol outside the
United States will require us to invest additional resources or enter into
arrangements with partners.

         OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL, THE LOSS OF WHOM COULD IMPAIR
OUR BUSINESS.

         Our success depends upon our ability to attract and retain qualified
scientific, technical and managerial personnel. Pharmaceutical companies,
academic and government organizations, research institutions and other entities
compete for the services of qualified scientists, technicians and managerial
personnel. We may not be able to attract and retain such personnel.


                                       16
<PAGE>
Furthermore, our anticipated growth and expansion into areas and activities
requiring additional expertise will require additional personnel.

         OUR FAILURE TO EXPAND OUR MANAGEMENT SYSTEMS AND CONTROLS TO SUPPORT
ANTICIPATED GROWTH COULD HARM OUR BUSINESS.

         Our operations continue to grow and we expect this expansion to
continue as we execute our business strategy. Sustaining our growth has placed
significant demands on management and our administrative, operational,
information technology, financial and personnel resources. Accordingly, our
future operating results will depend on the ability of our officers and other
key employees to continue to implement and improve our operational, quality
compliance, regulatory support and financial control systems, and effectively
expand, train and manage our employee base. We may not be able to manage our
growth successfully, which could seriously harm our operating results and
business.

         RISKS RELATED TO OUR INDUSTRY

         WE HAVE MANY COMPETITORS, SEVERAL OF WHICH HAVE SIGNIFICANTLY GREATER
FINANCIAL AND OTHER RESOURCES.

         We face competition from several companies that are focused on
developing D-hormone therapies, particularly to treat secondary
hyperparathyroidism and hyperproliferative diseases. We also compete with other
companies that produce D-hormones and D-hormone analogs for international
marketplaces where these treatments have already been approved for secondary
hyperparathyroidism and hyperproliferative diseases. We expect competition to
increase further as additional companies begin to enter our markets and/or
modify their existing products to compete directly with ours. Companies also
compete indirectly with us utilizing different therapeutic approaches. Many of
our competitors have substantially greater financial, research and development
and marketing resources than we do and are better equipped to develop,
manufacture and market products, for example:

                  -        Abbott Laboratories, Inc., markets intravenous
                           calcitriol (Calcijex), and intravenous paricalcitol
                           (Zemplar), both of which compete with Hectorol
                           Injection.

                  -        Roche Pharmaceuticals markets oral calcitriol
                           (Rocaltrol) and TEVA Pharmaceuticals markets a
                           generic form of oral calcitriol. These products are
                           approved to manage secondary hyperparathyroidism in
                           kidney dialysis and CKD patients in the United States
                           and in European countries. Oral calcitriol is also
                           approved in Japan.

                  -        A number of companies market oral and intravenous
                           alfacalcidol, a synthetic analog of calcitriol, in
                           Europe and Japan under various trade names.

                  -        Other companies, including Amgen, Inc., Chugai
                           Pharmaceutical Co., Ltd., and NPS Pharmaceuticals,
                           Inc., also are developing new therapies to manage
                           secondary hyperparathyroidism in kidney dialysis
                           patients in the United States, European or Asian
                           markets.

                  -        Leo Pharmaceuticals Products A/S and TEVA
                           Pharmaceuticals are marketing alfacalcidol in Europe
                           to manage secondary hyperparathyroidism in kidney
                           dialysis patients or to treat osteoporosis in elderly
                           patients associated with secondary
                           hyperparathyroidism.

                  -        Leo Pharmaceuticals Products A/S and ILEX Oncology,
                           Inc., are developing D-hormone therapies to treat
                           certain cancers.

                  -        Leo Pharmaceuticals Products A/S and Bristol-Myers
                           Squibb Company are marketing topical Dovonex in the
                           United States and Europe to treat psoriasis. Teijin
                           Ltd. is marketing topical tacalcitol to treat
                           psoriasis outside the United States.

         Our competitors may have broad product lines which allow them to
negotiate exclusive, long-term supply contracts and offer comprehensive pricing
for their products. Broader product lines may also provide our competitors with
a significant advantage in marketing competing products to group purchasing
organizations and other managed care organizations that are increasingly seeking
to reduce costs through centralized purchasing. Greater financial resources and
product development capabilities may allow our competitors to respond more
quickly to new or emerging technologies and changes in customer requirements
that may render our products obsolete. These technological developments which
result in Hectorol becoming obsolete or non-competitive may occur before we are
able to achieve profitability. We also face competition for marketing,
distribution and collaborative development agreements, for establishing
relationships with academic and research institutions and for licenses to
intellectual property. Our competitors compete with us in attracting and
retaining qualified scientific and management personnel as well as in acquiring
technologies complementary to our programs.


                                       17
<PAGE>
         OUR PRODUCTS AND DEVELOPMENT ACTIVITIES ARE SUBJECT TO EXTENSIVE
GOVERNMENT REGULATION WHICH COULD MAKE IT MORE EXPENSIVE AND TIME-CONSUMING FOR
US TO CONDUCT OUR BUSINESS.

         Any new drug product must undergo lengthy and rigorous clinical testing
and other extensive, costly and time-consuming procedures mandated by the FDA
and foreign regulatory authorities. We may elect to delay or cancel our
anticipated regulatory submissions for new indications for Hectorol or proposed
new products for a number of reasons, including:

                  -        unanticipated clinical testing results;

                  -        lack of sufficient resources;

                  -        changes in, or adoption of, new FDA regulations;

                  -        unanticipated enforcement of existing regulations or
                           guidelines;

                  -        unexpected technological developments; and

                  -        developments by our competitors.

         The FDA continues to review products even after they receive FDA
approval. The manufacture and marketing of Hectorol is subject to ongoing
regulation, including compliance with the FDA's current Good Manufacturing
Practices, adverse event reporting requirements and the FDA's general
prohibitions against promoting products for "off-label" uses, or uses not listed
on the FDA-approved labeling. We also are subject to inspection and market
surveillance by the FDA for compliance with these and other requirements. Any
enforcement action resulting from failure to comply with these requirements
could adversely affect the manufacturing and marketing of Hectorol. In addition,
the FDA could withdraw a previously approved product from the market upon
receipt of new information.

         We must also comply with numerous federal, state and local laws,
regulations and recommendations relating to safe working conditions, current
Good Laboratory Practices, current Good Manufacturing Practices and the
experimental use of animals. We cannot predict the extent of government
regulation or the impact of new governmental regulations which might have an
adverse effect on the discovery, development, production and marketing of our
products, and require us to incur significant costs to comply with the
regulations.

         RISKS RELATED TO OUR STOCK

         CONCENTRATION OF OWNERSHIP IN OUR COMPANY BY CERTAIN SHAREHOLDERS MAY
MAKE IT MORE DIFFICULT TO REPLACE OR REMOVE OUR CURRENT MANAGEMENT.

         Based on the number of shares outstanding at August 1, 2002, our
executive officers and directors beneficially own approximately 24% of the
outstanding shares of our common stock and, as a result, have significant
control of us, which they could exert to make it more difficult to replace or
remove our current management.

         OUR FUTURE OPERATING RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK
IS LIKELY TO FLUCTUATE SUBSTANTIALLY IN THE FUTURE.

         Our stock price has fluctuated substantially since we became a public
company in May 1996. Our stock price, like that of many other biotechnology and
pharmaceutical companies, is likely to remain volatile. The trading price of our
common stock may fluctuate widely as a result of a number of factors, some of
which are not in our control, including:

                  -        market perception and customer acceptance of our
                           products;

                  -        our efforts to increase sales of our Hectorol
                           products;

                  -        quarter-to-quarter variations in our operating
                           results;

                  -        timely implementation of new and improved products;

                  -        our level of investment in research and development;

                  -        increased competition;

                  -        our establishment of strategic alliances or
                           acquisitions;

                  -        changes in our relationships with suppliers;

                  -        litigation concerning intellectual property rights in
                           the industry;

                  -        announcements regarding clinical activities or new
                           products by us or our competitors;

                  -        timing of regulatory actions, such as product
                           approvals or recalls;

                  -        costs we incur in anticipation of future sales, such
                           as inventory purchases or expansion of manufacturing
                           facilities;

                  -        general and economic conditions in the biotechnology
                           and pharmaceutical industry and the state of
                           healthcare cost containment efforts, including
                           reimbursement policies;

                  -        limited research coverage by independent securities
                           analysts; and

                  -        changes in earnings estimates by analysts.


                                       18
<PAGE>
         In addition, the market for our stock has experienced extreme price and
volume fluctuations, which have often been unrelated to our operating
performance. We believe that period-to-period comparisons of our historical and
future results will not necessarily be meaningful and that investors and
prospective investors in Bone Care should not rely on them as an indication of
future performance. To the extent we experience the factors described above, our
future operating results may not meet the expectations of securities analysts or
investors from time to time, which may cause the market price of our common
stock to decline or be volatile.

         SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY
DEPRESS OUR STOCK PRICE.

         Most of our outstanding shares of common stock are freely tradable. The
market price of our common stock could drop due to sales of a large number of
shares or the perception that such sales could occur. These factors also could
make it more difficult to raise funds through future offerings of common stock.

         RISKS RELATED TO INTELLECTUAL PROPERTY

         IF WE ARE UNABLE TO PROTECT OUR PATENTS, OUR COMPETITIVENESS AND
BUSINESS PROSPECTS MAY BE MATERIALLY DAMAGED.

         Our success will depend to a significant degree on our ability to
obtain and enforce patents and licenses to patent rights, both in the United
States and in other countries. The patent position, however, of pharmaceutical
companies is often uncertain and involves complex legal and factual questions,
not the least of which is that we cannot predict the breadth of patent claims in
pharmaceutical patents. In addition, a substantial backlog of pharmaceutical
patent applications exists at the United States Patent and Trademark Office. The
backlog may delay review and potential issuance of patents.

         To date, we have filed a number of patent applications in the United
States and other countries. Our issued patents and pending patent applications
relating to Hectorol are method-of-use patents which cover only the use of
certain compounds to treat specified conditions, rather than composition-of-
matter patents which would cover the chemical composition of the active
ingredient. Method-of-use patents provide less protection than
composition-of-matter patents because of the possibility of off-label uses if
other companies market or make the compound for other uses. We actively continue
to file applications as appropriate for patents covering our products, uses and
processes. We cannot guarantee that we will obtain patent protection for our
products or processes.

         We also cannot guarantee that competitors will not successfully
challenge our patents, if issued, on the basis of validity and/or
enforceability. Nor can we guarantee that they will not circumvent or design
around our patent position. We could face increased competition as a result of
the failure of patents to be issued on our pending applications or a finding of
invalidity and/or unenforceability of one of our patents.

