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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2002,                                            
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to           .                                 

Commission file number 0-19825



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SciClone Pharmaceuticals, Inc.

(Exact name of Registrant as specified in its
charter)


|                                                                                                     |  |                                         
|---------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|California                                                                                           |  | 94-3116852                              
|(State or other jurisdiction of
    Incorporation or organization)                                   |  | (I.R.S. Employer
    Identification No.)
|                                                                                                    
|901 Mariners Island Boulevard
    San Mateo, California(Address of principal executive
    offices) |  | 94404(Zip Code)                         

(650) 358-3456

(Registrants telephone number, including
area code)


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

None


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

Common Stock, no par value


(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 þ          No o

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.     o

The aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately
$180,927,000 as of March 4, 2003, based upon the closing
sale price of the Registrants Common Stock on The Nasdaq
National Market on such date. Shares of Common Stock held by
each executive officer and director have been excluded from the
calculation because such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

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

The aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately
$72,081,000 as of June 28, 2002, based upon the closing
sale price of the Registrants Common Stock on The Nasdaq
National Market on such date. Shares of Common Stock held by
each executive officer and director have been excluded from the
calculation because such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

As of March 4, 2003, there were 37,465,064
shares of the Registrants Common Stock outstanding.

Part III incorporates by reference from the
definitive proxy statement for the Registrants 2003 Annual
Meeting of Shareholders to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this Form.



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TABLE OF CONTENTS

|               |  |                                                                                           |    |      |    | 
|-------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                           |    | Page
|               |  |                                                                                           |    | No. 
|               |  |                                                                                           |    |     
|Part I        
|              
|Item 1.        |  | Business                                                                                  |    |      | 1  | 
|Item 2.        |  | Properties                                                                                |    |      | 15 | 
|Item 3.        |  | Legal Proceedings                                                                         |    |      | 15 | 
|Item 4.        |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 15 | 
|Part II       
|              
|Item 5.        |  | Market for the Registrants Common Equity
    and Related Shareholder Matters             |    |      | 15 | 
|Item 6.        |  | Selected Consolidated Financial Data                                                      |    |      | 17 | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 18 | 
|Item 7A.       |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |    |      | 34 | 
|Item 8.        |  | Financial Statements and Supplementary Data                                               |    |      | 35 | 
|               |  | Report of Independent Auditors                                                            |    |      | 36 | 
|               |  | Consolidated Balance Sheets                                                               |    |      | 37 | 
|               |  | Consolidated Statements of Operations                                                     |    |      | 38 | 
|               |  | Consolidated Statements of
    Shareholders Equity                                       |    |      | 39 | 
|               |  | Consolidated Statements of Cash Flows                                                     |    |      | 40 | 
|               |  | Notes to Consolidated Financial
    Statements                                            |    |      | 41 | 
|Item 9.        |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |      | 56 | 
|Part III      
|              
|Item 10.       |  | Directors and Executive Officers of the Registrant                                        |    |      | 56 | 
|Item 11.       |  | Executive Compensation                                                                    |    |      | 56 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 57 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                            |    |      | 57 | 
|Part IV       
|              
|Item 14.       |  | Controls and Procedures                                                                   |    |      | 57 | 
|Item 15.       |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |    |      | 58 | 
|Signatures     |  |                                                                                           | 62 |     
|Certifications |  |                                                                                           | 63 |     



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NOTE REGARDING FORWARD-LOOKING
STATEMENTS:

This Annual Report on Form 10-K contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements are based on our
current expectations, estimates and projections about our
industry, managements beliefs and certain assumptions made
by us. Words such as anticipates,
expects, intends, plans,
believes or similar expressions are intended to
identify forward-looking statements including those statements
we make regarding anticipated product sales; the timing and
outcome of clinical trials; the timing of reporting of clinical
trial results; partnering prospects for ZADAXIN; our
expectations and ability to seek additional capital resources,
initiate marketing collaborations and initiate new product
development; ZADAXINs ability to enhance the immune
system; research and development and other expense levels; level
of gross margin and the allocation of financial resources to
certain trials and programs. These statements are not guarantees
of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict.
Therefore, our actual results could differ materially and
adversely from those expressed in any forward-looking statements
as a result of various factors including, but not limited to,
those described under the caption Risk Factors in
this Annual Report on Form 10-K. We undertake no obligation
to revise or update publicly any forward-looking statements for
any reason.

PART I

Item 1.Business

Overview

SciClone Pharmaceuticals, Inc.
(SciClone or the Company) is a
biopharmaceutical company engaged in the development and
commercialization of therapeutics to treat life-threatening
diseases. Our lead product ZADAXIN is in several late-stage
clinical trials, including two phase 3 hepatitis C
clinical trials in the U.S., a recently completed phase 3
hepatitis B clinical trial in Japan, a phase 2
malignant melanoma clinical trial in Europe, and two
phase 2 liver cancer trials in the U.S. In addition to
ZADAXIN, our other drug development opportunities include
SCV-07, a potentially orally available therapeutic to treat
viral and infectious diseases, and products to address the
protein-based disorder that causes cystic fibrosis.

ZADAXIN has been approved for sale by the
ministries of health in over 30 countries and is marketed
in China and selected other countries outside the U.S. The cash
flow generated by these operations contributes significant
support to our ZADAXIN late-stage clinical trials. ZADAXIN has
been administered to over 10,000 patients to date in both
clinical and commercial use, alone and in combination with
antiviral and anticancer drugs, without producing any known
ZADAXIN related significant side effects or toxicities. ZADAXIN
is manufactured by third party manufacturers in the U.S. and
Europe in compliance with U.S. Food and Drug Administration
(FDA) current Good Manufacturing Practices (cGMP), or the
foreign equivalent of such standards.

Our business strategy focuses on developing
late-stage products to treat life-threatening diseases that
offer significant market opportunities. ZADAXIN is currently in
multiple phase 3 and phase 2 clinical trials for the
treatment of viral diseases and cancer. These therapeutic
categories currently represent multi-billion dollar markets in
the U.S., Europe, and Japan. We design our clinical trials with
the input of leading physicians and selected major
pharmaceutical companies, and we structure trials to support
regulatory approval for ZADAXIN in the U.S., Europe, and Japan.

ZADAXIN is the only non-interferon based new drug
that we know of in phase 3 hepatitis C clinical trials in
the U.S. today. We are currently enrolling patients in our
hepatitis C trials and all of the planned 1,000 patients
must have previously failed hepatitis C therapies currently
approved by the U.S. FDA. Half of all hepatitis C patients
treated in the U.S. fail to respond to current therapy and
become non-responders. Re-treatment of
non-responders with the same drugs is rarely effective. Our
trials are designed to prove that

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ZADAXIN in combination with pegylated interferon
alpha should be the first U.S. FDA approved therapy for
non-responders.


In Japan, our over 300 patient phase 3
clinical trial using ZADAXIN as a therapy for hepatitis B
is complete. We are compiling and analyzing the final data and
expect to report the results in the second quarter of 2003. If
the results are positive, we intend to submit a hepatitis B
regulatory filing in Japan.

Our European partner Sigma-Tau is targeting a
European oncology approval for ZADAXIN. Sigma-Tau is currently
enrolling patients in a phase 2 malignant melanoma clinical
trial that is planned to enroll over 300 patients in
Europe. In addition, Sigma-Tau intends to use data from our U.S.
phase 3 hepatitis C clinical trials, if they are
positive, to pursue regulatory approval for ZADAXIN for this
indication in Europe.

In the major pharmaceutical markets, we have
maintained significant marketing rights and strong intellectual
property protection for ZADAXIN. We anticipate that ZADAXIN
should have enhanced partnering value at the conclusion of its
U.S. phase 3 clinical trials, if they are successful,
although there is no assurance such a partnering arrangement
will be pursued or can be achieved. We have strong intellectual
property protection for ZADAXIN as a therapy for
hepatitis C with patent protection into 2015 in the U.S.
and 2012 in the European Union and Japan. ZADAXIN as a therapy
for hepatitis B is patent protected into 2012 in Japan.

ZADAXIN

ZADAXIN is a pure synthetic preparation of
thymosin alpha 1, a substance that circulates naturally and
is instrumental in the bodys immune response to fight
viral infections and certain cancers. ZADAXIN is easily and
safely administered just under the skin twice a week. After
administration, thymosin alpha 1 circulates at 50 to 100
times its normal level in the body. In over 10,000 patients to
date, ZADAXIN has been administered in both clinical and
commercial use, alone and in combination with antiviral and
anticancer drugs, without producing any ZADAXIN related
significant side effects or toxicities. ZADAXIN is also referred
to as thymalfasin, the generic name for thymosin alpha 1.

Published scientific and clinical studies have
shown that ZADAXIN helps stimulate, maintain and direct the
bodys antiviral and anticancer immune response. ZADAXIN
helps the immune system target and eradicate virally infected or
cancer cells.

When the immune system recognizes virally
infected or cancer cells, it responds by increasing white blood
cells called CD4 helper T-cells. These cells can be directed
towards one of two pathways, referred to as T-helper 1
(Th1) or T-helper 2 (Th2). Studies have shown that a
Th1-directed immune response is fundamental to the eradication
of certain viral disease, such as hepatitis C or
hepatitis B, and certain cancers.

ZADAXIN helps activate a Th1-directed immune
response by promoting stem cell differentiation into
CD4 T-cells and subsequent differentiation of those cells
into the Th1 subset. At the same time, ZADAXIN helps increase
the production of CD8 T-cells and NK or natural killer
cells, a population of cells able to directly attack and kill
virally-infected and certain cancer cells. As ZADAXIN increases
Th1 cytokines such as interleukin-2 (IL-2) and gamma interferon,
it also decreases production of Th2 cytokines such as IL-4. Both
of these activities are important in an effective cellular
response to a hepatitis C viral infection. Moreover,
ZADAXIN reduces T-cell apoptosis, or programmed cell death,
which allows these beneficial cells to circulate for a longer
period of time.

In addition to its positive effects on the immune
system, ZADAXIN also exhibits direct antiviral effects. ZADAXIN
enhances the expression of surface-marker proteins on
virally-infected and certain cancer cells. These surface markers
help the bodys immune system recognize and target virally
infected and cancer cells for eradication by the immune response.

Clinical
Development Strategy

Our U.S. clinical development strategy for
ZADAXIN has been to select an indication that offers a large
patient population representing a significant market potential,
the opportunity for improvement to current

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therapy, the likelihood of an expedited
regulatory review due to lack of approved treatment options, and
where we have a strong intellectual property position. Our
primary focus is on our phase 3 hepatitis C clinical
trials in the U.S. These trials were designed to generate data
to support a New Drug Application in the U.S. and similar
regulatory filings in Europe and Japan.


Hepatitis C

In the U.S., we have selected hepatitis C as
the first targeted U.S. FDA approved indication for
ZADAXIN. We believe this indication offers a large patient
population representing a significant market opportunity, the
opportunity for improvement to current therapy, and the
potential for an expedited review by the U.S. FDA.

The hepatitis C virus (HCV) is one of
the worlds most prevalent blood borne chronic infectious
diseases. Complications from HCV include cirrhosis of the liver,
liver failure and liver cancer. The World Health Organization
estimates that more than 170 million people are infected
with hepatitis C worldwide, including an estimated
10 million people in the U.S., Europe and Japan. The
Centers for Disease Control estimate that four million people in
the U.S. are infected with HCV. HCV related deaths among this
group are expected to triple by 2010 to 30,000 annually. There
is no vaccine to prevent HCV infection.

The total market for HCV therapies in the U.S.,
Europe and Japan was $1.7 billion in 2001 and is expected
to grow to $6.6 billion by 2011, according to Decision
Resources estimates.

The current standard of care for HCV patients is
the new longer-acting pegylated form of interferon alpha, most
typically used in combination therapy with the antiviral drug
ribavirin. Pegylated interferon alpha can induce severe
toxicities and ribavirin introduces additional toxicities of its
own. Many patients cannot, or will not, tolerate a complete
12 month course of interferon alpha and ribavirin at
approved optimal doses, and dose reduction of one or both drugs
is commonly prescribed. Consequently, efficacy may be reduced.

Current HCV therapy of pegylated interferon alpha
and ribavirin is effective in just over half of all treated
patients and the side effect profile is severe. For the
estimated 2 million HCV carriers in the U.S. with a high
viral load of a particularly difficult to treat HCV strain
(genotype 1), current therapy is even less effective and
works in only 30 percent of patients. Patients who fail
current therapy (non-responders) seldom respond to re-treatment
with the same therapy. The large majority of non-responders have
a high viral load of HCV genotype 1.

Published data indicate ZADAXIN in combination
with pegylated interferon alpha has the potential to benefit HCV
non-responders. Complete data from a twelve week study in
31 patients show that groups of HCV non-responders, all
with a high viral load of genotype 1, treated with ZADAXIN
in combination with pegylated interferon alpha reported ZADAXIN
dose-related early virologic response rates ranging from 20 to
36 percent. These data, which showed increasing
dose-related response rates, suggest ZADAXINs potential to
add to the antiviral effects of pegylated interferon alpha.
Early virologic response is suggested to be an early indicator
of sustained response. A sustained response is evidence of
complete clearance of the virus from the body six months after
completion of 12 months of therapy. A sustained responder
is considered effectively cured of hepatitis C.

We are conducting two phase 3 clinical
trials in the U.S. using ZADAXIN in combination with pegylated
interferon alpha as a therapy for non-responders to previous
hepatitis C therapy. Our goal is for ZADAXIN in combination with
pegylated interferon alpha to be the first U.S. FDA approved
hepatitis C therapy for non-responders, the most difficult group
of HCV patients to treat. If this combination therapy is
approved for non-responders, we believe that ZADAXIN could be
beneficial in combination with current therapy (pegylated
interferon alpha with or without ribavirin) as a first course of
therapy for all HCV patients. Currently, ZADAXIN is the only
non-interferon based new drug that we know of in phase 3
hepatitis C clinical trials in the U.S. ZADAXIN used alone
or in combination with other drugs to treat hepatitis C is
patent protected into 2015 in the U.S. and into 2012 in Europe
and Japan.

Our two ZADAXIN phase 3 hepatitis C
clinical trials are designed to provide statistically
significant results and demonstrate a clinical benefit from
using ZADAXIN in combination with pegylated interferon

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alpha in treating hepatitis C
non-responders. These trials are multicenter, randomized, and
double-blinded and plan to enroll a total of 1,000
hepatitis C non-responder patients. One trial is treating
patients with mild cirrhosis of the liver and the other trial is
treating patients with no liver damage. These trials are two of
the largest hepatitis C clinical studies ever conducted
exclusively in the U.S. and among a few in the world to treat
solely non-responders.


In these clinical trials, patients in equal
numbers are being assigned to a 12 month course of ZADAXIN
plus pegylated interferon alpha or placebo plus pegylated
interferon alpha. After completing treatment, all patients will
be followed for a six month observation period. These treatment
and follow up periods are consistent with the U.S. FDA
standard for demonstrating sustained response to
hepatitis C therapy. Primary endpoints are a sustained
virological response (clearance of the HCV virus) and an
improvement in the liver histological activity index measured at
the end of the six month follow up observation period. Secondary
endpoints are the same as the primary endpoints but are measured
at the end of the 12 months of therapy.

The PEGASYS brand of pegylated interferon alpha
for both trials is being provided at no cost to us by
F. Hoffmann La-Roche, which receives the right to use the
data resulting from the trials but does not receive any
marketing rights to ZADAXIN or the combination therapy. These
trials are also supported by our European partner Sigma-Tau,
which has European marketing and development rights for ZADAXIN.
In early 2002, Sigma-Tau contributed $2,685,000 to SciClone for
funding of these trials, and is obligated to make an additional
$1,000,000 milestone payment when the targeted 1,000 patients
are enrolled in these trials. Sigma-Tau and affiliates currently
own close to 10% of SciClones common stock outstanding.

Hepatitis
B

The hepatitis B virus (HBV) is one of
the worlds most prevalent blood borne chronic infectious
diseases. The disease often leads to cirrhotic complications and
progression to liver cancer. The World Health Organization
estimates that more than 350 million people worldwide are
chronically infected with HBV. There are effective
hepatitis B vaccines that account for the relatively low
incidence of the virus in certain markets, such as the U.S. with
only 1.3 million chronically infected. However, in many
areas of the world, particularly in Asia, the virus is highly
prevalent.

The worldwide market for HBV therapeutics was
$325 million in 2001. Significant pharmaceutical markets
for hepatitis B therapy exist in Japan, China, Southern
Europe, and the Middle East. In Japan, there are
3.8 million chronically infected HBV carriers. We have
regulatory approval and are marketing ZADAXIN as a hepatitis B
therapy in certain countries, most notably in China. We recently
completed a phase 3 clinical trial in Japan, encompassing
over 300 patients using ZADAXIN as a monotherapy, and we expect
to report the results in the second quarter of 2003.

The goal of hepatitis B therapy is to induce a
durable interruption of viral replication which will lead to a
sustained response. Current HBV therapies in the U.S., Europe,
and Japan are inadequate in achieving this goal of a sustained
response. In Japan, these therapies include interferon alpha and
the nucleoside analogue lamivudine.

Interferon alpha, an injected drug, is effective
in stopping HBV viral replication in approximately
40 percent of patients. However, many patients are unable
to tolerate the manufacturers recommended four months of
therapy administered at doses three to four times that of
interferon alphas recommended HCV therapy dose. The severe
side effects frequently require dose reduction and even
termination of therapy. Lamivudine, an oral drug, is effective
in achieving a sustained response in approximately
16 percent of patients after one year of therapy.
Lamivudines primary benefit, while it is taken, is
suppressing of the virus and slowing the progression of liver
disease. However, after therapy is stopped the virus typically
rebounds, sometimes so strongly it can be fatal. Another concern
is that prolonged use of lamivudine causes the hepatitis B
virus to mutate, sometimes to a form resistant to the drug,
making therapy even more problematic. Viral mutations are common
after just one year of therapy. Adefovir, recently approved in
the U.S. and Europe but presently not in Japan, is a nucleotide
reverse transcriptase inhibitor that, like lamivudine,
suppresses hepatitis B viral replication while the drug is
taken. Adefovir, also an oral drug, is effective in achieving a
sustained response in approximately 12 percent of patients
after one year of therapy. It is uncertain yet whether prolonged
use of adefovir will lead to resistant viral mutations.

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We have publicly reported positive preliminary
data from our ZADAXIN phase 3 hepatitis B clinical
trial in Japan. Preliminary data on the first evaluated
one-third of patients in this over 300 patient study showed
ZADAXIN produced a sustained response in 24 percent of
patients after six months of therapy and 12 months of
follow up. In separate smaller studies, ZADAXIN has produced
sustained response rates of up to 40% when used as a monotherapy
and up to 70% in pilot studies when used in combination with
interferon alpha or lamivudine. ZADAXIN has not produced any
significant reported adverse effects.

Our ZADAXIN phase 3 hepatitis B
clinical trial in Japan is designed to demonstrate a clinical
benefit from using ZADAXIN in treating hepatitis B. The
trial patients were assigned to either one of two different
doses of ZADAXIN monotherapy for six months and then were
observed for 12 months of follow up. At the end of
treatment and follow up observation, the primary endpoint is
global improvement, as measured by a virological, chemical, and
biological response.

We have completed the treatment and follow up
observation in this clinical trial and are compiling and
analyzing the complete data. We expect to report results from
this trial during the second quarter of 2003. If the final data
are positive and demonstrate an efficacy and safety benefit to
using ZADAXIN in treating hepatitis B, we will prepare a
regulatory filing document to submit to the Japanese Ministry of
Health and Welfare. ZADAXIN as a therapy for hepatitis B is
patent protected into 2012 in Japan.

Oncology

We believe that ZADAXINs mechanism of
action and highly specific role in activating and directing
immune response is applicable for various cancers as well as for
viral infection. We believe that oncology will be a major market
opportunity for ZADAXIN.

We are conducting two phase 2 liver cancer
clinical trials in the U.S. Our European partner Sigma-Tau is
targeting a European oncology approval for ZADAXIN. Sigma-Tau is
currently enrolling patients in a phase 2 malignant
melanoma clinical trial and intends to use the data from this
trial, if positive, to determine the optimal design for a
pivotal phase 3 oncology trial. Sigma-Tau intends to use
data from our U.S. phase 3 hepatitis C clinical
trials, if positive, to pursue regulatory approval for ZADAXIN
for this indication in Europe.

Liver cancer (hepatocellular carcinoma or HCC) is
a common result of untreated or progressive hepatitis C or
hepatitis B and is one of the most prevalent fatal
malignancies in the world with approximately one million new
cases annually. The median survival for advanced HCC patients is
only eight months.

Current liver cancer therapies include
transarterial chemoembolization (TACE) and radio frequency
ablation (RFA). In the U.S., our ZADAXIN phase 2 liver cancer
clinical trials are designed to demonstrate a clinical benefit
from using ZADAXIN in combination with TACE or RFA. Patients are
receiving either ZADAXIN in combination with TACE or ZADAXIN in
combination with RFA, the two most common procedures for liver
cancer patients whose tumors cannot be treated either by surgery
or by liver transplantation. Patients are receiving six months
of therapy and are being observed for a period of 12 months
after the end of therapy. The endpoints are survival and tumor
response. ZADAXIN for the treatment of liver cancer is protected
by Orphan Drug status in both the U.S. and Europe.

Malignant melanoma is one of the deadliest forms
of cancer. There are 80,000 new melanoma cases diagnosed
annually in the U.S. and Europe and the median survival for
late-stage malignant melanoma patients is only five months.

Current malignant melanoma therapies include
interferon alpha and the chemotherapy drug dacarbazine (DTIC).
Data from a previous European pilot study indicate that ZADAXIN
in combination therapy with interferon alpha and DTIC
chemotherapy increases tumor response rates and survival rates
in malignant melanoma patients. In these studies, 23 of the 46
late-stage patients using ZADAXIN plus interferon alpha and DTIC
showed a complete or partial response. Moreover, the median
survival for participating patients was 12.5 months, more than
double the historical average.

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The ZADAXIN phase 2 malignant melanoma clinical
trial in Europe is designed to demonstrate a clinical benefit
from using ZADAXIN in combination with standard chemotherapy.
This clinical trial is being funded and conducted by Sigma-Tau,
which has exclusive marketing rights for ZADAXIN in most Western
European countries. Sigma-Tau is currently enrolling stage 4
(metastatic) malignant melanoma patients and plans to enroll
over 300 patients in this trial. All patients in this four-arm
study are receiving DTIC chemotherapy. In addition to receiving
DTIC, each patient is randomly assigned to receive either
ZADAXIN (in varying doses), interferon alpha, or ZADAXIN plus
interferon alpha. Patients are receiving six months of therapy
and will be observed for a period of 12 months after the
end of therapy. The endpoints are tumor response and survival.
The results of this clinical trial, if positive, are expected to
be used in the design of a ZADAXIN combination therapy phase 3
clinical trial for malignant melanoma.



| |                                                 
| | ------------------------------------------------
| | Additional Product Development
    Opportunities

Although most of our resources and efforts are
concentrated on developing ZADAXIN, our additional product
development opportunities include a potentially orally
administered therapeutic to treat viral and infectious diseases
and products to address the protein-based disorder that causes
cystic fibrosis.



| |       
| | ------
| | SCV-07

SciClone has acquired the rights to a new class
of immunomodulators that stimulate the immune system in a manner
similar to ZADAXIN. One of these is SCV-07, which also has the
potential to be administered orally. In 1999, we acquired the
exclusive worldwide rights outside of Russia to SCV-07 and other
compounds of a new class of immunomodulators from Verta Ltd., a
biotechnology company in St. Petersburg, Russia. SCV-07 and its
related class of compounds are covered by a U.S. composition of
matter patent as well as for their use as immunomodulators.

The World Health Organization estimates that
tuberculosis (TB) kills 2 million people each year, and is
the most common infectious disease in the world today. TB is a
highly infectious disease and getting a patient to a
non-contagious state is a primary goal of treatment and is
critical to efforts to contain the spread of the disease.

Data from phase 2 clinical trials conducted by
Verta in Russia demonstrated that SCV-07 has the capability to
significantly increase the rate at which tuberculosis patients
become non-contagious. In phase 2 clinical trials,
80 percent of TB patients undergoing standard anti-TB
chemotherapy plus a five-day regimen of parenteral SCV-07
therapy were no longer contagious (as measured by negative
sputum cultures) after three months compared to 37 percent
of patients whose anti-TB therapy did not include SCV-07. In
addition, all of the patients receiving SCV-07 reported an
improvement in symptoms, including fever and cough, and there
was a significant decrease in the number of patients with lung
damage. SCV-07 did not lead to additional adverse events in any
of the patients.

We are pursuing grant funding to conduct
additional clinical trials to test the optimal dosing and oral
administration of SCV-07 in the treatment of infectious diseases
with the intention of opening a U.S. Investigational New Drug
application (IND) to study SCV-07 in the U.S.



| |                        
| | -----------------------
| | CPX for Cystic Fibrosis

CPX is a novel small molecule protein-repair
therapy that can be orally administered. CPX is targeted for the
treatment of cystic fibrosis (CF), a common fatal genetic
disorder among Caucasians. We licensed CPX and a related class
of compounds from the National Institutes of Health (NIH). CPX
has been granted Orphan Drug status in both the U.S. and Europe.

In preclinical studies conducted at the NIH, CPX
demonstrated the ability to repair the two principal protein
defects underlying the cause of CF. CPX appears to enable the
defective protein to travel through the cell and reach the
epithelial cell membrane (trafficking) and to
improve an originally impaired transport of chloride ions across
the cell membrane. This mechanism of action is intended to
prevent the build-up of viscous mucus in the first place, and
thus lessen the danger of fatal infection common in CF patients.

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Our first CPX phase 2 clinical trial in the U.S.
was designed to demonstrate CPXs protein repair activity
in CF patients. Due to the erratic digestive absorption patterns
of CF patients, the sustained circulatory drug levels required
to assess efficacy were not achieved. We worked with the Cystic
Fibrosis Foundations Therapeutic Development Network and
reformulated CPX to prepare for additional toxicology and early
human studies. We currently are conducting development
activities with a reformulated CPX.

Marketing and Sales

SciClone initially had marketing rights to
ZADAXIN only outside of the U.S. and Europe. We began and
developed our marketing and sales capabilities in the
international markets available to us and to date we have
received ZADAXIN approvals by the ministries of health in over
30 countries outside of the U.S., most of Europe, and Japan.
ZADAXINs approvals are principally for the treatment of
hepatitis B and hepatitis C, and also in certain countries as a
vaccine or chemotherapy adjuvant for patients with weakened
immune systems. Our international sales provide significant cash
flow to help fund ZADAXINs phase 3 hepatitis C clinical
trials in the U.S.

After consolidating worldwide rights to ZADAXIN
in 1998, we were able to begin implementing our plans to develop
ZADAXIN for regulatory approval in the U.S. and Europe.

In the U.S., we have retained full commercial
rights to ZADAXIN. We currently are conducting phase 3 clinical
trials in the U.S. and we anticipate that ZADAXIN should have
enhanced partnering value after the conclusion of these trials,
if they are successful. However, there is no assurance that we
will pursue or achieve a partnering arrangement.

In the European Union (EU), Sigma-Tau is our
exclusive marketing and development partner for ZADAXIN. As part
of our collaborative agreement, we will provide our U.S.
hepatitis C phase 3 clinical trial data to assist
Sigma-Taus efforts to obtain regulatory approval in the EU
for ZADAXIN in hepatitis C therapy. In addition, Sigma-Tau
intends to seek EU regulatory approval for ZADAXIN for other
indications and is currently conducting and funding a large
phase 2 clinical trial using ZADAXIN in combination therapy for
malignant melanoma. We received from Sigma-Tau a $2,685,000
payment in January 2002 that is being recognized evenly as
contract revenue over the period of our U.S. hepatitis C
clinical development activities, estimated at three years
beginning in the second quarter of 2002. This payment is part of
the $3,685,000 Sigma-Tau has agreed to pay us to help fund the
U.S. hepatitis C clinical trials. The remaining $1,000,000 will
be paid upon completion of patient enrollment in our U.S.
clinical trials.

In Japan, we have recently completed a phase 3
clinical trial for ZADAXIN as a monotherapy for hepatitis B.
Schering-Plough is our exclusive marketing partner for ZADAXIN
in Japan.

In the markets where ZADAXIN is approved and
actively marketed, our marketing activities include providing
ZADAXIN related medical education, clinical experience programs
and participation in regional and international liver disease
related medical conferences. Where appropriate, these programs
will extend into other markets when ZADAXIN has regulatory
approval.

ZADAXIN sales are made in U.S. dollars and are
managed by our wholly owned international subsidiary, SciClone
Pharmaceuticals International Ltd. (SPIL). SPIL is registered in
the Cayman Islands, headquartered in Hong Kong, and has
international offices in Beijing, Hong Kong, Shanghai, and
Singapore. SPIL manages a distribution center in Hong Kong that
receives shipments of ZADAXIN manufactured in Europe under
contract agreements and distributes from there to international
markets. Under our established distribution arrangements, local
importers and distributors are responsible for the importation,
inventory, distribution, and invoicing of ZADAXIN.

Our largest single market for ZADAXIN is
currently the Peoples Republic of China, which accounted
for 88%, 89%, and 86% of ZADAXIN sales for the years ended
December 31, 2002, 2001, and 2000, respectively. China is
the worlds most populous nation and also has the largest
population of hepatitis B, hepatitis C, and liver cancer
patients. Although China and other developing countries
generally do not reimburse patients for relatively expensive
therapies such as ZADAXIN, SPIL has successfully established and
expanded the use of ZADAXIN in China in recent years.

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In China, SPIL sells ZADAXIN to well-established,
government licensed importing agents. Sales are made on a no
returns basis, except under limited terms regarding product
quality. These importing agents in turn sell ZADAXIN to four
licensed distributors who then distribute ZADAXIN to hospital
pharmacies and physicians throughout the country. In addition to
its Hong Kong office, SPIL also operates representative offices
in Beijing and Shanghai, and employs a medical education team of
approximately 60 full time employees in China to promote
physicians knowledge and use of ZADAXIN.

Manufacturing

ZADAXIN is manufactured in accordance with U.S.
FDA current Good Manufacturing Practices (cGMP), and the
Japanese or European equivalents of such standards. Products are
manufactured by third parties under exclusive contract
manufacturing and supply agreements. We closely monitor
production runs of our products and regularly conduct our own
quality assurance audit programs.

For our phase 3 clinical trials in the U.S. and
Japan, ZADAXIN is manufactured to U.S. FDA and Japanese cGMP
standards by contract manufacturers in the U.S. For our phase 2
clinical trial in Europe and for sale in other international
markets where approved, ZADAXIN is manufactured to European cGMP
standards by contract manufacturers in Europe.

In the event of the termination of an agreement
with any single supplier or manufacturer, we believe that we
would be able to enter into arrangements with similar terms with
other suppliers or manufacturers. We do not intend to acquire or
establish our own dedicated manufacturing facilities for any of
our products at this time.

Patents and Proprietary Rights



| |        
| | -------
| | Patents

An important element of our product development
strategy is to seek regulatory approval for our products for
indications with significant market potential and where we have
a strong proprietary position through patents covering use,
process, or composition of matter of our products. For our lead
product ZADAXIN, we have significant patent protection regarding
the use of thymosin alpha 1, or thymalfasin, and its
process of manufacture.

We have patents covering the use of thymosin
alpha 1 for treatment of hepatitis C that have been issued in
the U.S., a majority of European countries and numerous
international markets and extend into 2015 in the U.S. and 2012
in the European Union and Japan. In addition, patents for the
specific use of thymosin alpha 1 in treating
hepatitis C in non-responders to interferon alpha treatment
have been issued to us in the U.S. and various international
markets.

We are the exclusive licensee or owners of
patents that have been issued in the U.S., Japan, China and
other international markets covering the treatment of hepatitis
B using thymosin alpha 1. We are also the exclusive
licensee of patents that have been issued in the U.S., a
majority of European countries, Japan, and other international
markets that cover the use of thymosin alpha 1 to treat
small cell and non-small cell lung cancer. Several corresponding
additional patent applications have been issued or patent
applications are pending in other countries for each of the
above named indications.

For process patents, we are either a patentee or
exclusive licensee of use and process patents related to the
method of making and therapeutic uses of thymosin alpha 1.
Our process patents are directed to methods of making thymosin
alpha 1 and have been issued in the U.S., a majority of
European countries, Japan, Canada, Hong Kong, Taiwan, and South
Korea. Although the composition of matter patents related to
thymosin alpha 1 have expired in the major pharmaceutical
markets, we have several composition of matter patents and
applications directed to analogs and derivatives of thymosin
alpha 1 which have been granted in the U.S. and in
important international markets. We continue to seek additional
proprietary rights for thymosin alpha 1.

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We are the exclusive licensee of an issued U.S.
patent covering the use of CPX to treat cystic fibrosis, as well
as an issued U.S. patent and pending foreign patent applications
covering CPX analogs and their use in treating cystic fibrosis.

We are the exclusive licensee of an issued U.S.
patent covering the composition of matter of SCV-07 and related
compounds, as well as similar pending foreign patent
applications.



| |                   
| | ------------------
| | Proprietary Rights

In addition to our patent protection, we intend
to use other means to protect our proprietary rights. We are
pursuing marketing exclusivity periods that are available under
regulatory provisions in certain countries including the U.S.,
Europe, and Japan. These marketing exclusivity periods benefit
the holder of the first marketing approval for new chemical
entities or their equivalents for a given indication.

Orphan Drug protection has been or will be sought
where available if such protection also grants additional market
exclusivity. We hold an Orphan Drug product designation for
thymosin alpha 1 for hepatocellular carcinoma, hepatitis B, and
DiGeorge Anomaly in the U.S. and for hepatocellular carcinoma in
Europe. We hold an Orphan Drug product designation for CPX to
treat cystic fibrosis in the U.S. and Europe and are pursuing
other types of protection where applicable.

We have filed applications worldwide to recognize
and protect trademarks for ZADAXIN and other trademarks that
appear on our commercial packaging and promotional literature.
Copyrights for the commercial packaging may prevent counterfeit
products or genuine but unauthorized products from entering a
particular country by parallel importation. We have also
implemented anti-counterfeiting measures on commercial packaging
and plan to register the packaging with customs departments in
countries where such procedures exist. We also rely upon trade
secrets, which we seek to protect in part by entering into
confidentiality agreements with our employees, consultants,
corporate partners, suppliers and licensees.

Competition

There are few drugs currently approved by the
U.S. FDA for the treatment of hepatitis C or hepatitis B. For
the treatment of hepatitis C in the U.S., there are currently
two versions of pegylated interferon alpha being marketed, one
by Schering-Plough under the trade name
Peg-Intron, the other by F. Hoffmann
La-Roche under the trade name PEGASYS.
Schering-Plough markets ribavirin under the trade name
Rebetol and F. Hoffmann La-Roche sells a
separate brand of ribavirin under the trade name
COPEGUS. In previous clinical studies, ZADAXIN
has demonstrated the ability to add to the antiviral effects of
pegylated interferon alpha without adding to the side effects
caused by pegylated interferon alpha. Of the many future
potential hepatitis C therapies being developed, ZADAXIN is the
only non-interferon new therapy currently in phase 3 clinical
trials in the U.S. and we believe that other new therapies are
years behind ZADAXINs late-stage of development.

For the treatment of hepatitis B, current
therapies marketed include interferon alpha, nucleoside
analogues such as lamivudine, and the nucleotide reverse
transcriptase inhibitor adefovir. In previous clinical studies,
ZADAXIN as a monotherapy has demonstrated up to the same
efficacy as interferon alpha without producing adverse side
effects. Moreover, in small studies ZADAXIN in combination with
interferon alpha or lamivudine has demonstrated significantly
higher efficacy rates without producing additional side effects.

There are numerous methods to treat other viral
diseases and cancer and new therapeutic options continue to be
developed. ZADAXIN, as a pure synthetic preparation of thymosin
alpha 1, a substance that circulates naturally and is
instrumental in the bodys immune response to fight viral
infections and certain cancers, may be useful in combination
therapy for these other indications. ZADAXIN is currently being
studied in human clinical trials in combination with the
chemotherapeutic agents DTIC and interferon alpha for the
treatment of malignant melanoma. In over 10,000 patients to
date, ZADAXIN has been administered in both clinical and
commercial use, alone and in combination with antiviral and
anticancer drugs, without producing any ZADAXIN related
significant adverse side effects or toxicities. We believe that
as newer and better directed antiviral and anticancer therapies
are developed, ZADAXIN may increase these therapies

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efficacy without adding to the side effect
profile, although there can be no assurance that ZADAXIN or
other products we may develop will prove effective or safe in
such uses.


Government Regulation

Regulation by governmental authorities in the
U.S. and foreign countries is a significant factor in the
manufacturing and marketing of our products, as well as in
ongoing research and development activities and in preclinical
and clinical trials and testing related to our products. When
our products are manufactured, tested or sold in the U.S., they
will be regulated in accordance with the Federal Food, Drug, and
Cosmetic Act, commonly referred to as the FD&C Act and the
U.S. Public Health Service Act. In addition to obtaining FDA
approval for each product, each domestic manufacturing
establishment must be registered with the FDA. Domestic
manufacturing establishments are subject to inspections by the
FDA and by other federal, state and local agencies and must
comply with current U.S. Good Manufacturing Practices, or cGMP.
In complying with cGMP standards, manufacturers must continue to
expend time, money and effort in the area of production and
quality control to ensure full technical compliance.

The steps required before a new drug or
biological product may be distributed commercially in the U.S.
generally include:



| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conducting appropriate preclinical laboratory
    evaluations of the products chemistry, formulation and
    stability, and animal studies to assess the potential safety and
    efficacy of the product;                                      
|
| |  | submitting the results of these evaluations and
    tests to the FDA, along with manufacturing information and
    analytical data, in an Investigational New Drug Application, or
    IND, and receiving FDA approval of the IND;               
|
| |  | obtaining approval of Institutional Review
    Boards, or IRBs, to introduce the drug into humans in clinical
    studies;                                                                                                                       
|
| |  | conducting adequate and well-controlled human
    clinical trials that establish the safety and efficacy of the
    drug product candidate for the intended use, typically in the
    following three sequential, or slightly overlapping stages:



| |   |                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase 1:The drug is
    initially introduced into healthy human subjects or patients and
    tested for safety, dose tolerance, absorption, metabolism,
    distribution and excretion;                                                                                                                                            
|
| |  | Phase 2:The drug is
    studied in patients to identify possible adverse effects and
    safety risks, to determine dose tolerance and the optimal
    dosage, and to collect initial efficacy data;                                                                                                                               
|
| |  | Phase 3:The drug is
    studied in an expanded patient population at multiple clinical
    study sites, to confirm efficacy and safety at the optimized
    dose, by measuring a primary endpoint established at the outset
    of the study, and comparing it to that of established therapies,
    if any; and when required; and
|
| |  | Phase 4:The drug is
    studied in an expanded patient population in a post-approval
    setting for continued monitoring of safety and sometimes
    continued efficacy                                                                                                                                                           



| |   |                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | submitting to the FDA the results of preclinical
    studies, clinical studies, and adequate data on chemistry,
    manufacturing and control information to ensure reproducible
    product quality batch after batch in a New Drug Application, or
    NDA, or Biologics License Application, or BLA; and
|
| |  | obtaining FDA approval of the NDA or BLA prior to
    any commercial sale or shipment of the pharmaceutical agent.                                                                                                                                                                                         

When used in connection with trials and filings
in other countries, terms such as phase 1,
phase 2, phase 3,
phase 4, new drug application and
marketing application refer to what we believe are
comparable trials and filings in these other countries.

After FDA approval has been obtained, the FDA
will require post-marketing reporting to monitor the side
effects of the drug. Further studies may be required to provide
additional data on the products risks,

10



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benefits, and optimal use, and will be required
to gain approval for the use of the product as a treatment for
clinical indications other than those for which the product was
initially tested. Results of post-marketing programs may limit
or expand the further marketing of the product. Further, if
there are any modifications to the drug, including changes in
indication, labeling, or a change in the manufacturing process
or manufacturing facility, a NDA or BLA supplement may be
required to be submitted to the FDA.


The FD&C Act includes provisions intended to
facilitate and expedite the development and review of drugs and
biological products intended for treatment of serious or
life-threatening conditions that demonstrate the potential to
address unmet medical needs for such conditions. These
provisions set forth a procedure for designation of a drug as a
fast track product. Concurrent with or after an IND
is filed, the sponsor may request designation as a fast track
product, and the FDA will respond within 60 days.

An advantage of fast track designation is that
sponsors may submit, and the FDA may commence review of,
portions of an application before the complete application is
submitted, provided that FDA approves a schedule for submission
of the completed application. The sponsor of a fast track
product also may seek and obtain FDA approval based upon a
determination that the product has an effect on a clinical
endpoint or on a surrogate endpoint that is reasonably likely to
predict clinical benefit. A product approved on this basis is
subject to rigorous postmarket compliance requirements, and the
sponsor may be required to conduct post-approval studies to
validate and/or confirm the endpoint. The FDA may withdraw
approval of a fast track product if, for example, the sponsor
fails to conduct required post-approval studies or disseminates
false or misleading promotional materials.

The Orphan Drug provisions of the FD&C Act
provide incentives to drug and biologics manufacturers to
develop and manufacture drugs for the treatment of rare
diseases, currently defined as diseases that affect fewer than
200,000 individuals in the U.S. or, for a disease that affects
more than 200,000 individuals in the U.S., where the sponsor
does not realistically anticipate its product becoming
profitable. Under these provisions, a manufacturer of a
designated orphan product can seek tax benefits, and the holder
of the first FDA approval of a designated orphan product will be
granted a seven year period of marketing exclusivity for that
product for the orphan indication. While the marketing
exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same drug for the same indication
without a showing of clinical superiority, it would not prevent
other types of drugs from being approved for the same use. We
have been granted orphan designation by the FDA for ZADAXIN for
treatment of chronic active hepatitis B, DiGeorge Anomaly, and
hepatocellular carcinoma, and for CPX for treatment of cystic
fibrosis.

In the European Union, incentives for
manufacturers to develop medicinal products for the treatment of
rare diseases are provided pursuant to the Orphan Medicinal
Products Regulation (141/2000). Orphan medicinal products are
those products designed to diagnose, treat or prevent a
condition which occurs so infrequently that the cost of
developing and bringing the product to the market would not be
recovered by the expected sale of the product. In the EU, the
criterion for designation is a prevalence of the relevant
condition in no more than 5 per 10,000 of the population. The
incentives include, amongst others, a reduction in the fees
payable in respect of the marketing authorization application,
protocol assistance for clinical trials in support of the
application, and marketing exclusivity once the authorization is
granted. In the EU, marketing exclusivity is granted to products
with an orphan drug designation for a period of 10 years
during which the EU will not accept another application for a
marketing authorization for the same therapeutic indication in
respect of a similar medicinal product, unless the second
applicant can show its product is safer, more effective or
otherwise clinically superior. A similar medicinal product is
defined as a medicinal product containing a similar active
substance as contained in the authorized orphan medicinal
product.

We have been granted orphan designation
throughout the EU for ZADAXIN for treatment of hepatocellular
carcinoma, and for CPX for treatment of cystic fibrosis.
However, it should be noted that, as in the U.S., the granting
of orphan drug status in the EU does not affect the likelihood
of success of obtaining regulatory approval or marketing
authorization for the relevant product in any way.

Under the Drug Price Competition and Patent Term
Restoration Act of 1984, or DPCPTRA, a sponsor may be granted
marketing exclusivity for a period of time following FDA
approval of certain drug applications, regardless of patent
status, if the drug is a new chemical entity or new clinical
studies were used to support the

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marketing application. This marketing exclusivity
would prevent a third party from obtaining FDA approval for a
similar or identical drug through an Abbreviated New Drug
Application, or ANDA, which is the application form typically
used by manufacturers seeking approval of a generic drug, or
505(b)(2) application. The DPCPTRA also allows a patent owner to
extend the term of the patent for a period equal to one-half the
period of time elapsed between the filing of an IND and the
filing of the corresponding NDA plus the period of time between
the filing of the NDA and FDA approval with the maximum patent
extension term being five years. The recently enacted Best
Pharmaceuticals for Children Act provides an additional six
months of marketing exclusivity for new or marketed drugs for
certain pediatric testing conducted at the written request of
the FDA.


We may seek the benefits of additional orphan,
DPCPTRA, or fast track provisions, but we cannot assure that we
will be able to obtain any such benefits.

We are subject to foreign regulations governing
human clinical trials and pharmaceutical sales. The requirements
governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a
product by the comparable regulatory authorities of foreign
countries is required prior to the commencement of marketing of
our products in those countries. The approval process varies
from country to country and the time required for approval may
be longer or shorter than that required for FDA approval. In
general, foreign countries use one of three forms of regulatory
approval process. In one form, local clinical trials must be
undertaken and the data must be compiled and submitted for
review and approval. In Japan, for example, the process is time
consuming and costly because certain preclinical studies and
clinical trials must be conducted in Japan. A second form of
approval process requires clinical trial submissions, but
permits use of foreign clinical trials and typically also
requires some form of local trial as well. A third form of
approval process does not require local clinical trials, but
rather contemplates submission of an application including proof
of approval by countries that have clinical trial review
procedures. Thus, a prior approval in one or more of the U.S.,
Japan, most European Union countries or Australia, among others,
is often sufficient for approval in countries using this third
form of approval process.

The FDA regulates the export of drugs or bulk
pharmaceuticals from the U.S. In general, a drug that has been
approved for commercial sale in the U.S. may be exported for
commercial sale. An unapproved drug may be exported to a
listed country (Australia, Canada, Israel, Japan,
New Zealand, Switzerland, South Africa, and countries in the
European Union and the European Economic Area) for
investigational purposes without FDA authorization if exported
in accordance with laws of the foreign country, and in
accordance with the export requirements. Export of drugs to an
unlisted country for clinical trial purposes continues to
require FDA approval. An unapproved drug can be exported to any
country for commercial purposes without prior FDA approval,
provided that the drug (i) complies with the laws of that
country, and (ii) has valid marketing authorization or the
equivalent from the appropriate authority in a listed country.
Export of drugs not approved in the U.S. that do not have
marketing authorization in a listed country continue to require
FDA export approval. We have obtained, where necessary, FDA
approval for all exports of ZADAXIN from the U.S. for clinical
trial purposes, and will seek to obtain FDA approval, where
necessary, for any future shipments from the U.S. to any
unlisted country.

Failure to comply with applicable U.S. or foreign
regulatory requirements can, among other things, result in
warning letters, fines, suspensions of regulatory approvals,
product recalls or seizures, operating restrictions,
injunctions, total or partial suspension of production, civil
penalties, and criminal prosecutions. Further, additional
government regulation may be established or imposed by
legislation or otherwise, which could prevent or delay
regulatory approval of ZADAXIN, CPX or any of our future
products. Adverse events related to our products in any of our
existing or future markets could cause regulatory authorities to
withdraw market approval for such products, if any, or prevent
us from receiving market approval in the future.

The level of revenues and profitability of
pharmaceutical companies may be affected by the continuing
efforts of governmental and third party payors to contain or
reduce the costs of health care through various means, including
the extent and availability of reimbursement. We are unable to
predict when any proposed health care reforms will be
implemented, if ever, or the effect of the implemented reforms
on our business.