         In the United States, patent applications are maintained in secrecy
until a patent issues. We cannot be certain that others have not filed patent
applications for compounds, uses or processes covered by our pending
applications. We also cannot be certain that we were the first to invent or
discover the compound, use or process that is the subject of our applications.
Competitors may have filed applications for, or may have received patents and
may obtain additional patents and proprietary rights relating to, compounds,
uses or processes that block or compete with our patents and rights. We are
aware of a significant number of patent applications relating to D-hormones
filed by, and patents issued to, third parties. If any of our competitors have
filed patent applications in the United States that claim compounds, uses or
processes also claimed by us, we may have to participate in an interference
proceeding declared by the United States Patent and Trademark Office to
determine priority of invention and the corresponding right to a patent for the
compounds, uses or processes in the United States. A proceeding could result in
substantial cost to us even if the outcome is favorable.

         We have not filed patent applications in every country. In certain
countries, obtaining patents for our products, processes and uses may be
difficult or impossible. Patents issued in countries and regions other than the
United States, Japan and Europe may be harder to enforce than, and may not
provide the same protection as, patents obtained in the United States, Europe
and Japan.

         IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS AND TRADE SECRETS,
OUR COMPETITIVENESS AND BUSINESS PROSPECTS MAY BE MATERIALLY DAMAGED.

         Operation of our business also relies on our ability to protect
proprietary information and trade secrets. We require our employees, consultants
and advisors to execute confidentiality agreements upon commencement of
employment or consulting relationships with us. We cannot guarantee, however,
that these agreements will provide meaningful protection or adequate remedies
for our proprietary information and trade secrets in the event of unauthorized
use or disclosure of such information nor can we guarantee that the parties to
the agreements will not breach their agreements. We also cannot guarantee that
third parties


                                       19
<PAGE>
will not know, discover or develop independently equivalent proprietary
information or techniques, that they will not gain access to our trade secrets
or disclose our trade secrets to the public. Therefore, we cannot guarantee that
we can maintain and protect unpatented proprietary information and trade
secrets.

         WE MAY BE ACCUSED OF INFRINGING UPON THE PROPRIETARY RIGHTS OF OTHERS
AND ANY RELATED LITIGATION COULD DAMAGE OUR BUSINESS.

         Our commercial success depends significantly on our ability to operate
our business without infringing upon the patents and other proprietary rights of
third parties. We cannot guarantee that our compounds, uses or processes do not
and will not infringe upon the patents and proprietary rights of third parties.
In the event of an infringement determination, we may be enjoined from research,
development or commercialization of our products. We may also be required to
enter into royalty or license arrangements with third parties claiming
infringement or otherwise to design around their patents. Any required license,
if available at all, may not be obtained on commercially reasonable terms. If we
do not obtain the licenses or are unable to design around the patent, we may be
delayed or prevented from pursuing the development of some of our product
candidates.

ITEM 2. PROPERTIES

         We currently lease approximately 34,000 square feet of office and
laboratory space in Middleton, Wisconsin. This lease expires in January 2006. We
believe our facilities are adequate to meet our needs for the foreseeable
future.

ITEM 3. LEGAL PROCEEDINGS

         We may be a defendant from time to time in actions arising out of our
ordinary business operations. There are no material legal proceedings pending.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.


EXECUTIVE OFFICERS OF THE REGISTRANT

         As of August 1, 2002, our executive officers are as follows:

<TABLE>
<CAPTION>
        NAME                    AGE                      POSITION
        ----                    ---                      --------
<S>                             <C>               <C>
Paul L. Berns                    35               President and CEO
Robert A. Beckman                48               Vice President-Finance
Jim Caruso                       43               Vice President-Sales
Charlie Basil Mundy II           56               Vice President-Marketing
R. Andrew Morgan                 44               Vice President-Regulatory Affairs, Quality and Compliance
</TABLE>

         Paul L. Berns joined Bone Care in June 2002 as President and CEO and
Director. Mr. Berns was formerly Vice President and General Manager of the
Immunology and Oncology business unit of Abbott Laboratories from March 2001 to
April 2002. His prior appointments include Vice President, Marketing at BASF
Pharmaceuticals from June 2000 to March 2001 and serving at Bristol Myers Squibb
Company from 1990 to June 2000 where he held positions of Territory Manager,
Senior Product Manager, Director and finally Vice President of Neuroscience
Marketing.

         Robert A. Beckman has served as Vice President- Finance since July
2001. Mr. Beckman was previously the Vice President of Finance for Lunar
Corporation from 1987 until August 2000; he also served as Vice President of
Bone Care from May 1996 to November 1996 and served as a Director of Bone Care
from 1989 to July 2002.

         Jim Caruso joined Bone Care in August 2002 as our Vice President-
Sales. Mr. Caruso was Vice President of Sales of the Neuroscience Business Unit
at Novartis from June 2001 to August 2002. Mr. Caruso was Vice President of
Sales at BASF Pharmaceuticals from June 2000 to June 2001 and from 1988 to June
2000; Mr. Caruso held several positions at Bristol Myers Squibb including
Director of Sales- West Coast and Senior Director of Serzone Marketing.


                                       20
<PAGE>
         Charlie Basil Mundy II joined Bone Care in January 2002 as our Vice
President- Marketing. Mr. Mundy held several senior marketing positions at
Celltech Pharmaceuticals from July 2000 to December 2001. His prior appointments
include Vice President, Marketing at MGI Pharma from December 1997 to March
1999, Director, INFeD Sales at Schein Pharmaceutical from January 1996 to
December 1997 and Marketing Director for the National Kidney Foundation from May
1995 to January 1996. Mr. Mundy was previously employed by Johnson and Johnson,
Ortho Biotech Inc. for 27 years.

         R. Andrew Morgan, R.Ph., joined Bone Care in April 2002 as our Vice
President- Regulatory Affairs, Quality and Compliance. Mr. Morgan was Director
of Regulatory Affairs for Celltech Pharmaceuticals from November 1997 to March
2002. His prior appointments include Manager of Regulatory Affairs for Medeva,
Inc. from May 1994 to November 1997 and Senior Regulatory Affairs Associate for
Adams Laboratories from June 1991 to May 1994. Mr. Morgan also worked seven
years as a clinical Pharmacist and Manager at All Saints Hospital.

         Officers are elected to serve, subject to the discretion of the Board
of Directors, until their successors are appointed.


                                       21
<PAGE>
                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common stock is quoted on the NASDAQ National Market of The NASDAQ
Stock Market under the symbol "BCII" and has been publicly traded since May
1996. The following table sets forth high and low sales prices as reported on
The NASDAQ Stock Market for fiscal years 2001 and 2002 as indicated.

<TABLE>
<CAPTION>
                                           HIGH            LOW
                                          ------          ------
<S>                                       <C>             <C>
FISCAL YEAR ENDED JUNE 30, 2001
     First Quarter .............          $23.94          $18.00
     Second Quarter ............           30.25           13.00
     Third Quarter .............           18.38           14.75
     Fourth Quarter ............           27.80           14.92
FISCAL YEAR ENDING JUNE 30, 2002
     First Quarter .............          $27.50          $16.00
     Second Quarter ............           21.80           16.31
     Third Quarter .............           18.70           12.01
     Fourth Quarter ............           13.73            5.50
</TABLE>

         As of June 30, 2002, approximately 185 shareholders of record held our
common stock.

         We have never declared or paid any cash dividends on our common stock,
and we do not plan on paying any in the near future. Any future determination as
to the declaration and payment of dividends will be at the discretion of our
board of directors and will depend on then existing conditions, including our
financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and other factors our board of directors deem
relevant.


                                       22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

         The following table sets forth selected statements of operations data
and balance sheet data for the fiscal years ended June 30, 1998, 1999, 2000,
2001 and 2002. The financial data with respect to our statements of operations
for the fiscal years ended June 30, 2000, 2001 and 2002 and with respect to our
balance sheets as of June 30, 2001 and 2002 are derived from our audited
financial statements that appear elsewhere in this filing. The following
statements of operations data for fiscal years ended June 30, 1998 and 1999 and
balance sheet data as of June 30, 1998, 1999 and 2000 are derived from our
audited financial statements not included in this filing. You should read the
financial statement data in conjunction with the discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements and the related notes to those audited
financial statements included elsewhere in this filing.

<TABLE>
<CAPTION>
                                                                               YEAR ENDED JUNE 30,
                                                   ----------------------------------------------------------------------------
                                                     1998             1999             2000             2001             2002
                                                   --------         --------         --------         --------         --------
                                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                <C>              <C>              <C>              <C>              <C>
STATEMENTS OF OPERATIONS DATA:
Revenues ..................................             $--              $--         $    385         $  5,997         $ 14,991
Operating expenses:
     Cost of sales ........................              --               --              103            1,645            3,391
     Inventory write-off ..................              --               --              400              260              166
     Research and development .............           3,932            3,455            4,048            4,556            5,739
     Marketing and administrative .........             898            2,855            6,282            9,859           13,856
                                                   --------         --------         --------         --------         --------
          Total operating expenses ........           4,830            6,310           10,833           16,320           23,152

Loss from operations ......................          (4,830)          (6,310)         (10,448)         (10,323)          (8,161)
Interest income, net ......................             340              533              656            1,309            1,257
                                                   --------         --------         --------         --------         --------
Loss before income tax ....................          (4,490)          (5,777)          (9,792)          (9,014)          (6,904)
Income tax expense ........................              --               --              (13)              --               --
                                                   --------         --------         --------         --------         --------
Net loss ..................................        $ (4,490)        $ (5,777)        $ (9,805)        $ (9,014)        $ (6,904)
                                                   ========         ========         ========         ========         ========
Net loss per common share-basic and diluted        $  (0.51)        $  (0.57)        $  (0.89)        $  (0.70)        $  (0.49)
                                                   ========         ========         ========         ========         ========
Weighted average common shares outstanding            8,747           10,055           11,071           12,884           14,084
</TABLE>

<TABLE>
<CAPTION>
                                                                    JUNE 30,
                                   ----------------------------------------------------------------------------
                                                                 (IN THOUSANDS)

BALANCE SHEET DATA:                  1998             1999             2000             2001             2002
                                   --------         --------         --------         --------         --------
<S>                                <C>              <C>              <C>              <C>              <C>
Cash and cash equivalents .        $  3,484         $  7,314         $  4,736         $  1,843         $  2,024
Marketable securities .....              --               --            4,972           15,080           18,437
Long-term securities ......              --               --               --           14,424            3,720
Working capital ...........           3,073            7,956            9,229           20,786           24,962
Total assets ..............           5,813           10,303           12,460           40,477           34,684
Total long-term liabilities              --               --               --               --               --
Accumulated deficit .......         (10,020)         (15,797)         (25,602)         (34,616)         (41,520)
Total shareholders' equity            5,122            9,717           11,083           38,098           32,024
</TABLE>


                                       23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and our financial statements and the related
notes included elsewhere in this filing.

OVERVIEW OF OUR BUSINESS

         Bone Care is a pharmaceutical company engaged in discovering,
developing and commercializing improved vitamin D-hormone therapies to treat
secondary hyperparathyroidism in patients with kidney (or renal) disease,
osteoporosis and other diseases including psoriasis and cancers of the prostate,
breast and colon. We were founded in 1984 as a subsidiary of Lunar Corporation,
located in Madison, Wisconsin, and we were spun off from Lunar in 1996.

         We licensed our first product, doxercalciferol or Hectorol, as it is
known commercially, in 1987 from the University of Wisconsin, a leading vitamin
D research center. Hectorol, also known as doxercalciferol, is a vitamin D
replacement therapy approved by the FDA in two formulations to treat secondary
hyperparathyroidism in patients with end-stage renal disease, or ESRD. Hectorol
is a safe and effective therapy for reducing elevated levels of parathyroid
hormone (PTH) in blood in the management of secondary hyperparathyroidism, a
disease characterized by excessive secretion of PTH. Hyperparathyroidism, if
left untreated, can eventually result in cardiovascular compromise, reduced
immunity, muscle weakness, bone loss and fractures. Virtually all ESRD patients
suffer from secondary hyperparathyroidism. We obtained FDA approval for Hectorol
Capsules in June 1999, and we began selling this orally administered product in
the United States in October 1999. We filed a supplemental New Drug Application
with the FDA in December 2001 to treat secondary hyperparathyroidism in chronic
kidney disease (CKD) patients. If approved, this would expand the approved
indications for Hectorol Capsules. We obtained FDA approval for Hectorol
Injection in April 2000, and we began selling this intravenous product in the
United States in August 2000. We are also developing doxercalciferol and other
vitamin D-hormones to treat several other diseases.

         From our inception in 1984, we have generated minimal revenue from
operations, and from our inception substantially all of our resources have been
dedicated to:

         -        the development, patenting, pre-clinical testing, and clinical
                  trials of Hectorol Capsules and Hectorol Injection;

         -        the development of manufacturing processes for Hectorol
                  Capsules and Hectorol Injection;

         -        pursuing United States regulatory approvals of Hectorol
                  Capsules and Hectorol Injection;

         -        the sales and marketing associated with the launch of Hectorol
                  Capsules and Hectorol Injection; and

         -        research and development and pre-clinical testing of other
                  potential product candidates.

         We have lost money since inception and, as of June 30, 2002 have an
accumulated deficit of approximately $41.5 million. Our only sources of revenue
have been:

         -        revenues from the launch of Hectorol Capsules and Hectorol
                  Injection;

         -        licensing fees associated with our early stage research
                  collaborations, which licenses have since expired; and

         -        fees from conducting incidental laboratory assay services.

         We estimate that commercialization, regulatory compliance and sales
efforts associated with Hectorol Capsules and Hectorol Injection will exceed $14
million per year prior to achieving profitable operating levels. Further,
development of LR-103, BCI-202 and other product candidates, or expansion of
Hectorol into other therapeutic areas, will require significant, time-consuming
and costly research and development, pre-clinical testing and extensive clinical
trials prior to submission of any regulatory application for commercial use. We
plan to continue pre-clinical testing of LR-103 and BCI-202 in order to begin
Phase I clinical trials on both product candidates within three years. The
pre-clinical efforts could cost approximately $3 million. We expect to incur
substantial losses at least through June 30, 2003 until revenues from the sale
of Hectorol products are sufficient to offset those expenses. The amount and
timing of our operating expenses will depend on many factors, including:

         -        the extent to which Hectorol Capsules and Hectorol Injection
                  obtain market acceptance;

         -        the costs of sales and marketing activities associated with
                  Hectorol Capsules and Hectorol Injection;


                                       24
<PAGE>
         -        the status of our research and development activities;

         -        the costs involved in preparing, filing, prosecuting,
                  maintaining, protecting and enforcing our patent claims and
                  other proprietary rights;

         -        our ability to maintain our current manufacturing capabilities
                  through relationships with third parties or establish those
                  capabilities internally;

         -        technological and other changes in the competitive landscape;
                  and

         -        evaluation of the commercial viability or potential of product
                  candidates.

         As a result, we believe that period-to-period comparisons of our
financial results are not necessarily meaningful.

RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED JUNE 30, 2002 COMPARED TO JUNE 30,
2001

         Total revenues increased to $14,990,749 for the year ended June 30,
2002, from $5,997,282 for the year ended June 30, 2001. This increase resulted
from increased sales of both Hectorol Injection and Hectorol Capsules. Hectorol
Injection, launched in August 2000, generated revenues of $9,448,115 during the
year ended June 30, 2002 compared to $5,022,454 in the year ended June 30, 2001.
Hectorol Capsule revenues were $5,542,634 for the year ended June 30, 2002,
compared to $974,828 in the year ended June 30, 2001.

         Bone Care began selling Hectorol Capsules in October 1999. Because
Hectorol Capsules were Bone Care's first product, Bone Care did not initially
have historical data to estimate returns and exchanges in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 48, "Revenue Recognition
When Right of Return Exists." Revenues from shipments of Hectorol Capsules and
the related costs were deferred at the time of shipment to wholesalers and
included in the Statement of Operations at the time the product was sold by
these wholesalers to retail users of the product. Effective October 1, 2000,
Bone Care had sufficient experience to estimate future product returns and began
recording sales and the related costs of Hectorol Capsules and Hectorol
Injection based on shipments to its customers reduced by the estimated future
returns. Bone Care's June 30, 2002 balance sheet includes a reserve of $226,100,
representing the estimated amount of future returns related to Hectorol Capsules
and Hectorol Injection.

         Gross margins on product revenues (excluding a $165,817 inventory
write-off in fiscal 2002 and a $260,000 inventory write-off in fiscal 2001) were
$11,599,879, or 77% of product revenues, for the year ended June 30, 2002
compared to $4,352,443, or 73% of product revenues, for the year ended June 30,
2001. We wrote off $98,373 of excess Hectorol Capsule inventory in fiscal 2002
and $260,000 in fiscal 2001 representing amounts we estimated would not be sold
prior to the expiration date. During the year ended June 30, 2002, Bone Care
subsequently recovered approximately $300,000 of Hectorol Capsule inventory that
was previously written-off when the FDA agreed to extend the expiration date
from four to five years. The original cost of the recovered Hectorol Capsule
inventory was written-off over the years ended June 30, 2001 and 2000 as an
adjustment to cost-of-goods sold of $260,000 and $364,000 respectively. We also
wrote off $67,444 of Hectorol Injection inventory in the year ended June 30,
2002 that did not meet quality control release test standards. We expect gross
margins to decline somewhat in the year ended June 30, 2003, because we have
increased our expenditures for quality assurance and compliance.

         Our research and development expenses were $5,739,152 in the year ended
June 30, 2002 compared to $4,556,061 in the year ended June 30, 2001. The
$1,183,091 increase is attributable to expanded preclinical studies designed to
evaluate early stage compounds in the treatment of psoriasis and prostate,
breast, and colon cancers; an increase of one preclinical and two clinical
positions and related salaries and benefits; and increased facility costs at our
new Middleton, Wisconsin, site.

         Sales and marketing expenses increased $3,078,074 to $10,275,913 in the
year ended June 30, 2002 from $7,197,839 in the year ended June 30, 2001. These
increases are attributable to an increase in the sales force from 29 to 40
during the year ended June 30, 2002. We also increased the clinical support
staff from 5 to 7, and the marketing staff from 4 to 9 during the year ended
June 30, 2002. We implemented these headcount increases in anticipation of a
national J-code that became effective January 1, 2002. This code was issued by
the Centers for Medicare and Medicaid Services (CMS) for reimbursement of
Hectorol Injection during hemodialysis.

         General and administrative expenses increased $918,328 to $3,580,063 in
the year ended June 30, 2002 from $2,661,735 in the year ended June 30, 2001.
The increase was the result of our overall growth and related expansion of
infrastructure to support Bone Care's increased commercial activities. These
increases include costs associated with the executive search for the President
and CEO position, increased insurance premiums, salaries and general legal fees.


                                       25

<PAGE>

         Interest income decreased $51,770 to $1,257,171 in the year ended June
30, 2002 from $1,308,941 in the year ended June 30, 2001. The decrease was due
to lower average cash and marketable security balances for the year ended June
30, 2002, as well as a decline in yield on our investments.

RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED JUNE 30, 2001 COMPARED TO JUNE 30,
2000

         Total revenues increased to $5,997,282 for the year ended June 30,
2001, from $384,737 for the year ended June 30, 2000. This increase is primarily
the result of our launch of Hectorol Injection in August 2000, which generated
revenues of $5,022,454 during fiscal 2001. Hectorol Capsule revenues were
$974,828 for the year ended June 30, 2001, compared to $234,741 in the year
ended June 30, 2000.

         Bone Care began selling Hectorol Capsules in October 1999. Because
Hectorol Capsules were Bone Care's first product, Bone Care did not initially
have historical data to estimate returns and exchanges in accordance with SFAS
No. 48, "Revenue Recognition When Right of Return Exists." Revenues from
shipments of Hectorol Capsules and the related costs were deferred at the time
of shipment to wholesalers and included in the Statement of Operations at the
time the product was sold by these wholesalers to retail users of the product.
Bone Care's June 30, 2000, balance sheet includes deferred income of $63,539.
Effective October 1, 2000, Bone Care had sufficient experience to estimate
future product returns and began recording sales and the related costs of
Hectorol Capsules and Hectorol Injection based on shipments to its customers
reduced by the estimated future returns. Bone Care's June 30, 2001, balance
sheet includes $205,000, representing the estimated amount of future returns
related to Hectorol Capsules and Hectorol Injection.

         Gross margins on product revenues (excluding a $260,000 write-off in
fiscal 2001 and a $400,000 write-off in fiscal 2000) were $4,352,443, or 73% of
product revenues, for the fiscal year ended 2001 compared to $281,903, or 73% of
product revenues, for the fiscal year ended June 30, 2000.

         We wrote off $260,000 of excess Hectorol Capsule inventory in fiscal
2001 and $400,000 in fiscal 2000 representing amounts, which we estimated would
not be sold prior to the expiration date. In the fourth quarter of fiscal 2001,
the FDA agreed to lengthen the expiration period from three to four years.