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We are also subject to various federal, state and
local laws, regulations and recommendations relating to safe
working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use and disposal of
hazardous or potentially hazardous substances, including
radioactive compounds and infectious disease agents, used in
connection with research work and preclinical and clinical
trials and testing. The extent of government regulation that
might result from future legislation or administrative action in
these areas cannot be accurately predicted.

As the preceding discussion indicates, the
research, preclinical development, clinical development,
manufacturing, marketing and sales of pharmaceuticals, including
ZADAXIN, SCV-07 and CPX, are subject to extensive regulation by
governmental authorities. Products we develop cannot be marketed
commercially in any jurisdiction in which they have not been
approved. The process of obtaining regulatory approvals is
lengthy, uncertain and requires the expenditure of substantial
resources. For example, in some countries where we contemplate
marketing ZADAXIN, the regulatory approval process for drugs not
previously approved in countries that have established clinical
trial review procedures is uncertain and this uncertainty may
result in delays in granting regulatory approvals. In addition,
in certain countries such as Japan, the process for obtaining
regulatory approval is typically more time consuming and more
costly than in other major markets. We are currently pursuing
regulatory approvals of ZADAXIN in the U.S., Japan, and in a
number of other countries, and in the EU through our EU
marketing and development partner Sigma-Tau.

Third Party Reimbursement

ZADAXIN is a relatively expensive therapeutic
product. The amount of product utilized by the patient depends
on the disease, the dose, and length of treatment. The cost will
typically be several thousands of U.S. dollars for a course of
therapy. Currently, ZADAXIN is sold principally in countries
without broad government provided health care reimbursement
programs or adequate and widely distributed private health
insurers or other third party payor organizations. This lack of
third party reimbursement impedes the availability of ZADAXIN to
the broad affected patient populations in markets where it is
approved. We believe that, in addition to regulatory marketing
approvals, inclusion of ZADAXIN in drug insurance programs and
government drug cost reimbursement programs in the U.S., Europe
and Japan is essential to the commercial success of the product.

Employees

As of December 31, 2002, we had 97
employees, 23 in the U.S., and 74 in foreign offices. We
consider our relations with our employees to be satisfactory.

We also have engaged the services of numerous
experienced consultants worldwide with pharmaceutical and
business backgrounds to assist in our product development and
ZADAXIN commercialization activities. We plan to leverage our
key personnel by continuing to make extensive use of clinical
research organizations, contract laboratories, development
consultants and collaborations with pharmaceutical companies to
develop and market our products.

Recent Developments

In January 2003, Sigma-Tau and its affiliates
increased their aggregate ownership to close to 10% of
SciClones common stock outstanding by purchasing
approximately 504,938 unregistered shares of common stock
directly from the company for $1.8 million. Prior to this
transaction, all warrants held by Sigma-Tau to purchase a total
of 400,000 shares of SciClones common stock were
cancelled, and no new warrants were issued.

Available Information

We file electronically with the Securities and
Exchange Commission (or SEC) our annual reports on
Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934. The public may read or
copy any materials we file with the SEC at the SECs Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
The public may

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obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC. The address of that site
is http://www.sec.gov.


You may obtain a free copy of our annual reports
on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K and amendments to those reports
on the day of filing with the SEC on our website on the World
Wide Web at http:///www.sciclone.com, by contacting the
Investor Relations Department at our corporate offices by
calling 800-724-2566 or by sending an e-mail message to
investorrelations@sciclone.com.

Executive Officers of the Registrant

As of February 28, 2003, the executive
officers of the Company, who are elected by and serve at the
discretion of the Board of Directors, were as follows:

|                        |  |     |    |          |  |                                                                                                                                                         
|----------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Donald R. Sellers       |  |     | 58 |          |  | President, Chief Executive Officer, and Director,
    SciClone Pharmaceuticals, Inc.; Managing Director, SciClone
    Pharmaceuticals International Ltd.
|Alfred R. Rudolph, M.D. |  |     | 55 |          |  | Chief Operating Officer                                                                                                                                 
|Richard A. Waldron      |  |     | 49 |          |  | Chief Financial Officer                                                                                                                                 

Donald R. Sellershas served as SciClones President, Chief Executive Officer
and Director since 1996. From 1993 to present, he has also
served as Managing Director of SciClone Pharmaceuticals
International Ltd. At SciClone, Mr. Sellers has helped to
acquire global rights to ZADAXIN®, the Companys
leading immune system enhancing drug, to bring ZADAXIN into
phase 3 clinical trials in the U.S. and Japan and into 30
countries where it is sold worldwide generating revenues of
$17 million in 2002. Mr. Sellers has nearly
30 years of experience in the global pharmaceutical
industry, working with SciClone, Pfizer, Revlon Healthcare Group
and Sterling Drug International. Mr. Sellers spent five
years in Military Intelligence serving with Special Forces and
as a Counter-Intelligence Special Agent. He has an A.B. degree
from Lafayette College and a Master of International Management
degree with honors from the American Graduate School of
International Management. Mr. Sellers speaks five languages.

Alfred R. Rudolph,
M.D.,Chief Operating Officer of
SciClone Pharmaceuticals, Inc., has over 30 years of
experience in the biopharmaceutical industry. Since joining
SciClone in April 1997, Dr. Rudolph has been responsible
for the clinical, research, regulatory, manufacturing, and
quality assurance functions of the Company. Before joining
SciClone, Dr. Rudolph was President and Chief Operating
Officer of Neptune Pharmaceuticals, Inc., a marine-based natural
product screening company. Previously, Dr. Rudolph was
Senior Vice President of T Cell Sciences, Inc., Director of
Clinical Operations at Cetus Corporation, and Clinical Assistant
Professor of Medicine at University of California, San
Francisco. He began his pharmaceutical career with Bristol
Myers, where he worked in cancer drug development.
Dr. Rudolph earned a B.S. in Electrical Engineering from
the University of Rochester, and completed his fellowship
training in Hemotology-Oncology at Syracuse University.

Richard A.
Waldron,Chief Financial Officer of
SciClone Pharmaceuticals, Inc., has over twenty years experience
in the financing and management of biotechnology companies.
Prior to joining SciClone in March 2001, he was Vice President
and Chief Financial Officer from June 1999 to August 2000 for
Genelabs Technologies, Inc., a biotechnology company. From July
1995 through March 1999 he was Vice President and Chief
Financial Officer of GeneMedicine, Inc., a biotechnology company
engaged in gene therapy. From 1990 to 1995, he was a managing
director and the head of finance for technology-based companies
at Rauscher Pierce Refsnes, Inc., an investment banking firm.
From 1985 to 1990, he was a senior vice president responsible
for health care investment banking at Cowen & Company.
Mr. Waldron received his M.B.A. degree with honors from
Harvard University and his A.B. degree magna cum laude in
Economics from Princeton University.

14



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##### 



There are no family relationships among any of
the directors or executive officers of the Company.

Item 2.Properties

We currently lease approximately 14,768 square
feet of office space at our headquarters in San Mateo,
California and limited office space in Beijing, Hong Kong, Rome,
Shanghai, Singapore, and Tokyo. We believe that our existing
facilities will be adequate for our current needs and that
additional space will be available as needed.

Item 3.Legal
Proceedings

None

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

No matter was submitted to a vote of security
holders during the fourth quarter of the fiscal year ended
December 31, 2002.

PART II

Item 5.Market
for the Registrants Common Equity and Related Shareholder
Matters

Our Common Stock trades on The Nasdaq National
Market under the symbol SCLN.

The following table sets forth the high and low
sale prices per share for the quarterly periods indicated, as
reported by The Nasdaq National Market. The quotations shown
represent inter-dealer prices without adjustment for retail
markups, markdowns, or commissions, and may not necessarily
reflect actual transactions.

|     |             |              |   |      |  |  |   |      | 
|---- | ----------- | ------------ | - | ---- |  |  | - | ---- | 
|     |             |             
|     |             | Price Range 
|     |             | Common Stock
|     |             |             
|     |             | High         |   | Low 
|     |             |              |   |     
|2002 |             |              |   |      |  |  |   |     
|     | 4th quarter |              | $ | 4.35 |  |  | $ | 2.50 | 
|     | 3rd quarter |              |   | 3.27 |  |  |   | 1.98 | 
|     | 2nd quarter |              |   | 4.98 |  |  |   | 1.97 | 
|     | 1st quarter |              |   | 4.85 |  |  |   | 2.13 | 
|2001 |             |              |   |      |  |  |   |     
|     | 4th quarter |              | $ | 3.45 |  |  | $ | 2.50 | 
|     | 3rd quarter |              |   | 5.13 |  |  |   | 2.50 | 
|     | 2nd quarter |              |   | 5.83 |  |  |   | 3.77 | 
|     | 1st quarter |              |   | 7.75 |  |  |   | 3.69 | 

Recent Sales of Securities

In January 2003, the Company completed a direct
placement to affiliates of Sigma-Tau, in reliance upon
Regulation D of the Securities Act of 1933, as amended. The
affiliates purchased 504,938 shares of SciClones common
stock at $3.5648 per share. The shares issued were restricted
securities, and Sigma Tau and its affiliates are not permitted
to sell any of the shares purchased in this private placement
until January 24, 2004. Prior to this transaction, 400,000
warrants held by Sigma-Tau to purchase shares of SciClones
common stock were cancelled.

In June 2002, we completed a $10,600,000 direct
offering of common stock to institutional investors. The direct
offering consisted of 4,088,460 registered shares of common
stock at $2.60 per share.

15



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##### 



Shareholders

As of March 4, 2003, there were
approximately 393 holders of record and approximately 17,910
beneficial holders of our common stock and 37,465,064 shares of
common stock issued and outstanding.

As of December 31, 2002, 36,904,916 shares
of common stock were outstanding. If all options, warrants, and
convertible securities outstanding were exercised or converted
into shares of Common Stock, 8,436,262 shares would be issued
and would result in total shares of common stock outstanding of
45,341,178.

Dividends

We have not paid any dividends on our common
stock during the fiscal years ended December 31, 2000,
2001, and 2002 and currently intend to retain any future
earnings for use in our business.

16



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##### 



Item 6.Selected
Consolidated Financial Data

This section presents selected historical
financial data for each of the last five fiscal years and is
qualified by reference to and should be read in conjunction with
the consolidated financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K.

|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |           |            | 
|---------------------------------------------------------------------------------- | -------------------------- | ------------------------ | ----------- | ---------- | ---------- | ---- | ----------- | --------- | ---------- | ---- | ---------- | --------- | ---------- | - | ---------- | --------- | ---------- | - | ----------- | --------- | ---------- | 
|                                                                                   |                            |                         
|                                                                                   |                            | Year Ended December 31, 
|                                                                                   |                            |                         
|                                                                                   |                            | 2002                     |             | 2001       |            | 2000 |             | 1999      |            | 1998
|                                                                                   |                            |                          |             |            |            |      |             |           |            |     
|Statements of Operations data:                                                     |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|Product sales                                                                      |                            | $                        | 17,101,000  |            |            | $    | 13,831,000  |           |            | $    | 15,357,000 |           |            | $ | 9,091,000  |           |            | $ | 3,625,000   |          
|Contract/grant revenue                                                             |                            |                          | 671,000     |            |            |      |            |           |            |      |           |           |            |   | 307,000    |           |            |   | 100,000     |          
|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|                                                                                   |                            | Total revenues           |             |            | 17,772,000 |      |             |           | 13,831,000 |      |            |           | 15,357,000 |   |            |           | 9,398,000  |   |             |           | 3,725,000  | 
|Cost of product sales                                                              |                            |                          | 3,487,000   |            |            |      | 2,742,000   |           |            |      | 3,113,000  |           |            |   | 1,761,000  |           |            |   | 1,036,000   |          
|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|Gross margin                                                                       |                            |                          | 14,285,000  |            |            |      | 11,089,000  |           |            |      | 12,244,000 |           |            |   | 7,637,000  |           |            |   | 2,689,000   |          
|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|Operating expenses:                                                                |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|                                                                                   | Research and development   |                          |             | 11,647,000 |            |      |             | 8,561,000 |            |      |            | 4,182,000 |            |   |            | 4,604,000 |            |   |             | 9,293,000 |           
|                                                                                   | Sales and marketing        |                          |             | 8,724,000  |            |      |             | 8,764,000 |            |      |            | 7,720,000 |            |   |            | 5,503,000 |            |   |             | 5,123,000 |           
|                                                                                   | General and administrative |                          |             | 3,902,000  |            |      |             | 3,897,000 |            |      |            | 3,538,000 |            |   |            | 3,386,000 |            |   |             | 3,982,000 |           
|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|                                                                                   |                            | Total operating expenses |             |            | 24,273,000 |      |             |           | 21,222,000 |      |            |           | 15,440,000 |   |            |           | 13,493,000 |   |             |           | 18,398,000 | 
|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|Loss from operations                                                               |                            |                          | (9,988,000  | )          |            |      | (10,133,000 | )         |            |      | (3,196,000 | )         |            |   | (5,856,000 | )         |            |   | (15,709,000 | )        
|Writedown of note receivable from former officer                                   |                            |                          |            |            |            |      |            |           |            |      |           |           |            |   |           |           |            |   | (5,944,000  | )        
|Income from payment on note receivable from
    former officer                     |                            |                          |            |            |            |      | 3,497,000   |           |            |      | 400,000    |           |            |   | 20,000     |           |            |   |            |          
|Interest and investment income                                                     |                            |                          | 323,000     |            |            |      | 751,000     |           |            |      | 1,066,000  |           |            |   | 157,000    |           |            |   | 514,000     |          
|Interest and investment expense                                                    |                            |                          | (361,000    | )          |            |      | (334,000    | )         |            |      | (36,000    | )         |            |   |           |           |            |   | (21,000     | )        
|Other income (expense), net                                                        |                            |                          | (11,000     | )          |            |      | (13,000     | )         |            |      | 49,000     |           |            |   | 212,000    |           |            |   | 89,000      |          
|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|Net loss                                                                           |                            |                          | (10,037,000 | )          |            |      | (6,232,000  | )         |            |      | (1,717,000 | )         |            |   | (5,467,000 | )         |            |   | (21,071,000 | )        
|Deemed dividend on issuance of preferred stock                                     |                            |                          |            |            |            |      |            |           |            |      |           |           |            |   |           |           |            |   | (3,143,000  | )        
|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|Net loss attributable to common shareholders                                       |                            | $                        | (10,037,000 | )          |            | $    | (6,232,000  | )         |            | $    | (1,717,000 | )         |            | $ | (5,467,000 | )         |            | $ | (24,214,000 | )        
|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|Basic and diluted net loss attributable to common
    shareholders per share       |                            | $                        | (0.29       | )          |            | $    | (0.19       | )         |            | $    | (0.06      | )         |            | $ | (0.26      | )         |            | $ | (1.48       | )        
|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          
|Weighted average shares used in computing basic
    and diluted net loss per share |                            |                          | 35,002,003  |            |            |      | 32,356,287  |           |            |      | 29,904,924 |           |            |   | 21,162,936 |           |            |   | 16,335,096  |          
|                                                                                   |                            |                          |             |            |            |      |             |           |            |      |            |           |            |   |            |           |            |   |             |          

17



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##### 



|                                       |  |              |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|-------------------------------------- |  | ------------ | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                                       |  |             
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2002         |            | 2001 |  | 2000 |            | 1999 |  | 1998
|                                       |  |              |            |      |  |      |            |      |  |     
|Balance Sheet data:                    |  |              |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Cash, cash equivalents and investments |  | $            | 21,150,000 |      |  | $    | 16,468,000 |      |  | $    | 22,497,000 |  |  | $ | 3,621,000  |  |  | $ | 5,410,000  | 
|Working capital                        |  |              | 29,116,000 |      |  |      | 26,930,000 |      |  |      | 30,281,000 |  |  |   | 7,091,000  |  |  |   | 3,845,000  | 
|Total assets                           |  |              | 37,111,000 |      |  |      | 32,096,000 |      |  |      | 36,167,000 |  |  |   | 13,124,000 |  |  |   | 11,727,000 | 
|Redeemable preferred stock             |  |              |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   | 848,000    | 
|Total shareholders equity             |  |              | 23,354,000 |      |  |      | 22,774,000 |      |  |      | 28,077,000 |  |  |   | 9,301,000  |  |  |   | 6,428,000  | 
|Convertible notes payable              |  |              | 5,600,000  |      |  |      | 5,600,000  |      |  |      | 4,000,000  |  |  |   |           |  |  |   |           | 

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

This Managements Discussion and Analysis of
Financial Condition and Results of Operations should be read in
conjunction with the Selected Consolidated Financial
Data and our financial statements and related notes
thereto included elsewhere in this Annual Report on
Form 10-K. This Managements Discussion and Analysis
of Financial Condition and Results of Operations and other parts
of this Annual Report on Form 10-K contain forward-looking
statements which involve risks and uncertainties. See Note
Regarding Forward-Looking Statements and Risk
Factors contained in this Annual Report on Form 10-K.

Overview

During the periods encompassed by this Annual
Report on Form 10-K, we have devoted substantially all of
our resources to our ZADAXIN clinical trials and our ZADAXIN
commercialization activities. We conduct our research and
development efforts through a combination of internal and
collaborative programs. In addition to internal management and
staff, we rely upon arrangements with universities, other
clinical research sites and contract research organizations for
a significant portion of our product development efforts.
Oversight of all external and collaborative programs is
conducted by our executive officers and other staff from our
headquarters located in San Mateo, California.

From commencement of operations through
December 31, 2002, we have an accumulated deficit of
approximately $133,000,000. We expect our sales, gross margin
and operating expenses to increase over the next several years
as we expand our research and development, clinical testing and
sales and marketing capabilities. Our ability to achieve and
sustain operating profitability is primarily dependent on the
initiation, execution and completion of ZADAXIN clinical trials,
securing regulatory approvals for ZADAXIN in additional
countries, particularly in the U.S., Europe, and Japan,
successfully launching ZADAXIN, if approved, in those countries,
increasing ZADAXIN sales in approved markets, and developing and
maintaining ZADAXIN corporate partnering arrangements in the
U.S., Europe, and Japan. In addition, other factors may also
impact our ability to achieve and sustain operating
profitability, including manufacturing costs of ZADAXIN, our
ability to obtain additional financing to support our
operations, long-term product development and commercialization
programs, acquiring rights to additional drugs, and entering
into and extending agreements for product development and
commercialization, where appropriate.

Our operating results may fluctuate from quarter
to quarter and these fluctuations may be substantial as a result
of, among other factors, the number, timing, costs and results
of preclinical and clinical trials of our products, market
acceptance of ZADAXIN and the timing of orders for ZADAXIN from
international markets, particularly China, the regulatory
approval process, the timing of FDA or international regulatory
approvals, and the acquisition of additional product rights and
the funding, if any, provided as a result of corporate
partnering arrangements. Setbacks or delays in the launch, sale
or distribution of ZADAXIN, preclinical or clinical development
of our products, the regulatory approval process or
relationships with collaborative partners, and any shortfalls in
revenue or earnings from levels expected by securities analysts,
among other developments, in the past had, and could in the
future have, an immediate and significant adverse effect on the
trading price of our common stock in any given period.

18



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Critical Accounting Policies



| |        
| | -------
| | General

We have identified the policies below as critical
to our business operations and the understanding of our results
of operations. The impact and any associated risks related to
these policies on our business operations is discussed
throughout Managements Discussion and Analysis of
Financial Condition and Results of Operations where such
policies affect our reported and expected financial results. For
a detailed discussion on the application of these and other
accounting policies, see Note 1 in the Notes to the Consolidated
Financial Statements in Item 8 of this Annual Report on
Form 10-K. The Consolidated Financial Statements have been
prepared in accordance with accounting principles generally
accepted in the United Sates, which requires us to make
estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the
reported amounts of revenue and expenses during the reporting
period. On an on-going basis, we evaluate the relevance of our
estimates. We base our estimates on historical experience and on
various other market specific assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. There can be no assurance that actual results will not
differ from those estimates.

Revenue
Recognition

The Company recognizes revenue from product sales
at the time of shipment. There are no significant customer
acceptance requirements or post shipment obligations on the part
of the Company. Sales to importing agents or distributors are
recognized at time of shipment when title to the product is
transferred to them, and they do not have contractual rights of
return except under limited terms regarding product quality.
However, the Company will replace products that have expired or
are deemed to be damaged or defective when delivered. Payments
by the importing agents and distributors are not contingent upon
sale to the end user by the importing agents or distributors.

Contract revenue for research and development is
recorded as earned based on the performance requirements of the
contract. Nonrefundable contract fees for which no further
performance obligations exist, and there is no continuing
involvement by the Company, are recognized on the earlier of
when the payments are received or when collection is assured.

Revenue associated with substantive performance
milestones is recognized based on the achievement of the
milestones, as defined in the respective agreements and provided
that (i) the milestone event is substantive and its
achievement is not reasonably assured at the inception of the
agreement, and (ii) there are no future performance
obligations associated with the milestone payment.

To date we have not recorded estimated reductions
to revenue for expected sales returns as we have not experienced
any sales returns. If conditions become more competitive in any
of the markets served by ZADAXIN or if other circumstances
change, we may take actions to record product return estimates
that would result in a reduction of future revenue at the time
the return estimate is changed.

Accounts
Receivable

We are required to estimate the collectibility of
our trade receivables. A considerable amount of judgment is
required in assessing the ultimate realization of these
receivables including the current credit-worthiness of each
customer. Our ability to collect outstanding receivables from
our customers is critical to our operating performance and cash
flows. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers
to make required payments. If the financial condition of our
customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be
required. For the year ended December 31, 2002, sales to
six importing agents in China accounted for 88% of the
Companys product sales and sales to four importing agents
accounted for 89% and 86% of our product sales for the years
ended December 31, 2001 and 2000, respectively. In 2002,
the largest customer accounted for 41% of sales and the second
largest customer accounted for 27% of sales. No other

19



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##### 



customers accounted for more than 10% of sales in
2002. In 2001, the largest customer accounted for 47% of sales
and the second largest customer accounted for 30% of sales. No
other customers accounted for more than 10% of sales in 2001. In
2000, the largest customer accounted for 63% of sales and the
second largest customer accounted for 14% of sales. No other
customers accounted for more than 10% of sales in 2000. As of
December 31, 2002, approximately $8,627,000 or, 87% of our
accounts receivable were attributable to four customers in
China. We perform on-going credit evaluations of our
customers financial condition, and generally do not
require collateral from our customers. We maintain reserves for
credit losses, and such losses have been within our
expectations. We recognize reserves for bad debts ranging from
25% to 100% of past due accounts receivable based on the length
of time the receivables are past due and our collectibility
experience.


Inventories

We are required to state our inventories at the
lower of cost or realizable market value. In assessing the
ultimate realization of inventories, we are required to make
judgments as to future demand requirements and compare that with
the current inventory levels. It is possible that changes in
inventory reserves may be required in the future due to a change
in market conditions.

Impairment of
Intangible Assets

At December 31, 2002, we had net intangible
assets of $682,000 related to ZADAXIN product rights and had
never recorded any impairment losses related to intangible
assets. In assessing the recoverability of our intangible assets
we must make assumptions regarding estimated future cash flows
and other factors to determine the fair value of the respective
assets. If these estimates or their related assumptions change
in the future, we may be required to record impairment charges
for these assets.

Research and
Development Expenses

Our phase 3 clinical trials in the U.S. will
increase our research and development expenditures significantly
over the next year. Research and development expenditures are
charged to operations as incurred. Our cost accruals for
clinical trials are based on estimates of the services received
and efforts expended pursuant to contracts with numerous
institutions that conduct the clinical trials on our behalf. The
financial terms of these agreements are subject to negotiation
and variation from contract to contract and may result in uneven
payment flows. Payments under the contracts depend on factors
such as the achievement of certain events, the successful
enrollment of patients, and the completion of portions of the
clinical trial or similar conditions. The objective of our
accrual policy is to match the recording of expenses in our
financial statements to the actual services received and efforts
expended. Expenses related to grants to the institutions are
accrued based on the level of patient enrollment and activity
according to the protocol. In general, these expenses will be
higher for the initial and final months of a patients
scheduled 18 months of treatment and observation. Expenses
relating to the clinical research organization managing the
trials and laboratory and other direct expenses are recognized
in the period they are incurred and the services performed. We
monitor patient enrollment levels and related activity to the
extent possible and adjust our estimates accordingly; however,
if management has underestimated activity levels associated with
various studies at a given point in time, we could underestimate
our actual research and development expenses.

Results of Operations

Product sales were $17,101,000, $13,831,000 and
$15,357,000 for the years ended December 31, 2002, 2001 and
2000, respectively. The increase in sales from 2001 to 2002 was
primarily due to increased sales volume to our importing agents
in China, whereas the greater sales in 2000 compared to 2001 was
primarily due to a large sale of ZADAXIN to a new importer in
China during the third quarter of 2000. For the year ended
December 31, 2002, importing agents in China accounted for
88% of our product sales and accounted for 89% and 86% for the
years ended December 31, 2001 and 2000, respectively. Sales
emphasis is concentrated in China because, as one of our more
developed markets, marketing expenditures can result in rapid
benefits in sales and profits compared to newer markets which
require investment and development spending.

20



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##### 



We expect ZADAXIN sales to increase both in our
existing approved markets and in new markets once regulatory
approvals are secured and ZADAXIN is actively marketed. The
level of this sales increase is dependent upon increased ZADAXIN
market penetration in our existing approved markets, additional
ZADAXIN marketing approvals and the successful launch of ZADAXIN
in new markets. However, our primary corporate focus is the
execution and funding of our phase 3 clinical trials in the U.S.
Because we are concentrating our resources on these efforts, we
are focusing our international sales and marketing efforts on
maintaining and developing sales in existing active markets
rather than investing in the development of new markets.
Although we remain optimistic regarding the prospects of
ZADAXIN, we cannot assure that we will achieve sales increases,
maintain existing sales levels, or that we will receive
additional marketing indication approvals for ZADAXIN. Revenue
results are difficult to predict, and any shortfall in revenue
or any delay in recognizing revenue could cause our operating
results to vary significantly from quarter to quarter and could
result in additional future operating losses.

As part of our collaborative agreement with
Sigma-Tau, we received a $2,685,000 payment from Sigma-Tau in
January 2002 which is being recognized evenly as contract
revenue over the period of our U.S. hepatitis C clinical
development activities, estimated to be three years beginning in
the second quarter of 2002.

Cost of product sales was $3,487,000, $2,742,000
and $3,113,000 for the years ended December 31, 2002, 2001
and 2000, respectively. We expect cost of product sales to vary
from quarter to quarter, depending upon the level of ZADAXIN
sales, the absorption of fixed product-related costs, and any
charges associated with excess or expiring finished product.

Gross margin was $14,285,000, $11,089,000 and
$12,244,000 for the years ended December 31, 2002, 2001 and
2000, respectively. Gross profit margin was 80% in 2002, 2001
and 2000. We expect slight decreases in gross margin going
forward in international markets including China, our largest
and most mature market, should we maintain our product pricing
and absorb any increases in product costs.

Research and development expenses were
$11,647,000, $8,561,000 and $4,182,000 for the years ended
December 31, 2002, 2001, and 2000, respectively. The
increase in each year was primarily to support our ZADAXIN phase
3 clinical trials in the U.S. and Japan. In 2002, 2001 and 2000,
research and development (R&D) expenses represented
approximately 48%, 40% and 27%, respectively, of our total costs
and expenses. The major components of R&D expenses consist
of clinical studies performed by clinical trial institutions and
contract research organizations, related materials and supplies,
preclinical work, pharmaceutical development, personnel costs,
including salaries and benefits, third party research funding,
and overhead allocations consisting of various support and
facilities related costs. Our research and development
activities are also separated into three main categories:
research, clinical development and pharmaceutical development.
Research costs typically consist of preclinical and toxicology
work. Clinical development costs include Phase 1, 2, and 3
clinical trials as well as expanded clinical access programs.
Pharmaceutical development costs consist of product formulation
and chemical analysis. During 2002, we recorded approximately
$2,300,000 on research, $8,300,000 on clinical development, and
$1,100,000 on pharmaceutical development activities. This
compares to expenses in 2001 of approximately $2,800,000 on
research, $5,000,000 on clinical development, and $800,000 on
pharmaceutical development activities and expenses in 2000 of
approximately $2,400,000 on research, $500,000 on clinical
development, and $1,300,000 on pharmaceutical development
activities.

The initiation and continuation of our clinical
development programs has had and will continue to have a
significant effect on our research and development expenses and
is expected to require us to seek additional capital resources.
Due to the uncertain nature of the clinical trial process, and
enrollment rates in particular, it is not possible to determine
the timing of completion or total cost expected to be incurred
for each trial. In general, we expect research and development
expenses to increase significantly over the next several years
and to vary substantially from quarter to quarter as we pursue
our strategy of initiating additional preclinical and clinical
trials and testing, acquiring product rights, and expanding
regulatory activities.

Sales and marketing expenses were $8,724,000,
$8,764,000 and $7,720,000 for the years ended December 31,
2002, 2001 and 2000, respectively. The decrease from 2001 to
2002 was related to slightly lower promotional and advertising
expenses. The increase from 2000 to 2001 was related to
increased payroll expenses and expenses for advertising and
conferences associated with the expansion of our markets for

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ZADAXIN. We expect sales and marketing expenses
to increase in the next several quarters and years as we expand
our commercialization and marketing efforts.


General and administrative expenses were
$3,902,000, $3,897,000 and $3,538,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. The
increase from 2000 to 2001 was attributable to greater general
and administrative activities to support an increased level of
research and development on our late-stage clinical programs. In
the near term, we expect general and administrative expenses to
vary quarter to quarter as we increase our general and
administrative activities and resources to support increased
expenditures on preclinical and clinical trials and testing, and
regulatory, pre-commercialization and marketing activities.

Income from payment on a note receivable from a
former officer was approximately $3,497,000 and $400,000 for the
years ended December 31, 2001 and 2000, respectively. In
July 1997, the Company loaned to the former officer $5,944,000
in exchange for a promissory note and the pledge of 1,882,500
shares of SciClone common stock as collateral for such loan.
During 1998 it was determined that the value of the collateral
underlying the loan was more than temporarily impaired and that
a writedown of the book value of the note would be required. For
accounting purposes, the Company wrote off the entire remaining
book value in a non-cash charge to earnings in the fourth
quarter of 1998. Under a new agreement in 1999, the 1,882,500
shares of SciClone common stock held as collateral were retired
and the value of these shares at that date was applied as a
credit against the total indebtedness of the former officer.
After applying a credit for the retired stock of $3,142,000, the
officer entered into a new note in the amount of $3,615,000. The
note was fully repaid in the third quarter of 2001.

Interest and investment income was approximately
$323,000, $751,000 and $1,066,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. The
decrease over the years was due to lower average invested cash
balances and lower interest rates.

Interest and investment expense was approximately
$361,000, $334,000 and $36,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. The
increase over the years was from the interest accrued on senior
unsecured convertible notes.

Liquidity and Capital Resources

At December 31, 2002, 2001 and 2000, we had
$21,151,000, $16,468,000 and $22,497,000, respectively, in cash,
cash equivalents and short-term investments. The short-term
investments consist primarily of highly liquid marketable
securities. We have two letters of credit each secured by a
certificate of deposit. At December 31, 2002, the letters
of credit total $685,000, one for $633,000 under our lease
agreement, the other for $52,000 to facilitate our value added
tax filings in Europe.

Net cash used in operating activities totaled
$5,869,000, $12,008,000 and $5,917,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. Net cash
used in operating activities for the year ended
December 31, 2002 was less than the net loss primarily due
to the receipt of a payment from Sigma-Tau of $2,685,000 for a
clinical trial collaboration which increased deferred revenue
balances, increases in accounts payable, increases in accrued
clinical trials expense and, decreases in inventories, partially
offset by increases in prepaid expenses and accounts receivable.
Net cash used in operating activities for the year ended
December 31, 2001 was greater than the net loss primarily
due to a gain of $3,497,000 related to collection of a note
receivable, which had previously been written off in 1998, an
increase in inventories and a decrease in accounts payable and
other accrued expenses. Net cash used in operating activities
for the year ended December 31, 2000 was greater than the
net loss primarily due to increases in accounts receivable and
inventories. These increases in 2000 were partially offset by a
decrease in prepaid expenses and other assets and an increase in
accounts payable.

Net cash provided by investing activities of
$7,000 for the year ended December 31, 2002 related to the
net sale of $73,000 in short term investments and purchases of
$66,000 in property and equipment. Net cash used in investing
activities of $450,000 for the year ended December 31, 2001
related to the net purchases of $351,000 in short term
investments and $99,000 in property and equipment. Net cash used
in investing

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activities of $430,000 for the year ended
December 31, 2000 related to the net purchases of $331,000
in short term investments partially offset by the purchases of
$99,000 in property and equipment.


Net cash provided by financing activities totaled
$10,577,000, $5,995,000 and $24,886,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. Net cash
provided by financing activities for the year ended
December 31, 2002 consisted of approximately $9,914,000
from a direct offering of common stock to institutional
investors, approximately $514,000 related to exercises of
outstanding options under our employee stock option plans and
$149,000 for the issuance of common stock under our employee
stock purchase plan. Net cash provided by financing activities
for the year ended December 31, 2001 consisted of
$1,600,000 in proceeds from the issuance of a convertible note,
$544,000 in net proceeds from the issuance of common stock,
$354,000 for granting an investor the right to purchase
approximately $2,400,000 of senior unsecured convertible notes,
and $3,497,000 from the payment on a note receivable from a
former officer. Net cash provided by financing activities for
the year ended December 31, 2000 consisted of approximately
$5,326,000 from a private placement of common stock and warrants
to institutional investors, approximately $8,606,000 from the
exercise of outstanding warrants to purchase common stock by
institutional and accredited investors, approximately $191,000
from the issuance of common stock under our employee stock
purchase plan, approximately $3,100,000 from a private
placement, approximately $2,363,000 from the exercises of
outstanding options under our employee stock option plans,
$4,000,000 from the issuance of a convertible note, $900,000 for
granting investors the right to purchase approximately
$5,900,000 of senior unsecured convertible notes and $400,000
from the payment on a note receivable from a former officer.

The following tables summarize our contractual
cash obligations and other commitments as of December 31,
2002.

|                                   |  |                        |            |           |  |           |           |           |  |               |           |  |  |   |           |  |  |  |   | 
|---------------------------------- |  | ---------------------- | ---------- | --------- |  | --------- | --------- | --------- |  | ------------- | --------- |  |  | - | --------- |  |  |  | - | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |            | Less than |  |          
|Contractual Obligations            |  | Total                  |            | 1 Year    |  | 1-3 Years |           | 4-5 Years |  | After 5 Years
|                                   |  |                        |            |           |  |           |           |           |  |              
|Convertible notes payable          |  | $                      | 5,600,000  |           |  |           |          |           |  | $             | 4,000,000 |  |  | $ | 1,600,000 |  |  |  |  | 
|Operating leases                   |  | $                      | 6,262,000  |           |  | $         | 1,302,000 |           |  | $             | 2,750,000 |  |  | $ | 2,210,000 |  |  |  |  | 
|Minimum annual royalty obligations |  | $                      | 390,000    |           |  | $         | 65,000    |           |  | $             | 195,000   |  |  | $ | 130,000   |  |  |  |  | 
|                                   |  |                        |            |           |  |           |           |           |  |               |           |  |  |   |           |  |  |  |   | 
|Total contractual cash obligations |  | $                      | 12,252,000 |           |  | $         | 1,367,000 |           |  | $             | 6,945,000 |  |  | $ | 3,940,000 |  |  |  |  | 

|                             |  |       |         |                                            |  |           |         |           |  |               |   |  |  |  |   |  |  |  |   | 
|---------------------------- |  | ----- | ------- | ------------------------------------------ |  | --------- | ------- | --------- |  | ------------- | - |  |  |  | - |  |  |  | - | 
|                             |  |       |         |                                            |  |          
|                             |  |       |         | Amount of Commitment Expiration Per Period |  |          
|                             |  |       |         |                                            |  |          
|                             |  |       |         | Less than                                  |  |           |         |          
|Other Commercial Commitments |  | Total |         | 1 year                                     |  | 1-3 years |         | 4-5 years |  | After 5 years
|                             |  |       |         |                                            |  |           |         |           |  |              
|Letters of credit            |  | $     | 685,000 |                                            |  | $         | 685,000 |           |  |               |  |  |  |  |  |  |  |  |  | 

There are no officers or directors that were
involved in related party transactions in 2002.

We believe ZADAXIN product sales should continue
to increase and remain a valuable source of capital generation.
The initiation and continuation of U.S. clinical development
programs, however, is expected to require additional funding
either through equity or debt financing or from a collaborative
partner. The timing, achievement and sustainability of our
operating profitability and capital requirements may change
depending upon numerous factors, including the level of ZADAXIN
product sales, the timing and amount of manufacturing costs
related to ZADAXIN, the availability of complementary products,
technologies and businesses, the initiation and continuation of
preclinical and clinical trials and testing, particularly in the
U.S., the timing of regulatory approvals, developments in
relationships with existing or future collaborative partners and
the status of competitive products. Without additional
financing, or sales growth beyond our expectations, or a
combination thereof, we believe our existing capital resources
and interest on funds available are adequate to maintain our
current and planned operations into 2004. We are actively
reviewing alternatives for equity or debt financings and
potential partnering activities.

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Income Taxes

At December 31, 2002, we had net operating
loss carryforwards for federal income tax purposes of
approximately $71,400,000 which expire in the years 2006 through
2022. The difference between the cumulative losses for financial
reporting purposes and federal income tax purposes is primarily
attributable to losses incurred by our foreign subsidiaries. At
December 31, 2002, we had federal tax credit carryforwards
of approximately $4,100,000 which expire in the years 2009
through 2022.

Because of the change in ownership
provisions of the Internal Revenue Code, a portion of our net
operating loss carryforwards and tax credit carryforwards may be
subject to an annual limitation regarding their utilization
against taxable income in future periods. As a result of the
annual limitation, a portion of these carryforwards may expire
before ultimately becoming available to reduce future income tax
liabilities.

Recent Accounting Pronouncements

The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148
Accounting for Stock-Based Compensation 
Transition and Disclosure (SFAS 148) in
December 2002. SFAS 148 amends Statement of Financial
Accounting Standards No. 123 Accounting for
Stock-Based Compensation (SFAS 123) to
provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. The additional disclosure requirements of
SFAS 148 are effective for fiscal years ending after
December 15, 2002 and have been included in the
consolidated financial statements included elsewhere in this
Annual Report on Form 10-K. The Company has elected to
continue to follow the intrinsic value method of accounting as
prescribed by Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees, to account
for employee stock options.

Risk Factors

You should carefully consider the risks
described below, in addition to the other information in this
report on Form 10-K, before making an investment decision.
Each of these risk factors could adversely affect our business,
financial condition, and operating results as well as adversely
affect the value of an investment in our common stock.

Our phase 3 clinical trials in the U.S.
for the approval of ZADAXIN in combination with pegylated
interferon alpha for the treatment of hepatitis C may fail,
which will harm our business.

Currently, there is no U.S. FDA approved
therapy for hepatitis C patients who have failed to respond
to prior therapy with interferon alpha plus ribavirin or with
interferon alpha alone. We designed our phase 3 clinical
trials based on the use of ZADAXIN in combination with pegylated
interferon alpha to address this medical need. There can be no
assurances that the results from our previous hepatitis C
studies with ZADAXIN and non-pegylated interferon alpha which
enabled us to produce this design will carryover to the trials
involving a combination of ZADAXIN and pegylated interferon
alpha and any resulting data may be insufficient or inadequate
to demonstrate appropriate efficacy under FDA guidelines. In
addition, insufficient data resulting from the clinical trials
would also adversely affect our ability to market and sell
ZADAXIN in markets where it is approved for sale. In 2002 we
began enrolling patients in both of the phase 3 trials in
our hepatitis C clinical program in the U.S.; however,
there are trials being conducted by competitors seeking to
enroll similar patients and competition for appropriate patients
for these clinical trials is significant. We may not be able to
enroll patients quickly enough to meet our timing expectations
for completing the trial which would delay the preparation of a
new drug application (NDA); or we may not be able to fully
enroll the studies or patient drop out rates could be higher
than anticipated, either of which could weaken the quality of an
NDA. Our hepatitis C clinical trials have been designed to show
that the combination of ZADAXIN and pegylated interferon alpha
adds a significant clinical benefit when compared to the use of
pegylated interferon alpha alone in the re-treatment of
hepatitis C patients who have not responded to prior
therapy. However, the

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independent use of the pegylated form of
interferon alpha may perform better than anticipated which could
weaken the quality of an NDA. ZADAXIN has been used both
clinically and commercially in thousands of patients without
producing any reported ZADAXIN related significant side effects
or toxicities, and the pegylated interferon alpha used in the
clinical trials has been approved by the FDA and has documented
adverse side effects. Should the combination therapy of ZADAXIN
and pegylated interferon alpha cause significant new or to a
greater degree the same adverse side effects, our clinical
trials could be delayed, patients may drop out at a greater than
anticipated rate, we may be forced to halt the trials, or the
FDA may reject an NDA due to safety issues. If any of the
foregoing occurs, our efforts to market and sell ZADAXIN will be
impaired, our business will suffer and the price of our stock
may decline.


Our phase 3 clinical trials in Japan for
the approval of ZADAXIN for the treatment of hepatitis B
may fail, which will harm our business.

There is a need for better hepatitis B
therapies that improve efficacy and do not cause side effects.
Our phase 3 clinical trial was designed based on the use of
ZADAXIN to address this medical need. There can be no assurances
that the results from our previous hepatitis B studies that
enabled this design will carryover to the trials involving
ZADAXIN and any resulting data may be insufficient or inadequate
to demonstrate appropriate efficacy under Japanese Ministry of
Health guidelines. In addition, insufficient data resulting from
the clinical trial would also adversely affect our ability to
market and sell ZADAXIN in markets where it is approved for
sale. We may not be able to compile and analyze trial data
quickly enough to meet our timing expectations, which would
delay the preparation of a Japanese new drug application (JNDA).
Our hepatitis B clinical trial was designed to show that
ZADAXIN adds a significant clinical benefit in the treatment of
hepatitis B patients. Although ZADAXIN has been used safely
by over 10,000 patients to date, should ZADAXIN cause
significant adverse side effects, our JNDA could be delayed or
the Japanese Ministry of Health may reject our JNDA on safety
issues. If any of the foregoing occurs, our efforts to market
and sell ZADAXIN will be impaired, and our business will suffer
and the price of our stock may decline.

We rely on third parties to manufacture our
clinical trial product. Deficiencies in their work could delay
or harm our trials or the approval process and harm our
business.

We manufacture the ZADAXIN used in our
phase 3 trials under cGMP guidelines and under our direct
manufacturing and quality control using third party cGMP
manufacturers and suppliers. If unanticipated deficiencies in
these manufacturers or suppliers occur, this could create a
delay in the assembling of a timely and acceptable NDA. Not all
of the ZADAXIN planned to be used in our hepatitis C
clinical trials has been manufactured and received. Pegylated
interferon alpha is being supplied to us by Roche on an as
needed basis. Any delay in receiving or recall of pegylated
interferon alpha or ZADAXIN could delay the clinical trials or
detract from the integrity of the trial data. If any of the
foregoing occurs, our efforts to market and sell ZADAXIN in
combination with pegylated interferon alpha will be impaired,
our business will suffer and the price of our stock may decline.

We may not be able to successfully develop or
commercialize our products.

Many of our products are in the development stage
and will require the commitment of substantial resources,
devoted to extensive research, development, preclinical testing,
clinical trials, manufacturing scale-up and regulatory approval
prior to being ready for sale. We cannot assure you that
commercially viable products will result from these efforts. We
face significant technological risks inherent in developing
these products. We may also abandon some or all of our proposed
products before they become commercially viable. We have limited
experience in conducting and managing clinical trials and we
rely, in part, on third parties, particularly clinical research
organizations and our development partners, to assist us in
managing and monitoring clinical trials. Our reliance on these
third parties may result in delays in completing, or failure to
complete, these clinical trials if third parties fail to fulfill
their obligations to us. If any of our products, even if
developed and approved, cannot be successfully commercialized in
a timely manner, our business will be harmed and the price of
our stock may decline.

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We have not yet sold any product other than
ZADAXIN. We have experienced difficulties with the formulation
of CPX which has delayed its further development. Our future
revenue growth depends on increased market acceptance and
commercialization of ZADAXIN in additional countries,
particularly in the U.S., Europe and Japan. If we fail to
successfully market ZADAXIN, or if we cannot commercialize this
drug in the U.S. and other additional markets, our revenue and
operating results will suffer. Our future revenue will also
depend in part on our ability to develop other commercially
viable and accepted products; however, until we obtain
additional resources, substantially all of our resources are
focused on the development of ZADAXIN. Market acceptance of our
products will depend on many factors, including our ability to
convince prospective customers and prospective strategic
partners that our products are an attractive alternative to
other treatments and therapies, and manufacture products in
sufficient quantities with acceptable quality and at an
acceptable cost. Failure to do so will hurt our operations.

If we fail to satisfy and comply with
governmental regulations or if government regulations change,
our business may suffer.

All new drugs, including our products, which have
been developed or are under development, are subject to
extensive and rigorous regulation by the FDA, and comparable
agencies in state and local jurisdictions and in foreign
countries. These regulations govern, among other things, the
development, testing, manufacturing, labeling, storage,
pre-market approval, importation, advertising, promotion, sale
and distribution of our products. These regulations change from
time to time and new regulations may be adopted. For example, in
prior years, legislation has been introduced in the
U.S. Congress that would restrict the duration of the
marketing exclusivity of an orphan drug. There can be no
assurances that this type of legislation will not be
reintroduced and passed into law, or that the benefits of the
existing statute will remain in effect. Our failure to satisfy
and comply with regulations adopted by the FDA, and comparable
agencies in state and local jurisdictions and in foreign
countries, may delay or stop approval of our drugs. In
particular, such failure can, among other things, result in
warning letters, fines, suspensions of regulatory approvals,
product recalls or seizures, operating restrictions,
injunctions, total or partial suspension of production, civil
penalties, and criminal prosecutions. Furthermore, additional
government regulation may be established or imposed by
legislation or otherwise, which could prevent or delay
regulatory approval of ZADAXIN or any of our other future
products. Adverse events related to our products in any of our
existing or future markets could cause regulatory authorities to
withdraw market approval for such products, if any, or prevent
us from receiving market approval in the future. There is no
assurance that ZADAXIN, or any of our other products, will
demonstrate efficacy sufficient to obtain approval by the FDA or
its counterpart regulatory agencies in other indications or
countries.

Satisfaction of government regulations may take
several years and the time needed to satisfy them varies
substantially, based on the type, complexity and novelty of the
pharmaceutical product. As a result, government regulation may
cause us to delay the introduction of, or prevent us from
marketing, our existing or potential products for a considerable
period of time and to impose costly procedures upon our
activities. If regulatory approval of our products is granted,
such approval may impose limitations on the indicated uses for
which our products may be marketed.

If we fail to obtain regulatory approvals for
our products in countries where we have targeted regulatory
approval, we may not be able to sustain or increase our revenues
and our stock price may decline.