         Our research and development expenses were $4,556,061 in fiscal year
2001 and $4,048,608 in fiscal year 2000. The $507,453 increase was primarily due
to an increase in headcount and related salaries and benefits.

         Sales and marketing expenses increased $2,716,241 to $7,197,839 in
fiscal year 2001 from $4,481,598 in fiscal year 2000. $520,365 of the increase
related to the development of a marketing research database which analyzes
dialysis patient data associated with D-hormone treatments. The remainder of the
increase was a result of additional personnel and related expenses associated
with the launch of Hectorol Injection.

         General and administrative expenses increased $861,719 to $2,661,735 in
fiscal year 2001 from $1,800,016 in fiscal year 2000. The increase was the
result of our overall growth and related expansion of infrastructure to support
Bone Care's increased commercial activities.

         Interest income increased $653,367 to $1,308,941 in fiscal year 2001
from $655,574 in fiscal year 2000. The increase was attributable to the receipt
of $35,772,800 net cash proceeds from the sales of common stock during December
2000 and January 2001.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Our significant accounting policies are described in Note 1 to the
Notes to the Financial Statements included elsewhere in this filing. Those
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent liabilities. On an on-going basis, we evaluate our
estimates, including those related to our provision for sales returns and
allowances, allowance for doubtful accounts, and our estimate of excess and
obsolete inventory. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis of judgments regarding the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

                                       26
<PAGE>
Sales Returns and Allowances

         When revenue is recognized, Bone Care simultaneously records an
estimate of various costs, which reduce product sales. These costs include
estimates for product returns, chargebacks, rebates, and discounts. Estimates
are based on a variety of factors including actual return experience, rebate and
chargeback agreements, inventory levels at our wholesale customers, and
estimated sales by our wholesale customers to other third parties who have
contracts with us, respectively. Actual experience associated with any of these
items may differ materially from our estimates. Factors are reviewed that
influence our estimates and, if necessary, adjustments are made when we believe
that actual product returns, chargebacks, rebates, and discounts may differ from
established reserves.

Allowance for Doubtful Accounts

         An allowance is maintained for estimated losses resulting from the
inability of customers to make required payments. Credit terms are extended on
an uncollateralized basis primarily to wholesale drug distributors and
independent clinics throughout the United States. Management specifically
analyzes accounts receivable, historical bad debts, customer credit-worthiness,
percentage of accounts receivable by aging category, and changes in customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. If the financial condition of our customers were to deteriorate,
resulting in an impairment in their ability to make payments, additional
allowances may be required. Historically, our actual losses from uncollectible
accounts have been insignificant.

Excess and Obsolete Inventory

         Inventories are stated at the lower of cost or market, with cost
determined at a standard cost rate. In evaluating whether inventory is stated at
the lower of cost or market, management considers such factors as the amount of
inventory on hand, expiration dates, and the estimated time to sell such
inventory. As appropriate, provisions are made to reduce inventories to their
net realizable value. Historically, cost of inventories that potentially may not
sell prior to expiration or are deemed of no commercial value have been
written-off when identified.

LIQUIDITY AND CAPITAL RESOURCES

     In December 2000 and January 2001 we completed a public offering of
2,445,000 shares of common stock at a price of $16.00 per share. We received net
proceeds of approximately $35.8 million from the sale. In October 1999, we
completed a directed public offering of 1,229,058 shares of newly issued common
stock at a price of $9.02 per share. We received net proceeds of approximately
$11.0 million from the sale.

     Net cash used in operating activities was $6,639,200 in fiscal year 2002,
$12,581,831 in fiscal year 2001 and $7,995,937 in fiscal year 2000. The cash
used by operating activities was used primarily to fund research and development
as well as marketing and commercialization efforts for Hectorol Capsules and
Hectorol Injection.

     We have experienced negative cash flows from operations since our inception
and do not anticipate generating sufficient positive cash flows to fund our
operations until we achieve, if ever, significant revenues from the sale of
Hectorol Capsules and Hectorol Injection. We have expended, and expect to
continue to expend in the future, substantial funds for our:

     -    research and development programs;

     -    pre-clinical and clinical testing;

     -    regulatory processes, including completion of FDA post-approval Phase
          IV commitments for Hectorol Capsules and Hectorol Injection;

     -    manufacturing expenses;

     -    sales and marketing programs; and

     -    other operating expenses.

     Cash, cash equivalents and short- and long-term marketable securities were
$24,180,661 at June 30, 2002 and $31,346,903 at June 30, 2001. Cash and cash
equivalents and investments are currently comprised primarily in money market
funds, short-term investment grade United States government, municipal and
corporate debt securities.

                                       27
<PAGE>
     Bone Care's capital requirements will depend on numerous factors, including
the progress of commercialization and marketing activities; the progress of its
research and development programs; the progress of preclinical and clinical
testing; the time and cost involved in obtaining regulatory approvals; the cost
of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights; competing technological and market developments;
changes and developments in Bone Care's existing licensing relationships and the
terms of any new collaborative, licensing, co-promotion or distribution
arrangements that Bone Care may establish; the cost of manufacturing preclinical
and clinical products; and other factors not within our control.

     Based upon our current plans, we believe that we will have sufficient funds
to meet our operating expenses and capital requirements for at least the next
two years. Thereafter, we may need to raise additional capital to fund our
operations; however, we do not have any specific plans to raise additional
capital. If we seek additional funds, equity offerings or other sources would be
considered. There is no assurance that such additional funds will be available
on acceptable terms, if at all.

     At June 30, 2002, we had state tax net operating loss carryforwards of
approximately $38,010,000 and state research and development tax credit
carryforwards of approximately $449,000, which will begin expiring in 2006 and
2011, respectively. We also had federal net operating loss carryforwards of
approximately $39,352,000 and research and development tax credit carryforwards
of approximately $1,741,000, which will begin expiring in 2011 and 2012,
respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

     On June 30, 2001, the Financial Accounting Standards Board finalized
Statement of SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS
No. 142 goodwill will no longer be amortized. Instead, an assessment of fair
value will be used to test for impairment of goodwill on an annual basis or when
circumstances indicate a possible impairment. Bone Care adopted SFAS No. 142
effective July 1, 2001.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our sales from inception to date have been made to United States customers,
and as a result, we have not had any exposure to factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
However, in future periods, we expect to sell in foreign markets, including
Europe and Asia. As our sales are made in United States dollars, a strengthening
of the United States dollar could make our products less competitive in foreign
markets.

     As of June 30, 2002, we held $18,436,896 of short-term marketable
securities and $3,719,796 of long-term marketable securities. The investments
have been made for investment (as opposed to trading) purposes. Interest rate
risk with respect to our investments is not significant as all such investments
are in U.S. dollar cash equivalents and are:

     -    short-term investments, which are by their nature less sensitive to
          interest rate movements, or

     -    have maturities in excess of one year and are expected to be held to
          maturity, thereby eliminating the risks associated with interest rate
          changes.

                                       28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          BONE CARE INTERNATIONAL, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               ----
<S>                                                                                            <C>
Independent Auditor's Report..............................................................      30

Report of Independent Public Accountants..................................................      31

Balance Sheets as of June 30, 2001 and 2002...............................................      32

Statements of Operations for the Years Ended June 30, 2000, 2001 and 2002.................      33

Statements of Shareholders' Equity for the Years Ended June 30, 2000, 2001 and 2002.......      34

Statements of Cash Flows for the Years Ended June 30, 2000, 2001 and 2002.................      35

Notes to the Financial Statements.........................................................      36
</TABLE>

                                       29
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Shareholders of
Bone Care International, Inc.:


     We have audited the accompanying balance sheet of Bone Care International,
Inc. (a Wisconsin corporation) as of June 30, 2002 and the related statements of
operations, shareholders' equity, and cash flows for the year then ended. Our
audit also included the financial statement schedule listed in the index at Item
14. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audit. The financial statements of Bone Care International, Inc. as of
June 30, 2001 and for the years ended June 30, 2001 and June 30, 2000 were
audited by other auditors who have ceased operations. Those other auditors
expressed an unqualified opinion on those consolidated financial statements in
their report dated August 1, 2001.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

     In our opinion, such 2002 financial statements present fairly, in all
material respects, the financial position of Bone Care International, Inc., as
of June 30, 2002, and the results of their operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects, the information set forth
therein.

           As discussed above, the financial statements of Bone Care
International as of June 30, 2001, and for the year then ended were audited by
other auditors who have ceased operations. As described in Note 1, these
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards (Statement) No. 142,
Goodwill and other Intangible Assets, which was adopted by the Company as of
July 1, 2001. Our audit procedures with respect to the disclosures in Note 1
with respect to 2001 included (i) agreeing the previously reported net income to
the previously issued financial statements and the adjustments to reported net
income representing amortization expense (including any related tax effects)
recognized in those periods related to goodwill to the Company's underlying
records obtained from management, and (ii) testing the mathematical accuracy of
the reconciliation of adjusted net income to reported net income, and the
related earnings-per-share amounts. In our opinion, the disclosures for 2001 in
Note 1 are appropriate. However, we were not engaged to audit, review, or apply
any procedures to the 2001 financial statements of the Company other than with
respect to such disclosures and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 financial statements taken as a whole.

Deloitte & Touche LLP

Milwaukee, Wisconsin
August 2, 2002

                                       30
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

This report set forth below is a copy of a previously issued audit report by
Arthur Andersen LLP. This report has not been reissued by Arthur Andersen LLP in
connection with its' inclusion in this Form 10-K.

To: The Board of Directors and Shareholders of
Bone Care International, Inc.:

     We have audited the accompanying balance sheets of Bone Care International,
Inc. (a Wisconsin corporation) as of June 30, 2001 and 2000, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bone Care International,
Inc., as of June 30, 2001 and 2000, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 2001 in
conformity with accounting principles generally accepted in the United States.