The research, preclinical and clinical
development, manufacturing, marketing and sale of ZADAXIN and
our other drug candidates are subject to extensive regulation by
governmental authorities. ZADAXIN and any other products we may
sell in countries outside the U.S. must be approved by the
foreign counterparts of the FDA before they can be sold in any
jurisdiction. Obtaining regulatory approval is time-consuming
and expensive. In some countries where we are contemplating
marketing and selling ZADAXIN, the regulatory approval process
for drugs that have not been previously approved in countries
with established clinical trial review procedures is uncertain,
and this may delay or prevent the grant of regulatory approvals
for ZADAXIN. In addition, to secure these regulatory approvals,
we will need, among other things, to demonstrate favorable
results from additional clinical trials of ZADAXIN. Even if we
are able to complete

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the clinical trials we have sponsored or are
planning in a timely or cost effective manner, these trials may
not fulfill the applicable regulatory approval criteria, in
which case we will not be able to obtain regulatory approval in
these countries. There can be no assurance that we will
ultimately obtain regulatory approvals in our targeted countries
in a timely and cost-effective manner or at all. Our failure to
obtain the required regulatory approvals so that we can develop,
market and sell our products in countries where we currently do
not have such rights will limit our revenues.


In addition, adverse results that occur in our
clinical trials could result in restrictions on the use of
ZADAXIN, which may also hurt our business.

We will need to obtain additional capital to
support our long-term product development and commercialization
programs.

Our ability to achieve and sustain operating
profitability depends in large part on our ability to commence,
execute and complete clinical programs for, and obtain
additional regulatory approvals for ZADAXIN and other drug
candidates, particularly in the U.S., Europe and Japan, increase
ZADAXIN sales in existing markets, and launch ZADAXIN in new
markets. We cannot assure that we will ever achieve more
significant levels of sales or that we will receive additional
ZADAXIN market approvals.

Our current sales levels of ZADAXIN are not
expected to generate all the funds we anticipate will be needed
to support our current plans for product development including
our U.S. phase 3 clinical trials for ZADAXIN. We will need
to obtain additional financing to support our product
development and commercialization programs. We may seek
additional funds through public and private stock offerings,
arrangements with corporate partners, borrowings under lease
lines of credit or other sources. If we cannot raise the
necessary funds, we will have to reduce our capital
expenditures, curtail or delay our phase 3 clinical trials,
scale back our development of new products, reduce our workforce
and out-license to others products or technologies that we
otherwise would seek to commercialize ourselves, any of which
may harm our business and cause our stock price to fall.

The amount of capital we will need will depend on
many factors, including: the timing, location, scope and results
of ongoing and planned preclinical studies and clinical trials;
the cost of manufacturing or obtaining preclinical and clinical
materials; the timing and cost involved in applying for and
obtaining FDA and international regulatory approvals; whether we
elect to establish additional partnering arrangements for
development, sales, manufacturing, and marketing of our
products; the level of future ZADAXIN sales; expense levels for
our international sales and marketing efforts; our ability to
establish and maintain strategic arrangements for development,
sales, manufacturing and marketing of our products; competing
technological and market developments; the costs involved in
filing, prosecuting and enforcing patent claims; whether any or
all of our outstanding convertible notes are converted to common
stock; and whether any or all of our outstanding common stock
warrants are exercised and the timing and amount of these
exercises.

Many of the foregoing factors are not within our
control. If we need to raise additional funds and such funds are
not available on reasonable terms, we may be required to delay
or cancel our product development and commercialization
programs. Any additional equity financing will be dilutive to
shareholders, and any debt financing, if available, may include
restrictive covenants.

We have a history of operating losses and an
accumulated deficit. We expect to continue to incur losses in
the near term and may never achieve profitability.

We have experienced significant operating losses
since our inception and as of December 31, 2002, we had an
accumulated deficit of approximately $133,000,000. We expect our
operating expenses to increase over the next several years as we
plan to dedicate substantially all of our resources to expanding
our development, testing and marketing capabilities,
particularly in the U.S., and we may never achieve
profitability. Our failure to achieve profitability may cause
our stock price to decline.

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Our revenue is dependent on the sale of
ZADAXIN in foreign countries, particularly China, and if we
experience difficulties in our foreign sales efforts, our
financial condition will be harmed.

Our product revenue in the near term is highly
dependent on the sale of ZADAXIN in foreign countries. If we
experience difficulties in our foreign sales efforts, our
business will suffer and our financial condition will be harmed.
Substantially all of our ZADAXIN sales are to customers in
China. Sales of ZADAXIN in China may be limited due to its low
average personal income, lack of patient cost reimbursement,
poorly developed infrastructure, and existing and potential
competition from other products, including generics. We are
currently in the process of renewing our importation permit to
allow us to continue to sell our product to the importers in
China. Our business would be severely harmed if we were unable
to renew the permit or if the renewal process were prolonged and
we were not granted an exemption to make periodic shipments into
China. In China ZADAXIN is sold as an imported finished product.
The attractiveness of the ZADAXIN market has encouraged local
companies to introduce lower priced locally manufactured generic
competitive products. As this occurs, there could be a negative
impact on the price and the volume of ZADAXIN sold to this
country and this would harm our business.

In addition, our ZADAXIN sales and operations in
other parts of Asia, as well as in Latin America and the Middle
East, are subject to a number of risks, including: difficulties
and delays in obtaining pricing approvals and reimbursement,
product health registrations and importation permits; unexpected
changes in regulatory requirements; difficulties in staffing and
managing foreign operations; long payment cycles; difficulties
in accounts receivable collection; difficulties in enforcing our
proprietary rights; currency fluctuations; adverse or
deteriorating economic conditions; and potential adverse tax
consequences.

We do not have product sales in the U.S. with
which to offset any decrease in our revenue from ZADAXIN sales
in Asia, Latin America and the Middle East. In addition, some
countries in these regions, including China, regulate
pharmaceutical prices and pharmaceutical importation. These
regulations may reduce prices for ZADAXIN to levels
significantly below those that would prevail in an unregulated
market, limit the volume of product which may be imported and
sold, or place high import duties on the product, any of which
may limit the growth of our revenues or cause them to decline.

Because of Chinas tiered method of
importing and distributing finished pharmaceutical products, our
quarterly results may vary substantially from one period to the
next.

China uses a tiered method to import and
distribute finished pharmaceutical products. At each port of
entry, and prior to moving the product forward to the
distributors, government licensed importing agents must process
and evaluate each shipment to determine whether such shipment
satisfies Chinas quality assurance requirements. In order
to efficiently manage this process, the importing agents place
relatively few orders from time to time over any six month
period and each order is typically for large quantities.
Therefore, our sales to an importing agent can vary
substantially from quarter to quarter depending on the size and
timing of the orders, which has in the past and may in the
future cause our quarterly results to fluctuate. Because we use
a small number of importing agents in China, our account
receivable from any one importing agent is material and if we
were unable to collect receivables from any importer, our
business and cash-flow would be adversely affected, at least in
the short term.

We have limited sales, marketing and
distribution capabilities, which may adversely affect our
ability to successfully commercialize our products.

We currently have limited sales, marketing and
distribution capabilities, and we anticipate that we will be
relying on third-party collaborators to sell, market and
distribute our products for the foreseeable future. If our
arrangements with these third parties are not successful, or if
we are unable to enter into additional third-party arrangements,
we may need to substantially expand our sales, marketing and
distribution force. Our efforts to expand may not succeed, or we
may lack sufficient resources to expand in a timely manner,
either of which will harm our operating results. In addition, if
we are able to further expand our sales, marketing and
distribution capabilities, we will begin competing with other
companies that have experienced and well funded

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operations. If we cannot successfully compete
with these larger companies, our revenues may not grow and our
business may suffer.


If we are not able to establish and maintain
adequate manufacturing and supply relationships, the development
and sale of our products could be impaired.

To be successful, our products must be
manufactured in commercial quantities, in compliance with
regulatory requirements and at an acceptable cost. We may not be
able to maintain the long-term manufacturing relationships we
currently have with our suppliers and we anticipate changes will
be needed if our volume requirements increase. Manufacturing
interruptions could significantly delay clinical development of
potential products and reduce third-party or clinical researcher
interest and support of proposed trials. These interruptions
could also impede commercialization of our products, including
sales of ZADAXIN in approved markets, and impair our competitive
position. Any of these developments would harm our business.

In some countries, a manufacturing change may
require additional regulatory approvals. If we do not obtain the
required regulatory approvals for a manufacturing change in a
timely fashion, new ZADAXIN marketing approvals may be delayed
or sales may be interrupted until the manufacturing change is
approved. Either of these results would harm our business.

In addition, manufacturing, supply and quality
control problems may arise as we, either alone or with
subcontractors, attempt to scale-up our manufacturing
procedures. We may not be able to scale-up in a timely manner or
at a commercially reasonable cost, either of which could cause
delays or pose a threat to the ultimate commercialization of our
products and harm our business.

If we do not obtain rights to additional
products from third parties, our prospects for future revenue
may decline.

The clinical development of ZADAXIN is our
primary product development objective; however, if we do not
devote additional resources to CPX or advance SCV-07 and DAX,
the other products to which we have in-licensed rights, from
preclinical into clinical development, we may lose the rights to
these products. We may also have a shortage of drugs to develop
and commercialize if we do not license or otherwise acquire
rights to additional drugs. Any shortage in the number of drugs
that we are able to develop and commercialize may reduce our
prospects for future revenue.

Commercialization of some of our products
depends on collaborations with others. If our collaborators are
not successful, or if we are unable to find future
collaborators, we may not be able to properly develop and
commercialize our products.

We depend in part on our distributors and
business partners to develop and/or promote our drugs, and if
they are not successful in their efforts or fail to do so, our
business will suffer. We generally do not have control over the
amount and timing of resources that our business partners devote
to ZADAXIN and they have not always performed as or when
expected. If they do not perform their obligations as we expect,
particularly obligations regarding clinical trials, our
development expenses would increase and the development and/or
sale of our products could be limited or delayed, which could
hurt our business and cause our stock price to decline. In
addition, our relationships with these companies may not be
successful. Disputes may arise over ownership rights to
intellectual property, know-how or technologies developed with
our collaborators, and we may not be able to negotiate similar
additional arrangements in the future to develop and
commercialize ZADAXIN or other products.

If we fail to protect our products,
technologies and trade secrets, we may not be able to
successfully use, manufacture, market or sell our products, or
we may fail to advance or maintain our competitive
position.

Our success depends significantly on our ability
to obtain and maintain meaningful patent protection for our
products and technologies, to preserve our trade secrets and to
avoid infringing on the proprietary rights of third parties. Our
pending patent applications may not result in the issuance of
patents in the future. Our

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patents or patent applications may not have
priority over others applications. Our existing patents
and additional patents, if any, that may be issued may not
provide a competitive advantage to us or may be invalidated or
circumvented by our competitors. Others may independently
develop similar products or design around patents issued or
licensed to us. Patents issued to, or patent applications filed
by, other companies could harm our ability to use, manufacture,
market or sell our products or maintain our competitive position
with respect to our products. Although many of our patents
relating to ZADAXIN have expired, we have rights to other
patents and patent applications relating to ZADAXIN under
exclusive licenses. If we breach the terms of any of these
licenses, we could lose our rights to these patents and patent
applications.


Our commercial success also depends in part on us
not infringing valid, enforceable patents or proprietary rights
of third parties, and not breaching any licenses that may relate
to our technologies and products. We are aware of third-party
patents that may relate to our products. It is possible that we
may unintentionally infringe these patents or other patents or
proprietary rights of third parties. We may in the future
receive notices claiming infringement from third parties as well
as invitations to take licenses under third-party patents. Any
legal action against us or our collaborative partners claiming
damages and seeking to enjoin commercial activities relating to
our products and processes affected by third-party rights may
require us or our collaborative partners to obtain licenses in
order to continue to manufacture or market the affected products
and processes. Our efforts to defend against any of these
claims, even if unmeritorious, would require us to devote
resources and attention that could have been directed to our
operations and growth plans. In addition, these actions may
subject us to potential liability for damages. We or our
collaborative partners may not prevail in a patent action and
any license required under a patent may not be made available on
commercially acceptable terms, or at all.

Pharmaceuticals are either not patentable or have
only recently become patentable in some of the countries in
which we have exclusive rights to ZADAXIN. Past enforcement of
intellectual property rights in many of these countries has been
limited or non-existent. Future enforcement of patents and
proprietary rights in many other countries will likely be
problematic or unpredictable. Moreover, the issuance of a patent
in one country does not assure the issuance of a similar patent
in another country. Claim interpretation and infringement laws
vary by nation, so the extent of any patent protection is
uncertain and may vary in different jurisdictions.

If we make any acquisitions, we will incur a
variety of costs and may never realize the anticipated
benefits.

If appropriate opportunities become available, we
may attempt to acquire products, product candidates or
businesses that we believe fit strategically with our business.
We currently have no commitments or agreements with respect to
material acquisitions. If we do undertake any transaction of
this sort, the process of integrating an acquired product,
product candidate or business may result in operating
difficulties and expenditures and may absorb significant
management attention that would otherwise be available for our
ongoing business development plans. Moreover, we may never
realize the anticipated benefits of any acquisition. Future
acquisitions could result in in-process research and development
expenses, potentially dilutive issuances of equity securities,
the incurrence of debt, contingent liabilities and/or
amortization or impairment of goodwill or other intangible
assets, which could adversely affect our business, financial
condition and results of operations.

We may lose market share or otherwise fail to
compete effectively in the intensely competitive
biopharmaceutical industry.

Competition in the biopharmaceutical industry is
intense and we expect that competition to increase. Our success
depends on our ability to compete. We believe that the principal
competitive factors in this industry include the efficacy,
safety, price, therapeutic regimen, manufacturing quality
assurance, and patents associated with a given drug. Our
competitors include biopharmaceutical companies, biotechnology
firms, universities and other research institutions, both in the
U.S. and abroad, that are actively engaged in research and
development of products in the therapeutic areas we are
pursuing, particularly hepatitis C, hepatitis B, and

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cancer. Competitors are currently marketing drugs
for hepatitis C, hepatitis B and cancer, or have
products in late-stage clinical trials.


Most of our competitors, particularly large
biopharmaceutical companies, have substantially greater
financial, technical, regulatory, manufacturing, marketing and
human resource capabilities than we do. Most of them also have
extensive experience in undertaking the preclinical and clinical
testing and in obtaining the regulatory approvals necessary to
market drugs. Additional mergers and acquisitions in the
pharmaceutical industry may result in even more resources being
concentrated with our competitors. Where comparable products are
marketed by other companies, price is a competitive factor.
Increased competitive pressure could lead to intensified
price-based competition resulting in lower prices and margins,
which would hurt our operating results.

We currently rely on sales of ZADAXIN outside of
the U.S. as a treatment for hepatitis C and
hepatitis B and certain cancers as our primary source of
product revenue. Several large biopharmaceutical companies have
substantial commitments to interferon alpha, an approved drug
for treating hepatitis B and hepatitis C, and to
lamivudine and adefovir, approved drugs to treat hepatitis B. We
cannot assure you that we will compete successfully against our
competitors or that our competitors, or potential competitors,
will not develop drugs or other treatments for hepatitis C,
hepatitis B, cancer, and other diseases that will be
superior to ours.

In the U.S., our product ZADAXIN is being
evaluated in combination with pegylated interferon alpha for the
treatment of hepatitis C patients who have failed to
respond to prior therapy with interferon alpha plus ribavirin or
with interferon alpha alone. Other companies are researching,
developing, or marketing other products for use alone or in
combination with interferon alphas or pegylated interferon
alphas for clinical indications including HCV and HBV. Such
competitive products include ribavirin, allegedly improved
ribavirin molecules and other products not yet in late stage
clinical trials such as therapeutic vaccines and reverse
transcriptase inhibitors. Our clinical trials may not show
ZADAXIN to have advantages over such existing or future
competitive products nor to have clinically significant
synergistic value.

We believe that we can position ZADAXIN as a
complementary rather than competitive drug to many therapies,
but cannot guarantee that we will be successful in this
endeavor. We expect continuing advancements in and increasing
awareness of the use of immune system enhancer therapy to fight
cancer and infectious diseases and that this development may
create new competitors. We cannot assure you that we will be
able to successfully compete with any such competitors.

If third-party reimbursement is not available
or patients cannot otherwise pay for ZADAXIN, we may not be able
to successfully market ZADAXIN.

Our ability to successfully commercialize our
products may depend in part on the extent to which coverage and
reimbursement to patients for our products will be available
from government health care programs, private health insurers
and other third party payors or organizations. Significant
uncertainty exists as to the reimbursement status of new
therapeutic products, such as ZADAXIN, and we cannot assure you
that third party insurance coverage and reimbursement will be
available for therapeutic products we might develop. In most of
the emerging markets in which we sell ZADAXIN or intend to sell
ZADAXIN, reimbursement for ZADAXIN under government or private
health insurance programs is not yet widely available. The
failure to obtain third-party reimbursement for our products,
particularly in the U.S., Europe and Japan, will harm our
business. In the U.S., proposed health care reforms could limit
the amount of third-party reimbursement available for our
products. We cannot assure you that additional limitations will
not be imposed in the future on drug coverage and reimbursement.
In many emerging markets where we have marketing rights to
ZADAXIN, government resources and per capita income may be so
low that our products will be prohibitively expensive. In these
countries, we may not be able to market our products on
economically favorable terms, if at all.

Efforts by governmental and third-party payors to
contain or reduce health care costs could cause us to reduce the
prices at which we market our drugs, which will reduce our gross
margins and may harm our business. Various governments and
third-party payors are trying to contain or reduce the costs of
health care

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through various means. We expect that there will
continue to be a number of legislative proposals to implement
government controls. The announcement of proposals or reforms
could cause us to reduce the prices at which we market our
drugs, which will reduce our gross margins and may harm our
business.


If the current economic slowdown in the U.S.
causes the economies of other countries, particularly those in
Asia, Latin America and the Middle East to experience a slowdown
or recession, our business will suffer.

The U.S. is the worlds largest consumer and
as such, the current economic slowdown in the U.S. may adversely
affect the economies of other countries, including the
developing countries in Asia, Latin America and the Middle East
from which we derive essentially all of our revenues. If the
economic conditions in the U.S. continue or worsen, these
developing countries may also experience an economic slowdown or
recession, which would likely result in a decrease of sales of
ZADAXIN. Any decrease in sales of ZADAXIN would harm our
operating results, delay our efforts to achieve profitability,
and likely cause our stock price to decline.

The current geopolitical situation in the
Middle East and other countries may cause our business to
suffer.

If the current geopolitical conditions in the
Middle East and North Korea continue or worsen resulting global
developments would likely result in a decrease of sales of
ZADAXIN. Any decrease in sales of ZADAXIN would harm our
operating results, delay our efforts to achieve profitability,
and likely cause our stock price to decline.

If the current war on terrorism causes
economic slowdowns in the economies of or business disruptions
in certain countries our business will suffer.

The United States and its allied nations are
aggressively attacking terrorism with military and economic
actions. If these actions lead to economic slowdowns in the
economies of developing countries in Asia, Latin America and the
Middle East from which we currently derive essentially all of
our product revenue, then our sales could decrease. In addition,
our commercial product is manufactured in Europe and distributed
by us from our operations in Hong Kong. Any disruption of our
supply and distribution activities due to war or acts of
terrorism could decrease our sales. Any decrease in sales would
harm our operating results, delay our efforts to achieve
profitability, and likely cause our stock price to decline.

If we lose key personnel or are unable to
attract and retain additional, highly skilled personnel required
for the expansion of our activities, our business will
suffer.

We are highly dependent upon our ability to
attract and retain qualified personnel because of the
specialized, scientific and international nature of our
business. There is intense competition for qualified management,
scientific and technical personnel in the pharmaceutical
industry, and we may not be able to attract and retain the
qualified personnel we need to grow and develop our business
globally. In addition, numerous key responsibilities at SciClone
are assigned to a small number of individuals. If we were unable
to attract and retain qualified personnel as needed or promptly
replace those employees who are critical to our product
development and commercialization, the development and
commercialization of our products would be adversely affected.
At this time, we do not maintain key person life
insurance on any of our key personnel.

We may be subject to product liability
lawsuits and our insurance may be inadequate to cover
damages.

Clinical trials or marketing of any of our
current and potential products may expose us to liability claims
from the use of these products. We currently carry product
liability insurance. However, we cannot be certain that we will
be able to maintain insurance on acceptable terms for clinical
and commercial activities or that the insurance would be
sufficient to cover any potential product liability claim or
recall. If we fail to have sufficient coverage, our business,
results of operations and cash flows could be adversely affected.

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Future changes in financial accounting
standards may cause adverse unexpected revenue or expense
fluctuations, affect our reported or future results of
operations or impact our reported or future financial
position.

A change in accounting policies can have a
significant effect on our reported results and may affect our
reporting of transactions completed before the change is
effective. New pronouncements and varying interpretations of
pronouncements have occurred with frequency and may occur in the
future. Changes to existing rules or the questioning of current
practices may adversely affect our reported financial results or
financial position or the way we conduct our business.
Specifically, legislative and other proposals could result in
changes to accounting rules requiring us to account for employee
stock options issued at market value as an expense. These and
other potential changes could materially increase the expenses
we report under generally accepted accounting principles, and
adversely affect our operating results.

Compliance with legislative actions and
changing regulations related to corporate governance and public
disclosure may result in additional expenses including higher
insurance costs.

Changing laws, regulations and standards relating
to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock
Market rules, are creating increased requirements for companies
such as ours and there may be additional regulatory rulings and
changes. We are committed to maintaining high standards of
corporate governance and public disclosure. As a result, we
intend to invest all reasonably necessary resources to comply
with evolving standards, and this investment may result in
increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities
to compliance activities. In addition, insurers have increased
rates as a result of higher claims rates over the past year and
may increase rates in future years. Our rates for our various
insurance policies have increased significantly and may increase
further in future years.

If we are unable to comply with environmental
laws and regulations, our business may be harmed.

We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage,
handling and disposal of hazardous materials and waste products.
We currently maintain a supply of hazardous materials at our
facilities. In the event of an accident, we could be liable for
any damages that result, and the liability could exceed our
resources. While we outsource our research and development
programs involving the controlled use of biohazardous materials,
if in the future we conduct these programs ourselves, we might
be required to incur significant cost to comply with the
environmental laws and regulations.

The price of our common stock has experienced
substantial volatility and may fluctuate due to factors beyond
our control.

U.S. and global economies have weakened due to
the effects and uncertainties caused by the events of September
2001 which may result in a decrease in our revenues and cause
our stock price to decline. Further, high profile corporate
governance and accounting problems and resulting corporate
failures have eroded investor confidence. In the wake of these
events, U.S. and global capital markets have experienced a
period of extreme volatility, and this may continue for some
time.

In addition, there has been significant
volatility in the market prices for publicly traded shares of
pharmaceutical and biotechnology companies, including ours. The
following factors may have an adverse impact on the market price
of our common stock: significant negative changes in the major
equity market indices; announcements of technical or product
developments by us or our competitors; governmental regulation;
health care legislation; public announcements regarding advances
in the treatment of the disease states that we are targeting;
public announcements from government officials relating to the
biotechnology or pharmaceutical industries; patent or
proprietary rights developments; changes in third-party
reimbursement policies for our products; and fluctuations in our
operating results. We cannot assure you that the price of our
common stock will remain at or exceed current levels.

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Our indebtedness may result in future
liquidity problems.

As of December 31, 2002, we had $5,600,000
in convertible notes payable, $4,000,000 of which were issued in
the quarter ended December 31, 2000 and $1,600,000 in the
quarter ended March 31, 2001. This indebtedness, or
additional debt we may incur to fund our operations, may make it
more difficult for us to obtain additional financing. The
outstanding notes are payable five years after issuance unless
converted into common stock at the sole discretion of the
holder. If we are unable to satisfy our debt service
requirements, substantial liquidity problems could result which
would negatively impact our future prospects. As of
December 31, 2002 we had cash, cash equivalents and
short-term investments of $21,100,000.

Substantial sales of our stock or convertible
securities may impact the market price of our common
stock.

As of December 31, 2002, stock options for
5,097,482 shares of common stock were outstanding, of which
options for 3,677,142 shares were exercisable. Also
outstanding as of the same date were warrants exercisable for
1,970,500 shares of common stock at prices ranging from
$2.25 to $31.33 per share, 400,000 of which were cancelled in
January 2003, and two issues of notes convertible into a total
of 684,140 shares of common stock. In addition, the note
holder has the right to purchase senior unsecured convertible
notes due December 2005 and March 2006. If issued, the
additional notes will bear no interest (zero coupon) and will be
convertible into 684,140 shares of our common stock. Upon
exercise of options or warrants, or conversion of the notes,
these issued shares of common stock will be freely tradable.

Future sales of substantial amounts of our common
stock could adversely affect the market price of our common
stock. Similarly, if we raise additional funds through the
issuance of common stock or securities convertible into or
exercisable for common stock, the percentage ownership of our
shareholders will be reduced and the price of our common stock
may fall.

Issuing preferred stock with rights senior to
those of our common stock could adversely affect holders of
common stock.

Our charter documents give our board of directors
the authority to issue series of preferred stock without a vote
or action by our shareholders. The board also has the authority
to determine the terms of preferred stock, including price,
preferences and voting rights. The rights of holders of our
common stock may be adversely affected by the rights granted to
holders of preferred stock. For example, a series of preferred
stock may be granted the right to receive a liquidation
preference  a pre-set distribution in the event of a
liquidation  that would reduce the amount available
for distribution to holders of common stock. In addition, the
issuance of preferred stock could make it more difficult for a
third party to acquire a majority of our outstanding voting
stock. As a result, common shareholders could be prevented from
participating in transactions that would offer an optimal price
for their shares.



|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

The primary objective of our investment
activities is to preserve principal while at the same time
maximizing yields without significantly increasing risk. To
achieve this objective, we invest solely in U.S. Treasury or
U.S. government agency notes. Our investments in these notes are
subject to interest rate risk. To minimize the exposure due to
an adverse shift in interest rates, we invest in short-term
notes and maintain an average maturity of less than one year. A
hypothetical 60 basis point increase in interest rates would
result in an approximate $90,355 decrease (0.6%) in fair value
of our available-for-sale securities. This potential change is
based on sensitivity analyses performed on our financial
position at December 31, 2002. Actual results may differ
materially.

Substantially all our sales and manufacturing
costs to date have been in U.S. dollars. Accordingly, we
currently have no material exposure to foreign currency rate
fluctuations.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

SCICLONE PHARMACEUTICALS, INC.

INDEX TO FINANCIAL STATEMENTS

Consolidated Financial Statements at
December 31, 2002 and 2001 and for


Each of the Three Years in the Period Ended
December 31, 2002


|                                                                                                                         |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                                         |  | Page
|                                                                                                                         |  |     
|Report of Ernst & Young LLP, Independent
    Auditors                                                                    |  |      | 36 | 
|Consolidated Balance Sheets at December 31,
    2002 and 2001                                                            |  |      | 37 | 
|Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2002              |  |      | 38 | 
|Consolidated Statement of Shareholders
    Equity for each of the three years in the period ended
    December 31, 2002 |  |      | 39 | 
|Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2002              |  |      | 40 | 
|Notes to Consolidated Financial Statements                                                                               |  |      | 41 | 

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Shareholders 
 SciClone Pharmaceuticals, Inc.

We have audited the accompanying consolidated
balance sheets of SciClone Pharmaceuticals, Inc. as of
December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended
December 31, 2002. Our audits also included the financial
statement schedule listed at Item 15(a). These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule 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
consolidated financial position of SciClone Pharmaceuticals,
Inc. at December 31, 2002 and 2001, and the consolidated
results of its operations and its cash flows for each of the
three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related 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.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Palo Alto, California

January 30, 2003


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SCICLONE PHARMACEUTICALS, INC.



CONSOLIDATED BALANCE SHEETS


|                                         |                                                                                                                                                  |                                            |           |              |            |  |           |              |            | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | --------- | ------------ | ---------- |  | --------- | ------------ | ---------- | 
|                                         |                                                                                                                                                  | December 31,                               |           | December 31,
|                                         |                                                                                                                                                  | 2002                                       |           | 2001        
|                                         |                                                                                                                                                  |                                            |           |             
|ASSETS                                  
|Current assets:                          |                                                                                                                                                  |                                            |           |              |            |  |           |             
|                                         | Cash and cash equivalents                                                                                                                        |                                            | $         | 20,233,000   |            |  | $         | 15,518,000   |           
|                                         | Restricted short-term investments                                                                                                                |                                            |           | 685,000      |            |  |           | 633,000      |           
|                                         | Other short-term investments                                                                                                                     |                                            |           | 232,000      |            |  |           | 317,000      |           
|                                         | Accounts receivable, net of allowances of
    $638,000 in 2002 and 2001                                                                          |                                            |           | 9,276,000    |            |  |           | 8,792,000    |           
|                                         | Inventories                                                                                                                                      |                                            |           | 3,431,000    |            |  |           | 4,059,000    |           
|                                         | Prepaid expenses and other current assets                                                                                                        |                                            |           | 2,297,000    |            |  |           | 1,333,000    |           
|                                         |                                                                                                                                                  |                                            |           |              |            |  |           |             
|                                         |                                                                                                                                                  | Total current assets                       |           |              | 36,154,000 |  |           |              | 30,652,000 | 
|Property and equipment, net              |                                                                                                                                                  |                                            | 111,000   |              |            |  | 167,000   |             
|Intangible assets, net                   |                                                                                                                                                  |                                            | 682,000   |              |            |  | 1,091,000 |             
|Other assets                             |                                                                                                                                                  |                                            | 164,000   |              |            |  | 186,000   |             
|                                         |                                                                                                                                                  |                                            |           |              |            |  |           |             
|                                         |                                                                                                                                                  | Total assets                               |           | $            | 37,111,000 |  |           | $            | 32,096,000 | 
|                                         |                                                                                                                                                  |                                            |           |              |            |  |           |             
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                  |                                            |           |              |            |  |           |             
|                                         | Accounts payable                                                                                                                                 |                                            | $         | 3,150,000    |            |  | $         | 1,575,000    |           
|                                         | Accrued compensation and employee benefits                                                                                                       |                                            |           | 1,089,000    |            |  |           | 960,000      |           
|                                         | Accrued clinical trials expense                                                                                                                  |                                            |           | 966,000      |            |  |           | 296,000      |           
|                                         | Accrued professional fees                                                                                                                        |                                            |           | 679,000      |            |  |           | 633,000      |           
|                                         | Deferred revenue                                                                                                                                 |                                            |           | 895,000      |            |  |           |             |           
|                                         | Other accrued expenses                                                                                                                           |                                            |           | 259,000      |            |  |           | 258,000      |           
|                                         |                                                                                                                                                  |                                            |           |              |            |  |           |             
|                                         |                                                                                                                                                  | Total current liabilities                  |           |              | 7,038,000  |  |           |              | 3,722,000  | 
|Deferred revenue                         |                                                                                                                                                  |                                            | 1,119,000 |              |            |  |          |             
|Convertible notes payable                |                                                                                                                                                  |                                            | 5,600,000 |              |            |  | 5,600,000 |             
|Commitments and contingencies            |                                                                                                                                                  |                                            |           |              |            |  |           |             
|Shareholders equity:                    |                                                                                                                                                  |                                            |           |              |            |  |           |             
|                                         | Preferred stock, no par value; issuable in
    series; 10,000,000 shares authorized; none outstanding                                            |                                            |           |             |            |  |           |             |           
|                                         | Common stock, no par value; 75,000,000 shares
    authorized; 36,904,916 shares in 2002 and 32,474,150 shares
    in 2001 issued and outstanding |                                            |           | 156,290,000  |            |  |           | 145,713,000  |           
|                                         | Accumulated other comprehensive income                                                                                                           |                                            |           | 79,000       |            |  |           | 39,000       |           
|                                         | Accumulated deficit                                                                                                                              |                                            |           | (133,015,000 | )          |  |           | (122,978,000 | )         
|                                         |                                                                                                                                                  |                                            |           |              |            |  |           |             
|                                         |                                                                                                                                                  | Total shareholders equity                 |           |              | 23,354,000 |  |           |              | 22,774,000 | 
|                                         |                                                                                                                                                  |                                            |           |              |            |  |           |             
|                                         |                                                                                                                                                  | Total liabilities and shareholders equity |           | $            | 37,111,000 |  |           | $            | 32,096,000 | 
|                                         |                                                                                                                                                  |                                            |           |              |            |  |           |             

See notes to consolidated financial statements.

37



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##### 



SCICLONE PHARMACEUTICALS, INC.



CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                                   |                            |                          |             |            |            |      |             |            |            |   |            |            |            | 
|---------------------------------------------------------------------------------- | -------------------------- | ------------------------ | ----------- | ---------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                                                   |                            |                         
|                                                                                   |                            | Year Ended December 31, 
|                                                                                   |                            |                         
|                                                                                   |                            | 2002                     |             | 2001       |            | 2000
|                                                                                   |                            |                          |             |            |            |     
|Revenues:                                                                          |                            |                          |             |            |            |      |             |            |            |   |            |           
|                                                                                   | Product sales              |                          | $           | 17,101,000 |            |      | $           | 13,831,000 |            |   | $          | 15,357,000 |           
|                                                                                   | Contract revenue           |                          |             | 671,000    |            |      |             |           |            |   |            |           |           
|                                                                                   |                            |                          |             |            |            |      |             |            |            |   |            |           
|                                                                                   |                            | Total revenues           |             |            | 17,772,000 |      |             |            | 13,831,000 |   |            |            | 15,357,000 | 
|Cost of product sales                                                              |                            |                          | 3,487,000   |            |            |      | 2,742,000   |            |            |   | 3,113,000  |           
|                                                                                   |                            |                          |             |            |            |      |             |            |            |   |            |           
|Gross margin                                                                       |                            |                          | 14,285,000  |            |            |      | 11,089,000  |            |            |   | 12,244,000 |           
|                                                                                   |                            |                          |             |            |            |      |             |            |            |   |            |           
|Operating expenses:                                                                |                            |                          |             |            |            |      |             |            |            |   |            |           
|                                                                                   | Research and development   |                          |             | 11,647,000 |            |      |             | 8,561,000  |            |   |            | 4,182,000  |           
|                                                                                   | Sales and marketing        |                          |             | 8,724,000  |            |      |             | 8,764,000  |            |   |            | 7,720,000  |           
|                                                                                   | General and administrative |                          |             | 3,902,000  |            |      |             | 3,897,000  |            |   |            | 3,538,000  |           
|                                                                                   |                            |                          |             |            |            |      |             |            |            |   |            |           
|                                                                                   |                            | Total operating expenses |             |            | 24,273,000 |      |             |            | 21,222,000 |   |            |            | 15,440,000 | 
|                                                                                   |                            |                          |             |            |            |      |             |            |            |   |            |           
|Loss from operations                                                               |                            |                          | (9,988,000  | )          |            |      | (10,133,000 | )          |            |   | (3,196,000 | )         
|Interest and investment income                                                     |                            |                          | 323,000     |            |            |      | 751,000     |            |            |   | 1,066,000  |           
|Interest and investment expense                                                    |                            |                          | (361,000    | )          |            |      | (334,000    | )          |            |   | (36,000    | )         
|Other income (expense), net                                                        |                            |                          | (11,000     | )          |            |      | (13,000     | )          |            |   | 49,000     |           
|Income from payment on note receivable from
    former officer                     |                            |                          |            |            |            |      | 3,497,000   |            |            |   | 400,000    |           
|                                                                                   |                            |                          |             |            |            |      |             |            |            |   |            |           
|Net loss                                                                           |                            | $                        | (10,037,000 | )          |            | $    | (6,232,000  | )          |            | $ | (1,717,000 | )         
|                                                                                   |                            |                          |             |            |            |      |             |            |            |   |            |           
|Basic and diluted net loss per share                                               |                            | $                        | (0.29       | )          |            | $    | (0.19       | )          |            | $ | (0.06      | )         
|                                                                                   |                            |                          |             |            |            |      |             |            |            |   |            |           
|Weighted average shares used in computing basic
    and diluted net loss per share |                            |                          | 35,002,003  |            |            |      | 32,356,287  |            |            |   | 29,904,924 |           
|                                                                                   |                            |                          |             |            |            |      |             |            |            |   |            |           

See notes to consolidated financial statements.

38



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##### 



SCICLONE PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY

|                                                                                                       |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   |             |  
|------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | ------------- |  | ----------- | ----------- | ------------- |  | ------ | ------ |  |  | - | ------------ | - |  | - | ----------- | -
|                                                                                                       |  |              |            | Accumulated   |  |             |             |              
|                                                                                                       |  | Common Stock |            | Other         |  |             |             | Total        
|                                                                                                       |  |              |            | Comprehensive |  | Accumulated |             | Shareholders
|                                                                                                       |  | Shares       |            | Amount        |  | Income      |             | Deficit       |  | Equity
|                                                                                                       |  |              |            |               |  |             |             |               |  |       
|Balance at December 31, 1999                                                                           |  |              | 25,258,395 |               |  | $           | 124,328,000 |               |  | $      | 2,000  |  |  | $ | (115,029,000 | ) |  | $ | 9,301,000   |  
|Issuance of common stock from exercise of stock
    options, warrants and employee stock purchase plan |  |              | 5,752,819  |               |  |             | 11,160,000  |               |  |        |       |  |  |   |             |   |  |   | 11,160,000  |  
|Issuance of common stock from private placements                                                       |  |              | 1,198,072  |               |  |             | 8,427,000   |               |  |        |       |  |  |   |             |   |  |   | 8,427,000   |  
|Issuance of rights to purchase convertible note                                                        |  |              |           |               |  |             | 900,000     |               |  |        |       |  |  |   |             |   |  |   | 900,000     |  
|Net loss                                                                                               |  |              |           |               |  |             |            |               |  |        |       |  |  |   | (1,717,000   | ) |  |   | (1,717,000  | )
|Net unrealized gain on available-for-sale
    securities                                               |  |              |           |               |  |             |            |               |  |        | 6,000  |  |  |   |             |   |  |   | 6,000       |  
|                                                                                                       |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   |             |  
|Total comprehensive loss                                                                               |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   | (1,711,000  | )
|                                                                                                       |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   |             |  
|Balance at December 31, 2000                                                                           |  |              | 32,209,286 |               |  |             | 144,815,000 |               |  |        | 8,000  |  |  |   | (116,746,000 | ) |  |   | 28,077,000  |  
|Issuance of common stock from exercise of stock
    options, warrants and employee stock purchase plan |  |              | 264,864    |               |  |             | 544,000     |               |  |        |       |  |  |   |             |   |  |   | 544,000     |  
|Issuance of rights to purchase convertible note                                                        |  |              |           |               |  |             | 354,000     |               |  |        |       |  |  |   |             |   |  |   | 354,000     |  
|Net loss                                                                                               |  |              |           |               |  |             |            |               |  |        |       |  |  |   | (6,232,000   | ) |  |   | (6,232,000  | )
|Net unrealized gain on available-for-sale
    securities                                               |  |              |           |               |  |             |            |               |  |        | 31,000 |  |  |   |             |   |  |   | 31,000      |  
|                                                                                                       |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   |             |  
|Total comprehensive loss                                                                               |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   | (6,201,000  | )
|                                                                                                       |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   |             |  
|Balance at December 31, 2001                                                                           |  |              | 32,474,150 |               |  |             | 145,713,000 |               |  |        | 39,000 |  |  |   | (122,978,000 | ) |  |   | 22,774,000  |  
|Issuance of common stock from exercise of stock
    options, warrants and employee stock purchase plan |  |              | 342,306    |               |  |             | 663,000     |               |  |        |       |  |  |   |             |   |  |   | 663,000     |  
|Issuance of common stock from private placements                                                       |  |              | 4,088,460  |               |  |             | 9,914,000   |               |  |        |       |  |  |   |             |   |  |   | 9,914,000   |  
|Net loss                                                                                               |  |              |           |               |  |             |            |               |  |        |       |  |  |   | (10,037,000  | ) |  |   | (10,037,000 | )
|Net unrealized gain on available-for-sale
    securities                                               |  |              |           |               |  |             |            |               |  |        | 40,000 |  |  |   |             |   |  |   | 40,000      |  
|                                                                                                       |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   |             |  
|Total comprehensive loss                                                                               |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   | (9,997,000  | )
|                                                                                                       |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   |             |  
|Balance at December 31, 2002                                                                           |  |              | 36,904,916 |               |  | $           | 156,290,000 |               |  | $      | 79,000 |  |  | $ | (133,015,000 | ) |  | $ | 23,354,000  |  
|                                                                                                       |  |              |            |               |  |             |             |               |  |        |        |  |  |   |              |   |  |   |             |  

See notes to consolidated financial statements.

39



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##### 



SCICLONE PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |            |            |            |  
|------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------------------- | ---------- | --------- | ---------- | ---------- | ---------- | ---------- | ----------- | ---------- | ---------- | ---------- | ---------- | -
|                                                                                |                                                                  |                                            
|                                                                                |                                                                  | Year Ended December 31,                    
|                                                                                |                                                                  |                                            
|                                                                                |                                                                  | 2002                                        |                                                         | 2001       |           | 2000      
|                                                                                |                                                                  |                                             |                                                         |            |           |           
|Operating activities:                                                           |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|Net loss                                                                        |                                                                  | $                                           | (10,037,000                                             | )          |           | $          | (6,232,000 | )          |            | $           | (1,717,000 | )         
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|                                                                                | Depreciation and amortization                                    |                                             |                                                         | 556,000    |           |            |            | 556,000    |            |             |            | 529,000    |           
|                                                                                | Non-cash gain on equity securities                               |                                             |                                                         |           |           |            |            | (52,000    | )          |             |            |           |           
|                                                                                | Gain from payment on note receivable from former
    officer     |                                             |                                                         |           |           |            |            | (3,497,000 | )          |             |            | (400,000   | )         
|                                                                                | Changes in operating assets and liabilities:                     |                                             |                                                         |            |           |            |            |            |            |             |            |            |           
|                                                                                |                                                                  | Accounts receivable                         |                                                         |            | (484,000  | )          |            |            | (171,000   | )           |            |            | (4,278,000 | )         
|                                                                                |                                                                  | Inventories                                 |                                                         |            | 628,000   |            |            |            | (2,039,000 | )           |            |            | (939,000   | )         
|                                                                                |                                                                  | Prepaid expenses and other assets           |                                                         |            | (967,000  | )          |            |            | (205,000   | )           |            |            | 621,000    |           
|                                                                                |                                                                  | Accounts payable and other accrued expenses |                                                         |            | 1,576,000 |            |            |            | (603,000   | )           |            |            | 466,000    |           
|                                                                                |                                                                  | Accrued clinical trials expense             |                                                         |            | 670,000   |            |            |            | 94,000     |             |            |            | (57,000    | )         
|                                                                                |                                                                  | Accrued professional fees                   |                                                         |            | 46,000    |            |            |            | (32,000    | )           |            |            | (199,000   | )         
|                                                                                |                                                                  | Accrued compensation and employee benefits  |                                                         |            | 129,000   |            |            |            | 173,000    |             |            |            | 57,000     |           
|                                                                                |                                                                  | Deferred revenue                            |                                                         |            | 2,014,000 |            |            |            |           |             |            |            |           |           
|                                                                                |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|                                                                                |                                                                  |                                             | Net cash used in operating activities                   |            |           | (5,869,000 | )          |            |            | (12,008,000 | )          |            |            | (5,917,000 | )
|                                                                                |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|Investing activities:                                                           |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|                                                                                | Purchase of property and equipment                               |                                             |                                                         | (66,000    | )         |            |            | (99,000    | )          |             |            | (99,000    | )         
|                                                                                | Proceeds from sale of short-term investments                     |                                             |                                                         | 73,000     |           |            |            |           |            |             |            |           |           
|                                                                                | Payment on purchase of short-term investments                    |                                             |                                                         |           |           |            |            | (351,000   | )          |             |            | (331,000   | )         
|                                                                                |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|                                                                                |                                                                  |                                             | Net cash provided by (used in) investing
    activities |            |           | 7,000      |            |            |            | (450,000    | )          |            |            | (430,000   | )
|                                                                                |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|Financing activities:                                                           |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|                                                                                | Proceeds from issuance of common stock, net                      |                                             |                                                         | 10,577,000 |           |            |            | 898,000    |            |             |            | 20,486,000 |           
|                                                                                | Payment on notes receivable from former and
    current officers |                                             |                                                         |           |           |            |            | 3,497,000  |            |             |            | 400,000    |           
|                                                                                | Proceeds from issuance of convertible note                       |                                             |                                                         |           |           |            |            | 1,600,000  |            |             |            | 4,000,000  |           
|                                                                                |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|                                                                                |                                                                  |                                             | Net cash provided by financing activities               |            |           | 10,577,000 |            |            |            | 5,995,000   |            |            |            | 24,886,000 |  
|                                                                                |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|Net increase (decrease) in cash and cash
    equivalents                        |                                                                  |                                             | 4,715,000                                               |            |           |            | (6,463,000 | )          |            |             | 18,539,000 |           
|Cash and cash equivalents, beginning of year                                    |                                                                  |                                             | 15,518,000                                              |            |           |            | 21,981,000 |            |            |             | 3,442,000  |           
|                                                                                |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|Cash and cash equivalents, end of year                                          |                                                                  | $                                           | 20,233,000                                              |            |           | $          | 15,518,000 |            |            | $           | 21,981,000 |           
|                                                                                |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|Supplemental disclosures of cash flow
    information:                          |                                                                  |                                             |                                                         |            |           |            |            |            |            |             |            |           
|                                                                                | Cash paid for interest                                           |                                             | $                                                       | 336,000    |           |            | $          | 308,000    |            |             | $          |           |           

See notes to consolidated financial statements.

40



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##### 



SCICLONE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS

Note 1  The Company and Summary of
Significant Accounting Policies

The
Company

SciClone Pharmaceuticals, Inc.
(SciClone or the Company) is a
biopharmaceutical company engaged in the development and
commercialization of therapeutics to treat life-threatening
diseases. The Companys lead product ZADAXIN is in several
late-stage clinical trials, including two phase 3 hepatitis C
clinical trials in the U.S., a recently completed phase 3
hepatitis B clinical trial in Japan, a phase 2 malignant
melanoma clinical trial in Europe, and two phase 2 liver cancer
trials in the U.S. ZADAXIN has been approved for sale by the
ministries of health in over 30 countries and is marketed in
China and selected other countries outside the U.S. primarily
for the treatment of hepatitis B and hepatitis C.

Basis of
Presentation

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries,
SciClone Pharmaceuticals International Limited, SciClone Italy
S.R.L. and SciClone Japan K.K. SciClone Pharmaceuticals
International Limited is registered in the Cayman Islands with
its principal office located in Hong Kong. SciClone Italy S.R.L.
is registered in Italy with its principal office located in
Rome. SciClone Japan K.K. is registered in Japan with its
principal office located in Tokyo. All significant intercompany
accounts and transactions have been eliminated.

Revenue
Recognition

The Company recognizes revenue from product sales
at the time of shipment. There are no significant customer
acceptance requirements or post shipment obligations on the part
of the Company. Sales to importing agents or distributors are
recognized at time of shipment when title to the product is
transferred to them, and they do not have contractual rights of
return except under limited terms regarding product quality.
However, the Company will replace products that have expired or
are deemed to be damaged or defective when delivered. Payments
by the importing agents and distributors are not contingent upon
sale to the end user by the importing agents or distributors.