     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at item
14.1 is the responsibility of the Company's management and is presented for the
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Milwaukee, Wisconsin
August 1, 2001

                                       31
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                                 BALANCE SHEETS

                          AS OF JUNE 30, 2001 AND 2002

<TABLE>
<CAPTION>
                                      ASSETS                                               2001                  2002
                                      ------                                               ----                  ----
<S>                                                                                     <C>                  <C>
Current assets:
     Cash and cash equivalents .................................................        $  1,842,838         $  2,023,969
     Marketable securities .....................................................          15,079,575           18,436,896
     Accounts receivable, net of allowance for doubtful accounts of $100,000 as
        of June 30, 2001 and $152,960 as of June 30,2002 .......................           3,347,300            4,285,569
     Inventories ...............................................................           1,810,574            2,099,469
     Other current assets ......................................................           1,085,103              775,596
                                                                                        ------------         ------------
               Total current assets ............................................          23,165,390           27,621,499

Long-term securities ...........................................................          14,424,490            3,719,796

Property, plant, and equipment -- at cost:
     Leasehold improvements ....................................................             587,632              588,632
     Furniture and fixtures ....................................................             466,200              452,345
     Machinery and other equipment .............................................           1,419,293            2,317,405
                                                                                        ------------         ------------
                                                                                           2,473,125            3,358,382
     Less -- Accumulated depreciation and amortization .........................             970,120            1,573,497
                                                                                        ------------         ------------
                                                                                           1,503,005            1,784,885

Patent fees, net of accumulated amortization of $988,466 as of June 30, 2001 and
$998,027 as of June 30, 2002 ...................................................           1,025,320            1,198,249
Goodwill, net of accumulated amortization of  $1,000,752 as of June 30, 2001 and
  June 30, 2002 ................................................................             359,165              359,165
                                                                                        ------------         ------------
                                                                                        $ 40,477,370         $ 34,683,594
                                                                                        ============         ============
                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------
Current liabilities:
     Accounts payable ..........................................................        $  1,612,543         $  1,769,665
     Accrued liabilities --
          Accrued clinical study and research costs ............................             147,635              152,352
          Compensation payable .................................................             208,930              509,677
          Due to customers .....................................................             135,102                   --
          Other ................................................................              70,055                1,924
     Allowance for sales returns ...............................................             205,000              226,100
                                                                                        ------------         ------------
               Total current liabilities .......................................           2,379,265            2,659,718
Shareholders' equity:
     Preferred stock -- authorized 2,000,000 shares of $.001 par value; none
        issued .................................................................                  --                   --
     Common stock -- authorized 28,000,000 shares of no par value; issued and
        outstanding 13,955,372 and 14,156,772 as of June 30, 2001 and 2002,
        respectively ...........................................................          11,393,883           11,393,883
     Additional paid-in capital ................................................          61,240,197           62,096,272
     Accumulated deficit .......................................................         (34,616,341)         (41,520,236)
     Accumulated other comprehensive income (loss) .............................              80,366               53,957
                                                                                        ------------         ------------
               Total shareholders' equity ......................................          38,098,105           32,023,876
                                                                                        ------------         ------------
                                                                                        $ 40,477,370         $ 34,683,594
                                                                                        ============         ============
</TABLE>

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

                                       32
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                            STATEMENTS OF OPERATIONS

                    YEARS ENDED JUNE 30, 2000, 2001 AND 2002

<TABLE>
<CAPTION>
                                                            2000                  2001                  2002
                                                            ----                  ----                  ----
<S>                                                     <C>                  <C>                  <C>
Revenues .......................................        $    384,737         $  5,997,282         $ 14,990,749
Operating expenses:
     Cost of sales .............................             102,834            1,644,839            3,390,870
     Inventory write-off .......................             400,000              260,000              165,817
     Research and development ..................           4,048,608            4,556,061            5,739,152
     Marketing and administrative ..............           6,281,614            9,859,574           13,855,976
                                                        ------------         ------------         ------------
                                                          10,833,056           16,320,474           23,151,815
                                                        ------------         ------------         ------------
          Loss from operations .................         (10,448,319)         (10,323,192)          (8,161,066)
Interest income ................................             655,574            1,308,941            1,257,171
                                                        ------------         ------------         ------------
          Loss before income tax ...............          (9,792,745)          (9,014,251)          (6,903,895)
Income tax expense .............................              12,500                   --                   --
                                                        ------------         ------------         ------------
          Net loss .............................        $ (9,805,245)        $ (9,014,251)        $ (6,903,895)
                                                        ============         ============         ============
Net loss per common share -- basic and diluted .        $      (0.89)        $      (0.70)        $      (0.49)
                                                        ============         -------------        ------------
</TABLE>

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

                                       33
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                       STATEMENTS OF SHAREHOLDERS' EQUITY

                    YEARS ENDED JUNE 30, 2000, 2001, AND 2002

<TABLE>
<CAPTION>
                                                                                                      ACCUMULATED
                                                                      ADDITIONAL                         OTHER
                                         NUMBER OF        COMMON       PAID-IN        ACCUMULATED    COMPREHENSIVE
                                          SHARES           STOCK       CAPITAL          DEFICIT      INCOME (LOSS)          TOTAL
                                          ------           -----       -------          -------      -------------          -----
<S>                                     <C>            <C>           <C>            <C>              <C>              <C>
Balance at June 30, 1999 ..........     10,173,396     11,393,883     14,119,761     (15,796,845)            --          9,716,799
      Net loss for the year ended
         June 30, 2000 ............             --             --             --      (9,805,245)            --         (9,805,245)
      Unrealized loss on marketable
         securities ...............             --             --             --              --         (8,560)            (8,560)
                                                                                                                        ----------
      Comprehensive loss ..........             --             --             --              --             --         (9,813,805)
      Issuance of shares under
         stock option plan ........         54,114             --        204,583              --             --            204,583
      Issuance of stock awards ....            100             --             --              --             --                 --
      Issuance of common stock ....      1,229,058             --     10,975,610              --             --         10,975,610
                                        ----------    -----------    -----------    ------------       --------       ------------
Balance at June 30, 2000 ..........     11,456,668     11,393,883     25,299,954     (25,602,090)        (8,560)        11,083,187
      Net loss for the year ended
         June 30, 2001 ............             --             --             --      (9,014,251)            --         (9,014,251)
      Unrealized gain on marketable
         securities ...............             --             --             --              --         88,926             88,926
                                                                                                                        ----------
      Comprehensive loss ..........             --             --             --              --             --         (8,925,325)
      Issuance of shares under
         stock option plan ........         53,604             --        167,443              --             --            167,443
      Issuance of stock awards ....            100             --             --              --             --                 --
      Issuance of common stock ....      2,445,000             --     35,772,800              --             --         35,772,800
                                        ----------    -----------    -----------    ------------       --------       ------------
Balance at June 30, 2001 ..........     13,955,372     11,393,883     61,240,197     (34,616,341)        80,366         38,098,105
    Net loss for the year ended
         June 30, 2002 ............             --             --             --      (6,903,895)            --         (6,903,895)
    Amortization of gain on
         marketable securities ....             --             --             --              --        (26,409)           (26,409)
                                                                                                                      ------------
    Comprehensive loss ............             --             --             --              --             --         (6,930,304)
    Issuance of shares under
         stock option plan ........        201,400             --        856,075              --             --            856,075
                                        ----------    -----------    -----------    ------------       --------       ------------
Balance at June 30, 2002 ..........     14,156,772    $11,393,883    $62,096,272    $(41,520,236)      $ 53,957       $ 32,023,876
                                        ==========    ===========    ===========    ============       ========       ============
</TABLE>

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

                                       34
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                            STATEMENTS OF CASH FLOWS

                    YEARS ENDED JUNE 30, 2000, 2001 AND 2002

<TABLE>
<CAPTION>
                                                                                     2000               2001            2002
                                                                                     ----               ----            ----
<S>                                                                               <C>             <C>              <C>
Cash flows from operating activities:
      Net loss .............................................................      $(9,805,245)    $ (9,014,251)    $(6,903,895)
       Adjustments to reconcile net loss to net cash used in operating
          activities --
              Depreciation of fixed assets .................................          224,646          431,154         720,138
              Amortization of patents ......................................          323,715          246,128         177,720
              Amortization of goodwill .....................................           89,448           89,448              --
              Inventory write-off ..........................................          400,000          260,000         165,817
              Loss on disposal of fixed assets .............................               --            7,951           4,041
              Changes in assets and liabilities --
                    Accounts receivable ....................................          (29,481)      (3,317,819)       (938,269)
                    Inventories ............................................           79,991       (1,431,303)       (454,712)
                    Other current assets ...................................         (119,421)        (855,665)        309,507
                    Other noncurrent assets ................................           50,133               --              --
                    Accounts payable .......................................          198,263        1,211,594         157,122
                    Accrued liabilities ....................................          653,475         (350,529)        102,231
                    Allowance for sales returns ............................               --          205,000          21,100
                    Deferred income ........................................          (61,461)         (63,539)             --
                                                                                  -----------     ------------     -----------
                           Net cash used in operating activities ...........       (7,995,937)     (12,581,831)     (6,639,200)
                                                                                  -----------     ------------     -----------
Cash flows from investing activities:
       Sale (purchase) of marketable securities, net .......................       (4,980,735)     (10,018,474)      7,320,964
       Purchase of long-term securities, net ...............................               --      (14,424,490)             --
       Purchase of property, plant and equipment ...........................         (361,242)      (1,495,922)     (1,006,059)
       Patent fees .........................................................         (420,050)        (312,468)       (350,649)
                                                                                  -----------     ------------     -----------
                           Net cash (used) provided in investing activities        (5,762,027)     (26,251,354)      5,964,256
                                                                                  -----------     ------------     -----------
Cash flows from financing activities:
       Proceeds from issuance of common stock, net .........................       10,975,610       35,772,800              --
       Proceeds from exercise of stock options .............................          204,583          167,443         856,075
                                                                                  -----------     ------------     -----------
                        Net cash provided by financing activities ..........       11,180,193       35,940,243         856,075
                                                                                  -----------     ------------     -----------
                        Net (decrease) increase in cash and cash equivalents       (2,577,771)      (2,892,942)        181,131

Cash and cash equivalents at beginning of year .............................        7,313,551        4,735,780       1,842,838
                                                                                  -----------     ------------     -----------
Cash and cash equivalents at end of year ...................................      $ 4,735,780     $  1,842,838     $ 2,023,969
                                                                                  ===========     ============     ===========
</TABLE>

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

                                       35
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                          NOTES TO FINANCIAL STATEMENTS

                          JUNE 30, 2000, 2001 AND 2002

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

     Bone Care International, Inc. (Bone Care) is engaged in discovering,
developing and commercializing improved D-hormone therapies. In June 1999, Bone
Care received approval from the U.S. Food and Drug Administration for an oral
formulation of Hectorol, and in May 2000, Bone Care received approval for the
intravenous formulation. Hectorol is a synthetic D-hormone analog to manage
secondary hyperparathyroidism in kidney dialysis patients.