Contract revenue for research and development is
recorded as earned based on the performance requirements of the
contract. Nonrefundable contract fees for which no further
performance obligations exist, and there is no continuing
involvement by SciClone, are recognized on the earlier of when
the payments are received or when collection is assured.

Revenue associated with substantive performance
milestones is recognized based on the achievement of the
milestones, as defined in the respective agreements and provided
that (i) the milestone event is substantive and its
achievement is not reasonably assured at the inception of the
agreement, and (ii) there are no future performance
obligations associated with the milestone payment.

Use of
Estimates

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

Cash
Equivalents and Investments

Cash equivalents consist of highly liquid
investments with original maturities of three months or less.
All cash equivalents are carried at cost plus accrued interest,
which approximates market value.

41



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##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

We are required by our lease agreement to have a
letter of credit secured by a certificate of deposit of $633,000
at December 31, 2002. Under our European value added tax
filing arrangement, we have a letter of credit secured by a
certificate of deposit of $52,000 at December 31, 2002.

The Company classifies its entire investment
portfolio as available-for-sale and records these investments at
fair value, as determined by available market information, on
the balance sheet. The portfolio primarily consists of U.S.
Government securities and short-term debt instruments.
Unrealized gains or losses are included in accumulated other
comprehensive income on the consolidated balance sheet. The
amortized cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity. Such
amortization is included in investment income along with
interest earned. Realized gains or losses are determined on the
basis of specific identification. Management believes the credit
risk associated with these investments is limited due to the
nature of the investments.

For the years ended December 31, 2002, 2001
and 2000, net unrealized gains of approximately $40,000, $31,000
and $6,000, respectively, were included in accumulated other
comprehensive income. For the years ended December 31,
2002, 2001 and 2000, net realized gains were less than $1,000
for all years.

Inventories

Inventories are stated at the lower of cost
(first-in, first-out basis) or market.

Property and
Equipment

Property and equipment is stated at cost, less
accumulated depreciation. Depreciation is recorded over the
estimated useful lives of the respective assets (three to five
years) on the straight-line basis. Leasehold improvements are
amortized over the shorter of the estimated useful life or lease
term on the straight-line basis. Depreciation expense for the
years ended December 31, 2002, 2001 and 2000 was $122,000,
$146,000 and $120,000, respectively.

Intangible
Assets

Intangible assets include the following:

|                          |  |              |            |      |  |   |            |  
|------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                          |  |             
|                          |  | December 31,
|                          |  |             
|                          |  | 2002         |            | 2001
|                          |  |              |            |     
|Intangible product rights |  | $            | 2,456,000  |      |  | $ | 2,456,000  |  
|Accumulated amortization  |  |              | (1,774,000 | )    |  |   | (1,365,000 | )
|                          |  |              |            |      |  |   |            |  
|                          |  | $            | 682,000    |      |  | $ | 1,091,000  |  
|                          |  |              |            |      |  |   |            |  

In December 1997 the Company entered into an
agreement with Alpha 1 Biomedicals, Inc. (A1B) to
acquire the worldwide rights, except in Italy, Spain and
Portugal, where Sclavo S.p.A. (Sclavo), an
international pharmaceutical entity, owned exclusive marketing
rights, to ZADAXIN, which rights A1B had licensed from
Hoffmann-LaRoche, Inc. and F. Hoffmann-LaRoche AG, for
approximately $1,800,000. The transaction closed in July 1998
and eliminated the Companys royalty obligation to A1B with
respect to all sales of ZADAXIN after the acquisition date. In
April 1998, the Company entered into an agreement with Sclavo to
acquire ZADAXIN rights for Italy, Spain and Portugal from Sclavo
for approximately $1,400,000.

In connection with the foregoing transactions,
the Company estimated the fair market value of the intangible
assets purchased to be approximately $2,456,000 and expensed
$700,000 related to Hepatitis C in-process technology.

Acquired ZADAXIN product rights are being
amortized on a straight-line basis beginning in September 1998.
Amortization expense for the years ended December 31, 2002,
2001 and 2000 was $409,000 per year

42



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##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

based on an estimated useful life of six years.
Amortization expense for the years 2003 through 2012 is expected
to be $70,000 per year as the Company has reassessed the
estimated useful life of the assets to be an additional eight
years as of December 31, 2002 given that its European
patent for the use of ZADAXIN in the treatment of hepatitis C
expires in 2012. The Company reassesses the useful life of these
assets in accordance with current facts and circumstances.

The Companys policy is to identify and
record impairment losses on intangible product rights when
events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of
those assets. The Company to date has not identified any
impairment losses on these assets. Although the Company has a
history of operating and cash flow losses, the Company believes
that there is no impairment to the intangible assets because
ZADAXIN has been approved for sale in over 30 countries,
principally as a treatment for hepatitis B or hepatitis C. Based
on the Companys anticipated financial results for ZADAXIN
sales from 2001 to 2005, it has determined that the future cash
flows exceed the carrying amount of the assets.

Foreign
Currency Translation

The Company translates the assets and liabilities
of its foreign subsidiaries stated in local functional
currencies to U.S. dollars at the rates of exchange in effect at
the end of the period. Revenues and expenses are translated
using rates of exchange in effect during the period. Gains and
losses from the translation of financial statements denominated
in foreign currencies, if material, are included as a separate
component of other comprehensive income (loss) in the
statement of shareholders equity. There have been no
accumulated currency translation gains or losses included in any
period presented.

The Company records foreign currency transactions
at the exchange rate prevailing at the date of the transaction.
Monetary assets and liabilities denominated in foreign currency
are retranslated at the exchange rates in effect at the balance
sheet date. All translation differences arising from foreign
currency transactions are included in results of operations and
have not been significant.

Research and
Development Expenses

Research and development expenditures are charged
to operations as incurred. Major components of research and
development expenses consist of clinical development performed
on our behalf by institutions and contract research
organizations, personnel costs, including salaries and benefits,
preclinical work, pharmaceutical development, materials and
supplies, third party research funding and overhead allocations
consisting of various administrative and facilities related
costs. Our research and development activities are also
separated into three main categories: research, clinical
development and pharmaceutical development. Research costs
typically consist of preclinical and toxicology work. Clinical
development costs include Phase 1, 2 and 3 clinical trials
as well as expanded access programs. Pharmaceutical development
costs consist of product formulation and chemical analysis.

The continuation of ZADAXIN clinical trials have
had, and are expected to continue to have, the largest and most
significant effect on our research and development expenses.
Cost accruals for clinical trials are based on estimates of the
services received and efforts expended pursuant to contracts
with numerous institutions that conduct the clinical trials on
the Companys behalf. The financial terms of these
agreements are subject to negotiation and variation from
contract to contract and may result in uneven payment flows.
Payments under the contracts depend on factors such as the
achievement of certain events, the successful enrollment of
patients and the completion of portions of the clinical trial or
similar conditions. The objective of our accrual policy is to
match the recording of expenses to the actual services received
and efforts expended. Expenses related to grants to institutions
that conduct the clinical trials on our behalf are accrued based
on the level of patient enrollment and activity according to the
protocol. In general, these expenses will be higher for the
initial and final months of a patients scheduled 18 months
of treatment and observation. Expenses relating to the clinical
research organization (CRO) managing the trials and
laboratory and other direct expenses are

43



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##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

recognized in the period they are incurred and
the services performed. The Company monitors patient enrollment
levels and related activity to the extent possible and adjusts
estimates accordingly.

Our phase 3 clinical trials in the U.S. will
increase our research and development expenditures significantly
over the next year. Research and development expenditures are
charged to operations as incurred. Our cost accruals for
clinical trials are based on estimates of the services received
and efforts expended. Expenses related to grants to the
institutions are accrued based on the level of patient
enrollment and activity according to the protocol. In general,
these expenses will be higher for the initial and final months
of a patients scheduled 18 months of treatment and
observation. Expenses relating to the clinical research
organization managing the trials and laboratory and other direct
expenses are recognized in the period they are incurred and the
services performed. We monitor patient enrollment levels and
related activity to the extent possible and adjust our estimates
accordingly; however, if management has underestimated activity
levels associated with various studies at a given point in time,
we could underestimate our actual research and development
expenses.

Shipping and
Handling Costs

Costs related to shipping and handling are
included in cost of sales for all periods presented.

Advertising
Expenses

The Company expenses advertising costs as
incurred and these costs are included in sales and marketing
expenses for all periods presented. Advertising expenses for the
years ended December 31, 2002, 2001 and 2000 were $108,000,
$233,000 and $204,000, 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 basis,
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax 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 included
the enactment date. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is
more likely than not that some or all of the deferred tax assets
may not be realized.

Net Loss Per
Share

Basic net loss per share has been computed using
the weighted average number of shares of common stock
outstanding during the period. Diluted net loss per share equals
basic net loss per share given the Companys history of net
losses.

Had the Company been in a net income position,
diluted earnings per share would have included the shares used
in the computation of basic net loss per share as well as an
additional 8,436,262, 8,265,637 and 7,211,797 shares in 2002,
2001 and 2000, respectively, related to convertible notes
payable, outstanding options and warrants regardless of
conversion or exercise prices, not included in the calculation
of basic net loss per share.

Accounting
for Stock-Based Compensation

The Company accounts for its stock option and
employee stock purchase plans under the provisions of Accounting
Principles Board Opinion 25 (APB 25) and related
Interpretations. Accordingly, the Company

44



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##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

does not generally recognize compensation expense
in accounting for its stock option and employee stock purchase
plans for awards to employees and directors.

Pro forma information regarding net loss and net
loss per share is required by Statement of Financial Accounting
Standards No. 123 Accounting for Stock-Based
Compensation (SFAS 123) and has been
determined as if the Company had accounted for its stock awards
under the fair value method of that Statement. The fair value
for the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions for 2002, 2001 and 2000: risk-free
interest rates of 2.00%, 4.00% and 6.00%, respectively; dividend
yield of 0%; volatility factors of the expected market price of
the Companys common stock of 0.96, 0.96 and 0.97,
respectively, and a weighted average expected life of the option
of 3.88 years, 3.94 years and 3.90 years,
respectively. The weighted average estimated fair value of
options granted was $2.75 for 2002, $2.72 for 2001 and $7.31 for
2000. The fair value for the employee stock purchases was also
estimated using the Black-Scholes model with the following
assumptions for 2002, 2001 and 2000: risk-free interest rate of
2.00%, 4.00% and 6.00%, respectively; dividend yield of 0%;
expected volatility of 0.96, 0.96 and 0.97, respectively, and
expected life of 0.25 years. The weighted average estimated
fair value of the employee stock purchase plan shares purchased
was $0.99 for 2002, $1.86 for 2001 and $1.96 for 2000.

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 awards
have characteristics significantly different from those of
traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in
the Companys opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its employee stock options and stock purchases.

Had compensation expense for the Companys
option and employee purchase plans been determined based on the
fair value at the grant date for awards in 2002, 2001 and 2000
consistent with the provisions of SFAS 123, the Companys
net loss and net loss per share would have been adjusted to the
pro forma amounts for the years ended December 31 indicated
below:

|                                                                                                                |  |      |             |      |  |      |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                                                |  | 2002 |             | 2001 |  | 2000
|                                                                                                                |  |      |             |      |  |     
|Net loss  as reported                                                                                          |  | $    | (10,037,000 | )    |  | $    | (6,232,000 | ) |  | $ | (1,717,000 | )
|Total stock-based employee compensation expense
    determined under the fair value based method for all awards |  |      | (2,283,000  | )    |  |      | (2,756,000 | ) |  |   | (1,962,000 | )
|                                                                                                                |  |      |             |      |  |      |            |   |  |   |            |  
|Net loss  pro forma                                                                                            |  | $    | (12,320,000 | )    |  | $    | (8,988,000 | ) |  | $ | (3,679,000 | )
|                                                                                                                |  |      |             |      |  |      |            |   |  |   |            |  
|Basic and diluted net loss per share 
    as reported                                                          |  | $    | (0.29       | )    |  | $    | (0.19      | ) |  | $ | (0.06      | )
|                                                                                                                |  |      |             |      |  |      |            |   |  |   |            |  
|Basic and diluted net loss per share 
    pro forma                                                            |  | $    | (0.35       | )    |  | $    | (0.28      | ) |  | $ | (0.12      | )
|                                                                                                                |  |      |             |      |  |      |            |   |  |   |            |  

The effects of applying SFAS 123 for pro forma
disclosures are not likely to be representative of the effects
on reported net loss for future years due to the different
number of options granted each year.

Warrants issued in connection with equity and
debt arrangements and equity instruments issued to non-employees
are valued using the Black-Scholes option valuation model.
Warrants issued to placement agents and similar parties in
connection with equity financing are accounted for as stock
issuance costs with an equal amount recorded as additional
paid-in capital. Warrants issued to purchasers of the
Companys equities are not separately included in the
financial statements as their value is a sub-component of
additional paid-in capital. The fair value of warrants issued in
connection with debt arrangements, if material, is accounted for
as a debt discount and amortized as additional interest expense
over the term of the related debt.

45



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##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

Comprehensive
Income (Loss)

The Company reports changes in unrealized gains
or losses on the Companys available-for-sale securities in
comprehensive income (loss). For the years ended
December 31, 2002, 2001 and 2000, total comprehensive loss
amounted to $9,997,000, $6,201,000 and $1,711,000, respectively.

Segment
Information

The Company operates in one segment (see Note 9).

Concentration
of Credit Risk

The Peoples Republic of China, like Japan
and certain other Asian markets, uses a tiered method to import
and distribute products. The distributors make the sales in the
country, but the product is imported for them by licensed
importers. For the year ended December 31, 2002, sales to
six importing agents in China accounted for 88% of the
Companys product sales and sales to four importing agents
accounted for 89% and 86% of our product sales for the years
ended December 31, 2001 and 2000, respectively. In 2002,
the largest customer accounted for 41% of sales and the second
largest customer accounted for 27% of sales. No other customers
accounted for more than 10% of sales in 2002. In 2001, the
largest customer accounted for 47% of sales and the second
largest customer accounted for 30% of sales. No other customers
accounted for more than 10% of sales in 2001. In 2000, the
largest customer accounted for 63% of sales and the second
largest customer accounted for 14% of sales. No other customers
accounted for more than 10% of sales in 2000. As of December 31,
2002, approximately $8,627,000, or 87% of the Companys
accounts receivable were attributable to four importing agents
in China. The Company performs on-going credit evaluations of
its customers financial condition, and generally does not
require collateral from its customers. The Company maintains
reserves for credit losses, and such losses have been within
managements expectation. The Company recognizes reserves
for bad debts ranging from 25% to 100% based on the length of
time the receivables are past due and the Companys
collectibility experience.

Recent
Accounting Pronouncements

The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148
Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS 148) in December 2002. SFAS
148 amends SFAS 123 to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to
require more prominent disclosures in both annual and interim
financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The additional disclosure requirements
of SFAS 148 are effective for fiscal years ending after
December 15, 2002 and have been included in these financial
statements. The Company has elected to continue to follow the
intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25 Accounting for Stock
Issued to Employees, to account for employee stock options.

Reclassifications

Certain prior year amounts have been reclassified
to conform to the current years presentation. The
reclassifications did not have a material impact on our
consolidated financial statements.

46



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##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

Note 2  Available-for-sale
Securities

The following is a summary of available-for-sale
securities:

|                   |                             |                               |            |            |  |            |        |        |  |   |            |            | 
|------------------ | --------------------------- | ----------------------------- | ---------- | ---------- |  | ---------- | ------ | ------ |  | - | ---------- | ---------- | 
|                   |                             |                              
|                   |                             | Available-for-sale Securities
|                   |                             |                              
|                   |                             |                               |            | Gross      |  |           
|                   |                             | Amortized                     |            | Unrealized |  | Estimated 
|                   |                             | Cost                          |            | Gains      |  | Fair Value
|                   |                             |                               |            |            |  |           
|December 31, 2002: |                             |                               |            |            |  |            |        |        |  |   |            |           
|                   | Certificate of deposit      |                               | $          | 787,000    |  |            | $      |       |  |   | $          | 787,000    | 
|                   | U.S. government obligations |                               |            | 13,723,000 |  |            |        |       |  |   |            | 13,723,000 | 
|                   | Corporate equity securities |                               |            | 51,000     |  |            |        | 79,000 |  |   |            | 130,000    | 
|                   |                             |                               |            |            |  |            |        |        |  |   |            |           
|                   |                             | $                             | 14,561,000 |            |  | $          | 79,000 |        |  | $ | 14,640,000 |           
|                   |                             |                               |            |            |  |            |        |        |  |   |            |           
|December 31, 2001: |                             |                               |            |            |  |            |        |        |  |   |            |           
|                   | Certificate of deposit      |                               | $          | 865,000    |  |            | $      |       |  |   | $          | 865,000    | 
|                   | Corporate obligations       |                               |            | 10,858,000 |  |            |        | 6,000  |  |   |            | 10,864,000 | 
|                   | Corporate equity securities |                               |            | 51,000     |  |            |        | 33,000 |  |   |            | 84,000     | 
|                   |                             |                               |            |            |  |            |        |        |  |   |            |           
|                   |                             | $                             | 11,774,000 |            |  | $          | 39,000 |        |  | $ | 11,813,000 |           
|                   |                             |                               |            |            |  |            |        |        |  |   |            |           

As of December 31, 2002, the total
available-for-sale securities are included as follows,
$13,723,000 in cash and cash equivalents, $685,000 in restricted
short-term investments and $232,000 in other short-term
investments. As of December 31, 2001, the total
available-for-sale securities are included as follows,
$10,897,000, in cash and cash equivalents, $633,000, in
restricted short-term investments and $317,000 in other
short-term investments. As of December 31, 2002 and 2001
all available-for-sale securities had maturities of
12 months or less.

Note 3  Inventories

Inventories consisted of the following:

|                 |  |              |           |      |  |   |           | 
|---------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                 |  |             
|                 |  | December 31,
|                 |  |             
|                 |  | 2002         |           | 2001
|                 |  |              |           |     
|Raw materials    |  | $            | 2,190,000 |      |  | $ | 2,759,000 | 
|Work in progress |  |              | 159,000   |      |  |   | 869,000   | 
|Finished goods   |  |              | 1,082,000 |      |  |   | 431,000   | 
|                 |  |              |           |      |  |   |           | 
|                 |  | $            | 3,431,000 |      |  | $ | 4,059,000 | 
|                 |  |              |           |      |  |   |           | 

47



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##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

Note 4  Property and
Equipment

Property and equipment consisted of the following:

|                                               |  |              |          |      |  |   |          |  
|---------------------------------------------- |  | ------------ | -------- | ---- |  | - | -------- | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |          | 2001
|                                               |  |              |          |     
|Office furniture and fixtures                  |  | $            | 134,000  |      |  | $ | 120,000  |  
|Office equipment                               |  |              | 504,000  |      |  |   | 465,000  |  
|Leasehold improvements                         |  |              | 121,000  |      |  |   | 108,000  |  
|                                               |  |              |          |      |  |   |          |  
|                                               |  |              | 759,000  |      |  |   | 693,000  |  
|Less accumulated depreciation and amortization |  |              | (648,000 | )    |  |   | (526,000 | )
|                                               |  |              |          |      |  |   |          |  
|Net property and equipment                     |  | $            | 111,000  |      |  | $ | 167,000  |  
|                                               |  |              |          |      |  |   |          |  

Note 5  Collaborative
Agreements

In April 1999, the Company licensed to Sigma-Tau
semi-exclusive ZADAXIN development and marketing rights in Italy
and Spain, and exclusive rights in Switzerland. In March 2000,
this license was expanded and amended to include all of the
countries in the European Union and Sigma-Tau was made exclusive
licensee in these countries. In December 2001, this license was
further amended to define the scope of clinical development for
ZADAXIN that Sigma-Tau would undertake in Europe. Under the
terms of the December 2001 amendment, the Company received
$2,685,000 in the first quarter of 2002. This contract revenue
is being recognized over the three years commencing April 2002,
the estimated time to complete the ZADAXIN hepatitis C U.S.
clinical program and anticipated FDA regulatory filings, the
substantive performance requirements under the contract
amendment. For the year ended December 31, 2002, the
Company recognized $671,000 as contract revenue and the
remaining $2,014,000 is recorded as deferred revenue as of
December 31, 2002.

In April 1998, the Company entered into an
agreement to acquire all rights of Sclavo to ZADAXIN in Italy,
Spain and Portugal, including Sclavos marketing approval
for ZADAXIN in Italy as an influenza vaccine adjuvant. The
purchase price consisted of $297,000 in cash, 375,000 shares of
the Companys common stock, and warrants to purchase
375,000 shares of common stock at an exercise price of $4.125
per share, which warrants were exercised in January 2000.

Pursuant to its 1994 license agreement with A1B,
the Company obtained worldwide marketing, development and
manufacturing rights to ZADAXIN, with the exception of Italy,
Spain and Portugal. In April 1997, SciClone entered into an
arrangement with A1B to administer the sublicense activities of
the A1B licensee for Italy, Spain and Portugal. Under this 1997
agreement, the Company also acquired control of A1Bs
patent portfolio for ZADAXIN. In December 1997, SciClone and A1B
entered into an Asset Purchase Agreement pursuant to which the
Company acquired A1Bs worldwide rights to ZADAXIN, which
rights A1B licensed from Hoffmann-LaRoche, Inc. and F.
Hoffmann-LaRoche AG, and eliminated the Companys and its
current and future sublicensees royalty obligations to A1B
with respect to future sales of ZADAXIN. In July 1998, the
Company and A1B closed the Asset Purchase Agreement. In
accordance with the agreement, the Company issued to A1B 600,000
shares of common stock and loaned to A1B $210,000 in exchange
for the assets described above.

In connection with the foregoing transactions
with Sclavo and A1B, the Company estimated the fair market value
of the intangible assets purchased to be approximately
$2,456,000 and wrote off the remaining $700,000 related to
hepatitis C in-process technology.

In August 1997 the Company entered into a ZADAXIN
Patent License Agreement with The Fitzsimons Army Medical Center
of the U.S. Army (the U.S. Army). The
Company is obligated to pay the U.S. Army

48



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##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

a minimum annual royalty and a royalty based on a
percentage of ZADAXIN net sales revenue upon commercialization
of ZADAXIN for treatment of chronic hepatitis C in certain
countries, including the U.S., the European Union and Japan, but
not including China.

In October 1996, the Company entered into an
agreement with Schering-Plough K.K., giving Schering-Plough K.K.
exclusive marketing rights to ZADAXIN in Japan. Under the
agreement, Schering-Plough K.K. initiated development of ZADAXIN
as a monotherapy for the treatment of hepatitis B and
hepatitis C. Initially, Schering-Plough K.K. managed the
development process and the parties shared certain development
expenses. In 2001, the Company exercised its right to
participate directly in the development process and now manages
the process through its wholly owned subsidiary, SciClone Japan
K.K., using a Japanese clinical research organization, and
Schering-Plough K.K. as a consultant. Schering-Plough K.K.
continues to have exclusive marketing rights to ZADAXIN in Japan.

In April 1996, the Company acquired an exclusive
license to CPX, a synthetic compound, from the National
Institutes of Health (NIH). The NIH developed CPX as
a potential treatment for cystic fibrosis. Under this license
agreement, the Company is obligated to pay the NIH a minimum
annual royalty payment and, upon product approval, the NIH will
receive a milestone payment in addition to royalties based on a
percentage of CPX net sales revenue.