Revenue Recognition

     Bone Care began selling Hectorol Capsules in October 1999. Because Hectorol
Capsules were Bone Care's first product, Bone Care did not initially have
historical data to estimate returns and exchanges in accordance with Statement
of Financial Accounting Standard ("SFAS") No. 48, "Revenue Recognition When
Right of Return Exists." Revenues from shipments of Hectorol Capsules and the
related costs were deferred at the time of shipment to wholesalers and were
recognized in the Statement of Operations at the time the product was sold by
these wholesalers to retail users of the product. Bone Care now has sufficient
experience to estimate future product returns. Effective October 1, 2000, Bone
Care began recording sales and the related costs of Hectorol Capsules and
Hectorol Injection based on shipments to its customers reduced by the estimated
future returns. The terms of sale for all product sales are F.O.B. shipping
point. Revenue is recognized at the time of shipment as risk of loss has
transferred to the customer, delivery has occurred, and collectibility is
reasonably certain. Bone Care's June 30, 2002 balance sheet includes a $226,100
accrual for the estimated amount of future returns related to Hectorol Capsules
and Hectorol Injection.

     License fees received by Bone Care are recognized as income when the
associated licensing obligations are satisfied. For the year ended June 30,
2002, no license fees were recognized.

Cash, Cash Equivalents and Marketable Securities

     Highly liquid investments with original maturities of ninety days or less
at the time of purchase are considered to be cash equivalents. Other highly
liquid marketable securities with remaining maturities of one year or less at
the balance sheet date are classified as marketable securities. Bone Care
classifies its investment securities as available for sale or held to maturity
based upon its intent and ability to hold certain securities to maturity. Those
investments classified as available-for-sale are carried in the balance sheet at
fair value, with unrealized gains and losses recorded within accumulated other
comprehensive income, net of tax. Those investments classified as held to
maturity are carried in the balance sheet at cost, net of unamortized discounts
or premiums. Dividends, interest income and amortization of discounts and
premiums are recorded in current earnings.

         Bone Care has adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Marketable securities are classified as
held-to-maturity when management has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are classified as Long Term
Securities and stated at amortized cost. Marketable securities not classified as
held-to-maturity are classified as part of Current Assets and carried at fair
value.

Inventory

     Inventory is stated at the lower of cost or market; cost is determined by
the first-in, first-out method. Inventory consists of:

<TABLE>
<CAPTION>
                                             JUNE 30,
                                             --------
                                         2001         2002
                                         ----         ----
<S>                                  <C>           <C>
            Raw materials.......     $  385,834    $  456,548
            Work-in-process.....        955,514       610,171
            Finished goods......        469,226     1,032,750
                                     ----------    ----------
                                     $1,810,574    $2,099,469
                                     ==========    ==========
</TABLE>

     Bone Care periodically reviews its inventory carrying levels. During fiscal
2001 and 2002, Bone Care wrote-off $260,000 and $165,817, respectively, of
excess inventory representing amounts, which Bone Care estimates will not be
sold prior to expiration.

                                       36
<PAGE>
                         BONE CARE INTERNATIONAL, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

                          JUNE 30, 2000, 2001 AND 2002

Depreciation and Amortization

     Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. Accelerated methods of depreciation are used for financial statement and
income tax reporting purposes for all asset classes except for leasehold
improvements, which are depreciated based on straight-line for financial
statement reporting and accelerated methods for income tax reporting. The cost
of property, plant and equipment are depreciated over the following estimated
useful lives:

<TABLE>
<CAPTION>
                   ASSET CLASSIFICATION           ESTIMATED USEFUL LIFE
                   --------------------           ---------------------
<S>                                               <C>
            Machinery, furniture, and fixtures        5 - 7 years
            Leasehold improvements                      5 years
</TABLE>

Intangible Assets

     Legal costs incurred to register patents are amortized over a period of up
to 10 years. Bone Care continuously evaluates whether events and circumstances
have occurred that indicate the remaining estimated useful life of goodwill or
intangibles may warrant revision or that the remaining balance of goodwill or
intangibles may not be recoverable. When factors indicate that goodwill or
intangibles should be evaluated for possible impairment, Bone Care assesses
recoverability from expected future operations using undiscounted cash flows.
Impairment would be recognized in operating results if a permanent diminution in
value occurred. Impairment would be measured using fair value.

     On June 30, 2001, the Financial Accounting Standards Board (FASB) finalized
SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142,
existing goodwill at June 30, 2001 will no longer be amortized. Instead, an
assessment of fair value will be used to test for impairment of goodwill on an
annual basis or when circumstances indicate a possible impairment. On July 1,
2001, the Company adopted SFAS No. 142. Application of the non-amortization
provision of SFAS No 142 has resulted in an increase in income of $89,448 in
fiscal 2002. At June 30, 2002, the unamortized balance of goodwill was $359,165.

         SFAS No. 142 prescribes a two-phase process for impairment testing of
goodwill. The first phase, required to be completed by December 31, 2001,
screens for impairment; while the second phase (if necessary), required to be
completed by June 30, 2002, measures the impairment. Bone Care has completed its
first phase impairment analysis during the quarter ended December 31, 2001 and
year-ended June 30, 2002 and found no instances of impairment.

<TABLE>
<CAPTION>
                                                                            Year Ended June 30,
                                                                            -------------------
                                                                           2001             2002
                                                                           ----             ----
<S>                                                                    <C>             <C>
Net Loss:  Reported net loss                                           $(9,014,251)    $(6,903,895)
           Goodwill amortization                                            89,448               -
                                                                       ------------    ------------
                    Adjusted net loss                                  $(8,924,803)    $(6,903,895)
                                                                       ============    ============
Basic and diluted loss per share:
           Reported loss per share                                         $ (0.70)    $     (0.49)
           Goodwill amortization                                              0.01               -
                                                                       ------------    ------------
                    Adjusted basic and diluted loss per share              $ (0.69)    $     (0.49)
                                                                       ============    ============
</TABLE>

Research and Development Costs

     Materials, labor and overhead expenses related to research and development
projects are charged to operations as incurred.

                                       37
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

                          JUNE 30, 2000, 2001 AND 2002

Stock-based Compensation

     Stock-based compensation related to employees and non-employee directors is
recognized using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
thus there is no compensation expense for options granted with exercise prices
equal to the fair value of Bone Care's common stock on the date of the grant.

Net Loss Per Share

     Net loss per share is based on a weighted average number of shares of
common stock of 11,070,667, 12,883,632, and 14,084,313 for the years ended June
30, 2000, 2001 and 2002, respectively. Options to purchase common stock have
been excluded from the calculation of diluted earnings per share as the impact
of these options on diluted earnings per share would be antidilutive. The
excluded options totaled 690,054, 1,018,683, and 689,133 for the years ended
June 30, 2000, 2001 and 2002, respectively.

Income Taxes

     Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and credit carry forwards. Deferred tax assets and
liabilities are measured using enacted rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The amount of deferred tax assets is reduced to the amount of any tax benefits
that Bone Care expects to realize. Because Bone Care has not yet reached
profitability and future profitability cannot be assured, no value has been
recorded for deferred tax assets.

Fair Value of Financial Instruments

The fair value of financial instruments, which consisted of cash and cash
equivalents, marketable securities, receivables, accounts payable and accrued
liabilities, approximated their carrying values at June 30, 2001 and 2002 due to
the short-term nature of these instruments.

Concentration of Risk

     Bone Care has no internal manufacturing capabilities. Bone Care relies on
third party contractors to produce our active pharmaceutical ingredient and for
the subsequent manufacturing and packaging of finished drug products.

     Bone Care had purchased the active pharmaceutical ingredient in Hectorol
from a single supplier that is no longer able to supply it to us. Management is
working toward qualifying two additional suppliers, the first of which has been
approved for commercial production in August 2002. In addition, Bone Care
utilizes one supplier to formulate ampules, one supplier to formulate capsules
and another supplier to package Hectorol. However, management believes that
other suppliers, formulators, and vendors are available and could provide these
goods and services to Bone Care on comparable terms. A change in suppliers,
however, could cause a delay in manufacturing and a possible loss of sales,
which would affect operating results adversely.

                                       38
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

                          JUNE 30, 2000, 2001 AND 2002

     The sole manufacturer of Hectorol Injection received a warning letter from
the FDA in September 2000 identifying general deviations from the FDA's current
Good Manufacturing Practices (c-GMP) regarding manufacturing procedures, records
and training. Our supplier received another letter from the FDA in December 2001
identifying additional deviations from c-GMP pursuant to a follow-up inspection
of their facility. In response to this second FDA letter, our supplier agreed to
halt production of Hectorol Injection until such time as these deviations could
be remediated. Our supplier is scheduled to produce validation lots during late
October and early November that could ultimately be used as commercial product.
If our manufacturer completes the validation lots by early November and passes
the FDA site inspection and the FDA accelerates their review of our submission,
we do not anticipate a reduction in revenue as a result of a reduced supply of
product. If our manufacturer does not meet this timetable, we could experience a
reduction in revenue. There can be no assurance that the FDA will find that our
manufacturer's responses and corrective actions are adequate or that the FDA
will not take further action. If the FDA is not satisfied with our
manufacturer's responses and corrective actions, the FDA could take regulatory
actions against our manufacturer, including seizure of products, injunction
against further manufacture, recall or other actions that could interrupt
production of Hectorol Injection. Any such action would have a material adverse
effect on us. We are managing the inventory levels of the supplier channels to
attempt to ensure that the end-users of our product, clinics and patients, do
not experience any shortage of product. In addition, we have been working on
contingency plans, including an additional source of supply. We anticipate that
an additional source would be available during the second quarter of calendar
year 2003.

     Five individual customers comprise $4,316,000, or 71%, of the gross
accounts receivable balance as of June 30, 2002. These same five customers
represented 69% of Bone Care's net revenues for the year ended June 30, 2002,
with the largest of the five companies representing 27% of net revenues.

Use of Estimates

     In preparing the financial statements, Bone Care's management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Advertising Expenses

         Bone Care expenses advertising costs as incurred. Advertising expenses
were $758,416, $1,075,300, and $688,758 for years ended June 30, 2000, 2001 and
2002, respectively.

(2) SHAREHOLDERS' EQUITY

     In December 2000, Bone Care completed a public offering of 2,300,000 shares
of common stock at a price of $16.00 per share. Bone Care received proceeds of
$33,657,000 from the sale, net of offering expenses. In January 2001, the
underwriters of the Company's December 2000 common stock offering exercised
their over-allotment option to acquire 145,000 additional shares of common stock
at a price of $16.00 per share. Bone Care received proceeds of $2,115,800 from
the sale, net of offering expenses.

(3) STOCK OPTIONS

     Bone Care has granted options to key employees and directors under two
separate programs.

     The 1989 option plan is intended to qualify as an incentive stock option
plan within the meaning of Section 422 of the Internal Revenue Code of 1986.
Stock options to purchase shares of Bone Care's common stock granted under this
plan may be exercised, with certain exceptions in the case of the optionee's
death or retirement, only during employment. Stock options granted are
exercisable, during the optionee's lifetime, only by the optionee. The stock
options are all fully vested and expire 10 years from the granting date. In June
1990, the Board of Directors of Bone Care agreed not to issue any new options
under this plan, and except for a grant in March 1996 of replacement stock
options to purchase 78,970 shares in exchange for the forfeiture of an equal
amount of previously granted stock options, has not made any subsequent grants
under this plan.

                                       39
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

                          JUNE 30, 2000, 2001 AND 2002

     Under the second option program, titled the Bone Care International, Inc.,
1996 Stock Option Plan, a total of 1,000,000 shares of common stock were made
available. This stock option plan was amended in November 2000 and November 2001
to increase the number of available shares to 2,300,000 of which 1,212,267
remain available for grant at June 30, 2002. Options granted under this program
have an exercise price equal to the Company's common stock trading price on the
date of the grant and vest over periods ranging from nine months to five years.
The options will expire 10 years from the granting date, or upon termination of
employment.

     A summary of stock option activity and related information is presented
below:

<TABLE>
<CAPTION>
                                                                               YEAR ENDED JUNE 30,
                                                                               -------------------
                                                       2000                          2001                         2002
                                                       ----                          ----                         ----
                                                              WEIGHTED                      WEIGHTED                      WEIGHTED
                                                              AVERAGE                       AVERAGE                        AVERAGE
                                                              EXERCISE                      EXERCISE                      EXERCISE
                                                OPTIONS        PRICE        OPTIONS          PRICE         OPTIONS         PRICE
                                                -------        -----        -------          -----         -------         -----
<S>                                            <C>            <C>         <C>                <C>        <C>               <C>
Outstanding -- beginning of year .....           548,638       $ 4.71        690,054         $ 7.04      1,018,683         $11.03
Granted ..............................           221,250        12.09        444,833          16.84        189,000          16.30
Exercised ............................           (54,114)        3.78        (53,604)          3.12       (201,400)          4.25
Terminated/canceled ..................           (25,720)        7.68        (62,600)         15.21       (317,150)         15.24
                                                 -------       ------        -------         ------        -------         ------
Outstanding -- end of year ...........           690,054       $ 7.04      1,018,683         $11.03        689,133         $12.51
                                                 =======       ======        =======         ======        =======         ======
Exercisable at end of year ...........           277,360       $ 3.80        384,550         $ 4.89        324,866         $ 8.95
                                                 =======       ======        =======         ======        =======         ======
Weighted average fair value of options
   granted during year ...............         $    6.99                  $     9.76                    $     9.78
                                               =========                  ==========                    ==========
</TABLE>

     The options outstanding at June 30, 2002 have been segregated into five
ranges for additional disclosure as follows:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                                         -------------------                  -------------------
                        OPTIONS             WEIGHTED        WEIGHTED                        WEIGHTED
                       OUTSTANDING          AVERAGE         AVERAGE       EXERCISABLE        AVERAGE
   RANGE OF            AT JUNE 30,         REMAINING        EXERCISE      AT JUNE 30,       EXERCISE
EXERCISE PRICES           2002         CONTRACTUAL LIFE      PRICE            2002            PRICE
---------------           ----         ----------------      -----            ----            -----
<S>                    <C>             <C>                  <C>           <C>               <C>
 $2.11 - $3.00           92,600                3.6           $ 2.12          92,600          $ 2.12
  $5.75-$8.00            60,700                5.4             6.94          54,800            6.88
 $9.00 - $13.00         168,000                7.5            10.50         111,000           10.72
 $15.25-$18.25          364,833                9.0            16.91          65,266           17.11
    $23.56                3,000                8.0            23.56           1,200           23.56
</TABLE>

     Bone Care has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock options, and as a result, no compensation
expense for stock options was recognized. For disclosure purposes only under the
SFAS No. 123, Accounting for Stock-Based Compensation, the Black-Scholes option
pricing model was used to calculate the "fair value" of stock options using the
following weighted-average assumptions:

<TABLE>
<CAPTION>
                                                   2000          2001         2002
                                                   ----          ----         ----
<S>                                             <C>          <C>          <C>
   Risk-free interest rate...................        6.1%         5.1%         4.1%
   Expected market price volatility factor...        0.53         0.56         0.60
   Weighted average expected life............   6.0 years    6.0 years    6.0 years
</TABLE>

     No dividends are expected to be paid.

                                       40
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

                          JUNE 30, 2000, 2001 AND 2002

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Bone Care's
pro forma information follows:

<TABLE>
<CAPTION>
                                                   2000           2001            2002
                                                   ----           ----            ----
<S>                                           <C>             <C>            <C>
    Net loss:
         As reported.......................   $ (9,805,245)   $(9,014,251)   $(6,903,895)
         Pro forma.........................    (10,276,600)    (9,897,569)    (7,958,477)
    Net loss per share -- basic and diluted:

         As reported.......................   $      (0.89)   $     (0.70)   $     (0.49)
         Pro forma.........................          (0.93)         (0.77)         (0.57)
</TABLE>

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

(4) SHAREHOLDERS' RIGHTS PLAN AND PREFERRED STOCK

     In 1996, Bone Care adopted a Shareholders' Rights Plan. Under this plan,
each share of common stock has associated with it one preferred share purchase
right (a Right). Under certain circumstances, each Right would entitle holders
to purchase from Bone Care 1/200th of one share of Series A Junior Participating
Preferred Stock for the price of $12.50 per 1/200th of a share. The Rights do
not have voting or dividend rights and, until they become exercisable, have no
dilutive effect on per-share earnings. The Rights are not presently exercisable
and are transferable only with the related shares of common stock. The Board of
Directors has designated 140,000 shares of the Preferred Stock as Series A
Junior Participating Preferred Stock in connection with the Rights.

(5) INCOME TAXES

     As of June 30, 2002, Bone Care has federal net operating losses of
$39,352,000 and R & D tax credit carryforwards of $1,741,000, which expire in
2011 through 2022. As of June 30, 2002, Bone Care also has state net operating
losses of $38,010,000 and R&D tax credit carry-forwards of $449,000, which
expire in 2006 through 2022.

                                       41
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

                          JUNE 30, 2000, 2001 AND 2002

     Significant components of Bone Care's deferred tax assets at June 30, 2001
and 2002 are as follows:

<TABLE>
<CAPTION>
                                                          2001             2002
                                                          ----             ----
<S>                                                 <C>               <C>
Deferred tax assets:
     Inventory reserves ....................        $    362,000      $    288,000
     Deferred income .......................                  --            88,000
     Accrued liabilities ...................              18,000           195,000
     Allowance for doubtful accounts .......              39,000            29,000
     Other .................................              45,000            67,000
     Federal net operating loss carryforward          10,456,000        13,380,000
     Federal R&D tax credit carryforward ...           1,245,000         1,741,000
     State net operating loss carryforward .           2,671,000         1,901,000
     State R&D tax credit carryforward .....             262,000           449,000
     Valuation allowance ...................         (14,727,000)      (17,676,000)
                                                    ------------      ------------
Net deferred tax assets ....................             371,000           462,000
Deferred tax liabilities:
     Patents ...............................            (371,000)         (462,000)
                                                    ------------      ------------
Total deferred taxes .......................        $         --      $         --
                                                    ============      ============
</TABLE>

     The net change in the valuation allowance for the years ended June 30, 2001
and 2002 was an increase of $4,093,000 and $2,949,000, respectively. Realization
of deferred tax assets is dependent upon generating sufficient taxable income
prior to the expiration of the related carryforward period. Management believes
it is more likely than not that such deferred tax assets may expire unused and,
accordingly, has established a valuation against them.

     Income tax expense of $12,500 for the year ended June 30, 2000 consists of
foreign taxes.

(6) LEASE COMMITMENTS

     Bone Care has an operating lease for its office and laboratory facilities
which commenced in January 2001 and terminates in January 2006. Lease payments
under this lease include utilities, operating costs, and property taxes. The
lease agreement provides for lease payments, which average $55,671 per month.
Total lease expense was $110,000, $412,212, and $649,182 for the years ended
June 30, 2000, 2001, and 2002, respectively.

     Minimum future payments under this lease as of June 30, 2002, are as
follows:

<TABLE>
<S>                                                  <C>
                              2003..............     $  658,643
                              2004..............        676,755
                              2005..............        695,366
                              2006..............        352,399
                              Thereafter........             --
                                                     ----------
                                        Total...     $2,383,163
                                                     ==========
</TABLE>

(7) PROFIT-SHARING PLAN

Bone Care has established a 401(k) profit sharing plan covering substantially
all employees. Employer contributions to the plan are at the discretion of the
Board of Directors. Bone Care's policy is to fund profit sharing plan
contributions as they accrue. Profit sharing expense amounted to $22,710,
$61,205 and $166,675 for the years ended June 30, 2000, 2001 and 2002,
respectively.

                                       42
<PAGE>
                          BONE CARE INTERNATIONAL, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

                          JUNE 30, 2000, 2001 AND 2002

(8) MARKETABLE SECURITIES

     Securities classified as Held-to-Maturity at June 30, 2002 include the
following:

<TABLE>
<CAPTION>
                                        AMORTIZED COST      FAIR VALUE
                                        --------------      ----------
<S>                                     <C>                <C>
      Corporate bonds                     $14,428,684      $14,575,067
      Government securities                    28,008           28,130
      Certificates of deposit                 200,000          200,000
                                          -----------      -----------
      Total                               $14,656,692      $14,803,197
                                          ===========      ===========
</TABLE>

     Securities classified as Available-for-Sale at June 30, 2002 include the
following:

<TABLE>
<CAPTION>
                                                                     UNREALIZED
                                 AMORTIZED COST      FAIR VALUE      GAIN (LOSS)
                                 --------------      ----------      -----------
<S>                              <C>                 <C>             <C>
   Government securities           $7,500,000        $7,500,000          $0
</TABLE>

         Scheduled maturities of marketable securities:

<TABLE>
<CAPTION>
                                              AMORTIZED COST       FAIR VALUE
                                              --------------       ----------
<S>                                           <C>                 <C>
                  Fiscal Year
                       2003                      $18,436,896      $18,515,573
                       2004 - 2006                 3,719,796        3,787,624
                                                 -----------      -----------
                  Total                          $22,156,692      $22,303,197
                                                 ===========      ===========
</TABLE>

(9) QUARTERLY FINANCIAL DATA (UNAUDITED)

     Summary quarterly financial data for the years ended June 30, 2002 and 2001
are summarized as follows:

<TABLE>
<CAPTION>
                                                    FIRST       SECOND        THIRD     FOURTH
                                                    QUARTER     QUARTER      QUARTER    QUARTER
                                                    -------     -------      -------    -------
                                                      (IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S>                                                 <C>         <C>          <C>        <C>
2002:
     Revenue ...............................        $ 2,652      $ 3,832      $ 3,775    $ 4,732
     Loss from operations ..................         (2,497)      (1,602)      (2,066)    (1,996)
     Net loss ..............................         (2,136)      (1,254)      (1,781)    (1,733)
     Net loss per share -- basic and diluted          (0.15)       (0.09)       (0.13)     (0.12)

2001:
     Revenue ...............................        $ 1,363      $   567      $ 2,009    $ 2,058
     Loss from operations ..................         (1,866)      (2,869)      (2,752)    (2,823)
     Net loss ..............................         (1,728)      (2,690)      (2,221)    (2,374)
     Net loss per share -- basic and diluted          (0.15)       (0.22)       (0.16)     (0.17)
</TABLE>

                                       43
<PAGE>
(10) RELATED PARTY

         Martin Barkin, M.D. is a board member of Bone Care and is the President
and Chief Executive Officer of Draxis Health, Inc. (a pharmaceutical company).

         Bone Care has granted Draxis Health Inc. a license to use and sell
Hectorol in Canada for secondary hyperparathyroidism, osteoporosis and other
metabolic bone diseases. Bone Care has also have granted Draxis a license in
Canada to all know-how developed by or on behalf of Bone Care relating to the
use of Hectorol for those indications. Draxis entered into the license agreement
in 1990 and paid Bone Care $100,000 for the rights to treat secondary
hyperparathyroidism and metabolic bone disease with Hectorol in Canada. The
agreement does not include royalty payments and expires upon the expiration date
of the last to expire of the Canadian patents. Draxis received marketing
approval for Hectorol Capsules in Canada in May 2001 and plans to launch the
product in the near future.

         In April 2002, Bone Care entered into a manufacturing agreement with
Draxis Pharma, a division of Draxis Health Inc. to produce Hectorol IV in
Canada. As of June 30, 2002, a balance of $175,000 was reported as a prepaid
asset for a deposit paid to Draxis to begin purchasing production equipment.
This deposit will be applied to the first three commercial lots purchased by
Bone Care.

         In March 2002, Bone Care entered into a supply agreement with Draxis
Health Inc. granting Draxis exclusive license to sell Hectorol Capsules in
Canada. The selling price is based on all associated product costs, which
include manufacturing, testing, and assay development plus a 10% administrative
fee. As of June 30, 2002 a balance of $140,636 was reported as part of accounts
receivable for amounts owed from Draxis.

                                       44
<PAGE>
         ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         On June 28, 2002, Bone Care dismissed Arthur Andersen LLP ("Arthur
Andersen") as its independent public accountants and appointed Deloitte & Touche
LLP as its new independent accountants. The decision to dismiss Arthur Andersen
and to retain Deloitte & Touche was approved by its Board of Directors (which
included all members of the Audit Committee of our Board of Directors) and was
not separately voted on by the Audit Committee of our Board of Directors. Arthur
Andersen's reports on the Company's consolidated financial statements for the
fiscal year ended June 30, 2001 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles. During the Company's two most recent
fiscal years ended June 30, 2001 and 2000, and the subsequent interim period
through June 28, 2002, there were no disagreements between the Company and
Arthur Andersen on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to Arthur Andersen's satisfaction, would have caused them to make
reference to the subject matter of the disagreement in connection with their
reports. None of the reportable events described in Item 304(a)(1)(v) of
Regulation S-K occurred during the fiscal years ended June 30, 2001 and 2000,
and the subsequent interim period through June 28, 2002. During the fiscal years
ended June 30, 2001 and 2000, and the subsequent interim period through June 28,
2002, the Company did not consult with Deloitte & Touche regarding any of the
matters or events set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Bone Care incorporates by reference the information required by this Item
from Bone Care's definitive Proxy Statement for its 2002 Shareholders Meeting to
be held on November 15, 2002, ("Proxy Statement") which will be filed with the
Securities and Exchange Commission not later than 120 days after the end of our
fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

     Bone Care incorporates by reference the information required by this Item
from the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

     Bone Care incorporates by reference the information required by this Item
from the Proxy Statement.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Bone Care incorporates by reference the information required by this Item
from the Proxy Statement.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  1. Financial statements

     Reference is made to the separate index to Bone Care's financial statements
     contained on page 30 hereof.

     2. Financial statement schedule

     See exhibit index contained on page 52.

     3. Exhibits

     Reference is made to the separate exhibit index contained on page 52
     hereof.

(b) Reports on Form 8-K

     On July 8th, 2002 Bone Care filed a Form 8-K reporting under Item 4 of
Form 8-K a change in its certifying accountant.

                                       45
<PAGE>
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

                                   BONE CARE INTERNATIONAL, INC.


                                   /s/ PAUL L. BERNS
                                   ------------------------------------------
                                   By  Paul Berns
                                       President and Chief Executive Officer

Date: September 25, 2002

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated have signed this report below.

<TABLE>
<S>                                    <C>                                               <C>
/s/  PAUL L. BERNS                     President and Chief Executive Officer             September 26, 2002
--------------------------------
Paul L. Berns                          (Principal Executive Officer)


/s/  ROBERT A. BECKMAN                 Vice President - Finance and Director             September 26, 2002
--------------------------------
Robert A. Beckman                      (Principal Financial and Accounting Officer)


/s/  RICHARD B. MAZESS, PH.D.          Chairman and Director                             September 26, 2002
--------------------------------
Richard B. Mazess, Ph.D.


/s/  MARTIN BARKIN, M.D.               Director                                          September 26, 2002
--------------------------------
Martin Barkin, M.D.



/s/  CHARLES R. KLIMKOWSKI, CFA        Director                                          September 26, 2002
--------------------------------
Charles R. Klimkowski, CFA



/s/  GARY E. NEI                       Director                                          September 26, 2002
--------------------------------
Gary E. Nei

/s/ MICHAEL D. CASEY                   Director                                          September 26, 2002
--------------------------------
Michael D. Casey

/s/ EDWARD STAIANO                     Director                                          September 26, 2002
--------------------------------
Edward Staiano
</TABLE>

                                       46
<PAGE>
                                 CERTIFICATIONS

                  I, Paul L. Berns, the President and Chief executive Officer of
Bone Care International, Inc. (the "registrant"), certify that:

1.   I have reviewed this annual report or Form 10-K of the registrant;

2.   based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary in
     order to make the statements made, in light of the circumstances under
     which such statements were made, not misleading with respect to the period
     covered by this annual report; and

3.   based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report.


Date: September 26, 2002
                                          /s/  PAUL  L. BERNS
                                          -------------------
                                          Paul L. Berns
                                          President and Chief Executive Officer

                  I, Robert A. Beckman, the Vice President-Finance of Bone Care
International, Inc. (the "registrant"), certify that:

1.   I have reviewed this annual report or Form 10-K of the registrant;

2.   based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary in
     order to make the statements made, in light of the circumstances under
     which such statements were made, not misleading with respect to the period
     covered by this annual report; and

3.   based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report.


Date: September 26, 2002
                                     /s/  ROBERT A. BECKMAN
                                     ----------------------
                                     Robert A. Beckman
                                     Vice President - Finance

                                       47
<PAGE>
                          BONE CARE INTERNATIONAL, INC.
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
           EXHIBIT
           NUMBER                           DOCUMENT DESCRIPTION
           ------                           --------------------
<S>                     <C>
            3.1(a)      Restated Articles of Incorporation of Registrant(1)
                        (Exhibit 3.1, Amendment No. 3 to Form 10/A)

            3.1(b)      Articles of Amendment of Registrant(2) (Exhibit 3.1(b))

            3.2         By-Laws of Registrant(3) (Exhibit 3.2)

            4.1         Shareholders Rights Agreement between Bone Care and
                        Norwest Bank Minnesota, N.A.(1) (Exhibit 4.1, Amendment
                        No. 3 to Form 10/A)

            4.2         First Amendment to Shareholder Rights Agreement between
                        Bone Care and Norwest Bank Minnesota, N.A.(1) (Exhibit
                        4.2, Amendment No. 4 to Form 10/A)

            10.1*       Incentive Stock Option Plan(1) (Exhibit 10.4)

            10.2*       1996 Stock Option Plan(2) (Exhibit 10.5)

            10.3        Amended and Restated License Agreement effective as of
                        June 8, 1998, by and between Bone Care and Draxis
                        Health, Inc.(4) (Exhibit 10.6)

            10.4*       Form of Stock Option Agreement(2) (Exhibit 10.7)

            10.5        Agreement, effective as of May 1, 1987, by and between
                        the Wisconsin Alumni Research Foundation and Bone Care
                        (confidential material appearing in this document has
                        been omitted and filed separately with the Securities
                        and Exchange Commission in accordance with the
                        Securities Act of 1933, as amended, and 17 C.F.R.
                        230.406 and 200.80 promulgated thereunder. Omitted
                        information has been replaced with asterisks).(2)
                        (Exhibit 10.8)

            14.1        Schedule II - Valuation and Qualifying Accounts and
                        Reserves

            23          Consent of Deloitte & Touche LLP

            27          Financial Data Schedule

            99.1        Certification Pursuant to Section 1350 of Chapter 63 of
                        Title 18 of the United States Code.

            99.2        Certification Pursuant to Section 1350 of Chapter 63 of
                        Title 18 of the United States Code.
</TABLE>

(1)  Incorporated by reference to exhibits filed with Registrant's Form 10
     Registration Statement (Registration Number 02-27854) filed under the
     Securities Exchange Act of 1934. Parenthetical references to exhibit
     numbers are to the exhibit numbers in the Form 10 or, if applicable, the
     amendment to the Form 10.

(2)  Incorporated by reference to exhibits filed with the Registrant's Form S-1
     Registration Statement (Registration Number 333-43923) filed under the
     Securities Act of 1933. Parenthetical references to exhibit numbers are to
     exhibit numbers in the Form S-1.

(3)  Incorporated by reference to the exhibits filed with the Registrant's
     Quarterly Report on Form 10-Q for the quarter ended December 31, 1996 (File
     No. 0-27854). Parenthetical references to exhibit numbers are to the
     exhibit numbers in the Form 10-Q.

(4)  Incorporated by reference to exhibits filed with the Registrant's Form
     S-1/A Registration Statement (Registration Number 333-43923) filed under
     the Securities Act of 1933. Parenthetical references to exhibit numbers are
     to exhibit numbers in the Form S-1/A.

*    Indicates a management contract or compensatory plan or arrangement
     required to be filed as an exhibit to this Form 10-K. Z Exhibit 23

                                       48