Note 6  Income Taxes

The domestic and foreign components of loss
before income tax and net loss at December 31 are as
follows:

|                               |  |      |             |      |  |      |            |   |  |   |            |  
|------------------------------ |  | ---- | ----------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                               |  | 2002 |             | 2001 |  | 2000
|                               |  |      |             |      |  |     
|Domestic                       |  | $    | (9,510,000  | )    |  | $    | (4,445,000 | ) |  | $ | (3,287,000 | )
|Foreign                        |  |      | (527,000    | )    |  |      | (1,787,000 | ) |  |   | 1,570,000  |  
|                               |  |      |             |      |  |      |            |   |  |   |            |  
|Loss before income tax expense |  | $    | (10,037,000 | )    |  | $    | (6,232,000 | ) |  | $ | (1,717,000 | )
|                               |  |      |             |      |  |      |            |   |  |   |            |  

Significant components of the Companys
deferred tax assets at December 31 are as follows:

|                                                        |                           |      |             |      |  |   |             |   | 
|------------------------------------------------------- | ------------------------- | ---- | ----------- | ---- |  | - | ----------- | - | 
|                                                        |                           | 2002 |             | 2001
|                                                        |                           |      |             |     
|Assets                                                  |                           |      |             |      |  |   |             |  
|Net operating loss carryforwards                        |                           | $    | 25,133,000  |      |  | $ | 21,158,000  |  
|R&D credit carryforwards                                |                           |      | 4,466,000   |      |  |   | 3,462,000   |  
|Note receivable written off for financial
    reporting |                           |      |            |      |  |   | 1,275,000   |  
|Other                                                   |                           |      | 1,121,000   |      |  |   | 1,553,000   |  
|                                                        |                           |      |             |      |  |   |             |  
|Gross deferred tax assets                               |                           |      | 30,720,000  |      |  |   | 27,448,000  |  
|Valuation allowance                                     |                           |      | (30,720,000 | )    |  |   | (27,448,000 | )
|                                                        |                           |      |             |      |  |   |             |  
|                                                        | Total deferred tax assets |      | $           |     |  |   | $           |  | 
|                                                        |                           |      |             |      |  |   |             |  

The valuation allowance increased by
approximately $3,272,000, $1,734,000 and $3,774,000 in the years
ended December 31, 2002, 2001 and 2000, respectively.
Deferred tax assets relating to carryforwards as of
December 31, 2002 include approximately $6,401,000
associated with stock option activity for which any subsequently
recognized tax benefits will be credited directly to
shareholders equity. The Company did not have any deferred
tax liabilities at December 31, 2002 or 2001.

At December 31, 2002, the Company has net
operating loss carryforwards for federal income tax purposes of
approximately $71,400,000 which expire in the years 2006 through
2022. The difference between the cumulative losses for financial
reporting purposes and federal income tax purposes is primarily
attributable

49



---



##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

to losses incurred by the Companys foreign
subsidiaries. At December 31, 2002, the Company has federal
tax credit carryforwards of approximately $4,100,000, which
expire in the years 2009 through 2022.

Because of the change in ownership
provisions of the Internal Revenue Code, a portion of the
Companys net operating loss carryforwards and tax credit
carryforwards may be subject to an annual limitation regarding
their utilization against taxable income in future periods. As a
result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to
reduce future income tax liabilities.

As a result of net operating losses and valuation
allowances, the Company did not record any state income tax
expense for the years ended December 31, 2002, 2001 and
2000.

Note 7  Commitments and
Contingencies



| |       
| | ------
| | Leases

The Company leases its main office facility under
a non-cancelable operating lease agreement which expires in
August 2007. The lease is for a period of seven years and
requires the Company to pay insurance and taxes and its pro-rata
share of operating expenses. The Company also leases various
office facilities abroad under non-cancelable lease agreements,
expiring in 2003 and 2005. Rental expense in 2002, 2001 and 2000
was $1,376,000, $1,296,000 and $498,000, respectively. Minimum
future rental payments amount to $1,302,000 in 2003, $1,323,000
in 2004, $1,427,000 in 2005, $1,280,000 in 2006 and $930,000 in
2007.



| |          
| | ---------
| | Royalties

Under the August 1997 ZADAXIN Patent License
Agreement with the U.S. Army, the Company is obligated to
pay the U.S. Army a minimum annual royalty and a royalty
based on a percentage of ZADAXIN net sales revenue upon
commercialization of ZADAXIN for treatment of chronic
hepatitis C in certain countries including the U.S., the
European Union and Japan, but not including China. During 2002,
2001 and 2000 the Company paid $20,000 per year related to the
minimum annual royalty.

Under the April 1996 CPX license agreement with
the NIH, the Company is obligated to pay the NIH a minimum
annual royalty and, upon commercialization of CPX, the Company
will be obligated to pay the NIH a royalty based on a percentage
of CPX net sales revenue. During 2002, 2001 and 2000 the Company
paid $45,000, $45,000, and $30,000, respectively, related to the
minimum annual royalty.



| |                          
| | -------------------------
| | Convertible Notes Payable

In March 2001, the Company issued a $1,600,000
senior unsecured convertible note with an investment affiliate
of UBS AG. The $1,600,000 note is convertible into 276,530
shares of common stock at a fixed conversion price of $5.7860
per share. The note accrues interest at a rate of 6% per year
payable semi-annually and will mature in March 2006. The Company
also received $354,000 for granting the investor the right to
purchase, at any time up to the notes maturity date,
approximately $2,400,000 of senior unsecured convertible notes
due March 2006. If issued, the notes will bear no interest (zero
coupon) and will be convertible into 276,530 shares of common
stock at a fixed conversion price of $8.5532 per share. The
Company may elect in lieu of delivering convertible notes to
deliver the respective number of shares of common stock.

In December 2000, the Company issued a $4,000,000
senior unsecured convertible note with an investment affiliate
of UBS AG. The $4,000,000 note is convertible into 407,610
shares of common stock at a fixed conversion price of $9.8133
per share. The note will accrue interest at a rate of 6% per
year payable semi-annually and will mature in December 2005. The
Company also received $900,000 for granting the investor the
right to purchase, at any time up to the notes maturity
date, approximately $5,900,000 of senior unsecured convertible
notes due December 2005. If issued, the notes will bear no
interest (zero coupon) and will be

50



---



##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

convertible into 407,610 shares of common stock
at a fixed conversion price of $14.5066 per share. The Company
may elect in lieu of delivering convertible notes to deliver the
respective number of shares of common stock.

Note 8  Shareholders
Equity



| |                          
| | -------------------------
| | Common Stock and Warrants

In June 2002, the Company completed a direct
offering of common stock to institutional investors. The Company
raised net proceeds of $9,914,000 from the offering of 4,088,460
shares of common stock at $2.60 per share.

In March 2000, the Company licensed to Sigma-Tau
exclusive development and marketing rights to ZADAXIN in Europe.
In addition, the Company completed a $3,100,000 million
private placement to Sigma-Tau consisting of 198,072 shares of
common stock, five-year immediately exercisable warrants to
purchase 200,000 shares of common stock at $15.67 per share and
five-year immediately exercisable warrants to purchase 200,000
shares of common stock at $31.33 per share. Sigma-Tau has no
registration rights with respect to the shares purchased. In
January 2003, all of Sigma-Taus warrants were cancelled
(see Note 11  Subsequent Events).

In January 2000, the Company completed a
$6,100,000 private placement to Brown Simpson Asset Management
which purchased 1,000,000 shares of common stock at a price of
$6.00 per share and five-year immediately exercisable warrants
to purchase 800,000 shares of common stock at an exercise price
of $7.00 per share. As of December 31, 2002, none of these
warrants had been exercised.

In June 1998, the Company entered into an
agreement with an institutional investor for an equity line that
was cancelled in November 1999. As a commitment fee to the
investor, the Company issued five-year warrants to purchase
300,000 shares of its common stock at an exercise price of $3.50
per share and five-year warrants to purchase 200,000 shares of
its common stock at an exercise price of $5.53 per share. As of
December 31, 2002, none of the foregoing warrants had been
exercised.

In connection with other equity offerings, the
Company has granted additional five-year warrants to investors
to purchase 100,000 shares of common stock at an exercise price
of $5.67 per share. Of this amount, warrants to purchase 37,500
shares have been exercised for aggregate proceeds to the Company
of approximately $213,000. As of December 31, 2002, the
remaining warrants to purchase 62,500 shares were outstanding.



| |                  
| | -----------------
| | Stock Award Plans

In August 1991, the Board of Directors and
shareholders of the Company approved the 1991 Stock Plan (the
1991 Plan) and reserved 1,300,000 shares for
issuance thereunder. In May 1993, the Board of Directors and
shareholders of the Company approved a 2,150,000 increase in the
shares reserved under the 1991 Plan. The 1991 Plan permits the
award of incentive or nonqualified stock options and shares of
common stock under restricted stock purchase agreements. In
January 1992, the Board of Directors and shareholders of the
Company approved the 1992 Stock Plan (the 1992 Plan)
and reserved 240,000 shares for issuance thereunder. The 1992
Plan permits the award of incentive or nonqualified stock
options which must be exercised in cash. In June 1995, the Board
of Directors and the shareholders of the Company approved the
1995 Equity Incentive Plan (the 1995 Plan) and
reserved 1,250,000 shares for issuance thereunder. The 1995 Plan
permits the award of incentive or nonqualified stock options and
shares of common stock under restricted stock awards. In May
1997, the Board of Directors and shareholders of the Company
approved a 750,000 increase in the shares reserved under the
1995 Plan. In June 1998, June 2000 and June 2002 the Board of
Directors and shareholders of the Company approved increases of
1,500,000, 1,250,000 and 1,350,000, respectively, in the shares
reserved under the 1995 Plan.

51



---



##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

Under the 1991, 1992 and 1995 Plans, options are
exercisable upon conditions determined by the Board of Directors
and expire ten years from the date of grant. Options are
generally granted at fair market value on the date of grant and
vest over time, generally four years.

In June 1995, the Board of Directors and the
shareholders of the Company approved the Nonemployee Director
Stock Option Plan (the Nonemployee Director Plan)
and reserved 250,000 shares for issuance thereunder. The
Nonemployee Director Plan automatically grants nonqualified
stock options to nonemployee directors upon their appointment or
first election to the Companys Board of Directors
(Initial Grant) and annually upon their reelection
to the Board of Directors at the Companys Annual Meeting
of Shareholders (Annual Grant). The options are
granted at fair market value on the date of grant. Initial
Grants vest annually over a period of three years. Annual Grants
vest monthly over a period of one year. In June 2000 and June
2002 the Board of Directors and shareholders of the Company
approved 250,000 increases in the shares reserved for issuance
under the Nonemployee Director Plan. In May 2002, the
shareholders of the Company approved to increase the Annual
Grant from 10,000 shares to 20,000 shares.

In July 1996, the Board of Directors and
shareholders of the Company approved the 1996 Employee Stock
Purchase Plan (the ESPP) and reserved
500,000 shares for issuance thereunder. All full-time
employees are eligible to participate in the ESPP. Under the
terms of the ESPP, employees can choose to have up to 15% of
their salary withheld to purchase the Companys common
stock. The purchase price of the stock is 85% of the lower of
the fair market value as of the first and last trading day of
each quarterly participation period. Under the ESPP, the Company
sold 67,160, 33,009 and 144,505 shares to employees in
2002, 2001 and 2000, respectively.

The following table summarizes the stock option
activity under the 1991, 1992 and 1995 Plans and the Nonemployee
Director Plan:

|                             |                                           |               |           |                     |   |          |           |            |   |   |      |       | 
|---------------------------- | ----------------------------------------- | ------------- | --------- | ------------------- | - | -------- | --------- | ---------- | - | - | ---- | ----- | 
|                             |                                           |               |           |                    
|                             |                                           |               |           | Options Outstanding
|                             |                                           |               |           |                    
|                             |                                           |               |           |                     |   | Weighted
|                             |                                           | Shares        |           | Number              |   | Average 
|                             |                                           | Available For |           | of                  |   | Exercise
|                             |                                           | Grant         |           | Shares              |   | Price   
|                             |                                           |               |           |                     |   |         
|Balance at December 31, 1999 |                                           |               | 1,253,856 |                     |   |          | 4,561,817 |            |   | $ | 3.34 |      
|                             | 1995 Plan shares reserved                 |               |           | 1,250,000           |   |          |           |           |   |   |      |      | 
|                             | Nonemployee Director Plan shares reserved |               |           | 250,000             |   |          |           |           |   |   |      |      | 
|                             | Options canceled                          |               |           | 56,366              |   |          |           | (56,366    | ) |   |      | 1.43  | 
|                             | Options granted                           |               |           | (931,250            | ) |          |           | 931,250    |   |   |      | 10.46 | 
|                             | Options exercised                         |               |           |                    |   |          |           | (1,010,624 | ) |   |      | 2.48  | 
|                             |                                           |               |           |                     |   |          |           |            |   |   |      |      
|Balance at December 31, 2000 |                                           |               | 1,878,972 |                     |   |          | 4,426,077 |            |   |   | 5.00 |      
|                             | Options canceled                          |               |           | 214,415             |   |          |           | (214,415   | ) |   |      | 7.27  | 
|                             | Options granted                           |               |           | (946,800            | ) |          |           | 946,800    |   |   |      | 3.98  | 
|                             | Options exercised                         |               |           |                    |   |          |           | (231,605   | ) |   |      | 1.83  | 
|                             | Plan shares expired                       |               |           | (120,718            | ) |          |           |           |   |   |      |      | 
|                             |                                           |               |           |                     |   |          |           |            |   |   |      |      

52



---



##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)

|                             |                                           |               |           |                     |   |          |           |          |   |   |      |      | 
|---------------------------- | ----------------------------------------- | ------------- | --------- | ------------------- | - | -------- | --------- | -------- | - | - | ---- | ---- | 
|                             |                                           |               |           |                    
|                             |                                           |               |           | Options Outstanding
|                             |                                           |               |           |                    
|                             |                                           |               |           |                     |   | Weighted
|                             |                                           | Shares        |           | Number              |   | Average 
|                             |                                           | Available For |           | of                  |   | Exercise
|                             |                                           | Grant         |           | Shares              |   | Price   
|                             |                                           |               |           |                     |   |         
|Balance at December 31, 2001 |                                           |               | 1,025,869 |                     |   |          | 4,926,857 |          |   |   | 4.86 |     
|                             | 1995 Plan shares reserved                 |               |           | 1,350,000           |   |          |           |         |   |   |      |     | 
|                             | Nonemployee Director Plan shares reserved |               |           | 250,000             |   |          |           |         |   |   |      |     | 
|                             | Options canceled                          |               |           | 349,979             |   |          |           | (349,979 | ) |   |      | 6.67 | 
|                             | Options granted                           |               |           | (795,500            | ) |          |           | 795,500  |   |   |      | 4.13 | 
|                             | Options exercised                         |               |           |                    |   |          |           | (274,896 | ) |   |      | 1.87 | 
|                             | Plan shares expired                       |               |           | (126,542            | ) |          |           |         |   |   |      |     | 
|                             |                                           |               |           |                     |   |          |           |          |   |   |      |     
|Balance at December 31, 2002 |                                           |               | 2,053,806 |                     |   |          | 5,097,482 |          |   | $ | 4.76 |     
|                             |                                           |               |           |                     |   |          |           |          |   |   |      |     

The following table summarizes information
concerning outstanding and exercisable options as of
December 31, 2002:

|                         |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                     |  |         
|                         |  | Options Outstanding |           |                    
|                         |  |                     |           | Options Exercisable
|                         |  |                     |           | Weighted            |  |          |      |            
|                         |  |                     |           | Average             |  | Weighted |      |             |  | Weighted
|                         |  |                     |           | Remaining           |  | Average  |      |             |  | Average 
|                         |  | Number              |           | Contractual         |  | Exercise |      | Number      |  | Exercise
|Range of Exercise Prices |  | Outstanding         |           | Life                |  | Price    |      | Exercisable |  | Price   
|                         |  |                     |           |                     |  |          |      |             |  |         
|$ 1.22  $ 1.59          |  |                     | 968,082   |                     |  |          | 6.35 |             |  | $        | 1.38  |  |  |  | 962,344   |  |  | $ | 1.38  | 
|$ 1.75  $ 3.68          |  |                     | 1,236,720 |                     |  |          | 7.14 |             |  |          | 3.13  |  |  |  | 813,141   |  |  |   | 2.87  | 
|$ 3.69  $ 4.50          |  |                     | 916,021   |                     |  |          | 8.35 |             |  |          | 4.21  |  |  |  | 268,523   |  |  |   | 4.20  | 
|$ 4.60  $ 5.50          |  |                     | 874,834   |                     |  |          | 4.27 |             |  |          | 5.27  |  |  |  | 806,417   |  |  |   | 5.32  | 
|$ 5.88  $10.75          |  |                     | 1,020,825 |                     |  |          | 6.20 |             |  |          | 9.40  |  |  |  | 745,717   |  |  |   | 8.99  | 
|$12.50                   |  |                     | 81,000    |                     |  |          | .87  |             |  |          | 12.50 |  |  |  | 81,000    |  |  |   | 12.50 | 
|                         |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 5,097,482 |                     |  |          | 6.43 |             |  |          | 4.76  |  |  |  | 3,677,142 |  |  |   | 4.57  | 
|                         |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 



| |          
| | ---------
| | 401k Plan

The Company has a pre-tax savings plan covering
substantially all U.S. employees, which qualifies under
Section 401(k) of the Internal Revenue Code. Under the
plan, eligible employees may contribute a portion of their
pre-tax salary, subject to certain limitations. The Company
contributes and matches 50% of the employee contributions, up to
15% of an employees salary. Company contributions, which
can be terminated at the Companys discretion, were
approximately $83,000, $73,000 and $58,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.



| |                
| | ---------------
| | Reserved Shares

As of December 31, 2002, the Company had
reserved shares of common stock for future issuance as follows,
excluding warrants to purchase 400,000 shares held by
Sigma-Tau that were cancelled in January 2003 (see
Note 11  Subsequent Events):

|                          |  |  |           | 
|------------------------- |  |  | --------- | 
|Options outstanding       |  |  | 5,097,482 | 
|Warrants outstanding      |  |  | 1,970,500 | 
|Convertible notes payable |  |  | 1,368,280 | 
|ESPP                      |  |  | 135,443   | 
|                          |  |  |           | 
|                          |  |  | 8,571,705 | 
|                          |  |  |           | 

53



---



##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)



|         |                                   
|-------- | ----------------------------------
|Note 9  | Significant Geographic Information

The Company operates in one business segment, the
development and commercialization of specialist-oriented
proprietary drugs for the treatment of chronic and life
threatening diseases. Currently, the Companys principal
focus has been the development and commercialization of ZADAXIN,
the only product that the Company sells.

The Chief Executive Officer has been identified
as the Chief Operating Decision Maker (CODM) because
he has final authority over resource allocation decisions and
performance assessment. The CODM does not receive discrete
financial information about the individual components of the
business segment.

The Companys domestic operations primarily
consist of product development. The Companys wholly owned
international subsidiary, SciClone Pharmaceuticals International
Ltd., is based in Hong Kong and is engaged in sales and
marketing and product distribution worldwide.

Information regarding geographic areas is as
follows:

|      |       |               |   |              |            |              |   |              |         |  |   |           |           |  |   |            |            | 
|----- | ----- | ------------- | - | ------------ | ---------- | ------------ | - | ------------ | ------- |  | - | --------- | --------- |  | - | ---------- | ---------- | 
|      |       |               |   | Contract     |            |              |   |             
|      |       | Product Sales |   | Revenue      |            |              |   |             
|      |       | for the Year  |   | for the Year |            | Long Lived   |   |             
|      |       | Ended         |   | Ended        |            | Assets       |   | Net Assets  
|      |       | December 31,  |   | December 31, |            | December 31, |   | December 31,
|      |       |               |   |              |            |              |   |             
|2002: |       |               |   |              |            |              |   |              |         |  |   |           |           |  |   |           
|      | U.S.  |               | $ |             |            |              | $ |             |         |  | $ | 624,000   |           |  | $ | 9,417,000  |           
|      | China |               |   | 15,073,000   |            |              |   |             |         |  |   | 99,000    |           |  |   | 13,728,000 |           
|      | Other |               |   | 2,028,000    |            |              |   | 671,000      |         |  |   | 234,000   |           |  |   | 209,000    |           
|      |       |               |   |              |            |              |   |              |         |  |   |           |           |  |   |           
|      |       | Total         |   | $            | 17,101,000 |              |   | $            | 671,000 |  |   | $         | 957,000   |  |   | $          | 23,354,000 | 
|      |       |               |   |              |            |              |   |              |         |  |   |           |           |  |   |           
|2001: |       |               |   |              |            |              |   |              |         |  |   |           |           |  |   |           
|      | U.S.  |               | $ |             |            |              | $ |             |         |  | $ | 945,000   |           |  | $ | 8,407,000  |           
|      | China |               |   | 12,325,000   |            |              |   |             |         |  |   | 137,000   |           |  |   | 13,968,000 |           
|      | Other |               |   | 1,506,000    |            |              |   |             |         |  |   | 362,000   |           |  |   | 399,000    |           
|      |       |               |   |              |            |              |   |              |         |  |   |           |           |  |   |           
|      |       | Total         |   | $            | 13,831,000 |              |   | $            |        |  |   | $         | 1,444,000 |  |   | $          | 22,774,000 | 
|      |       |               |   |              |            |              |   |              |         |  |   |           |           |  |   |           
|2000: |       |               |   |              |            |              |   |              |         |  |   |           |           |  |   |           
|      | U.S.  |               | $ |             |            |              | $ |             |         |  | $ | 1,157,000 |           |  | $ | 17,063,000 |           
|      | China |               |   | 13,174,000   |            |              |   |             |         |  |   | 144,000   |           |  |   | 10,973,000 |           
|      | Other |               |   | 2,183,000    |            |              |   |             |         |  |   | 495,000   |           |  |   | 41,000     |           
|      |       |               |   |              |            |              |   |              |         |  |   |           |           |  |   |           
|      |       | Total         |   | $            | 15,357,000 |              |   | $            |        |  |   | $         | 1,796,000 |  |   | $          | 28,077,000 | 
|      |       |               |   |              |            |              |   |              |         |  |   |           |           |  |   |           

Two customers accounted for 10% or more of total
revenues (41% and 27%) for the year ended December 31,
2002. Two customers accounted for 10% or more of total revenues
(46% and 29%) for the year ended December 31, 2001. Two
customers accounted for 10% or more of total revenues (63% and
16%) for the year ended December 31, 2000. No other
customer accounted for more than 10% of revenues during these
years.

54



---



##### 



SCICLONE PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIALS
STATEMENTS  (Continued)



|          |                                                  
|--------- | -------------------------------------------------
|Note 10  | Selected Quarterly Financial Data
    (unaudited)

|      |                                                                 |                    |   |            |   |              |   |             |   |  |   |            |   |  |   |            |  
|----- | --------------------------------------------------------------- | ------------------ | - | ---------- | - | ------------ | - | ----------- | - |  | - | ---------- | - |  | - | ---------- | -
|      |                                                                 |                   
|      |                                                                 | Three Months Ended
|      |                                                                 |                   
|      |                                                                 | March 31           |   | June 30    |   | September 30 |   | December 31
|      |                                                                 |                    |   |            |   |              |   |            
|2002: |                                                                 |                    |   |            |   |              |   |             |   |  |   |            |   |  |   |           
|      | Product sales                                                   |                    | $ | 3,948,000  |   |              | $ | 4,048,000   |   |  | $ | 4,298,000  |   |  | $ | 4,807,000  |  
|      | Contract revenue                                                |                    |   |           |   |              |   | 223,000     |   |  |   | 224,000    |   |  |   | 224,000    |  
|      | Cost of product sales                                           |                    |   | 792,000    |   |              |   | 815,000     |   |  |   | 918,000    |   |  |   | 962,000    |  
|      | Gross margin                                                    |                    |   | 3,156,000  |   |              |   | 3,457,000   |   |  |   | 3,604,000  |   |  |   | 4,068,000  |  
|      | Net loss                                                        |                    |   | (2,403,000 | ) |              |   | (3,345,000  | ) |  |   | (1,672,000 | ) |  |   | (2,617,000 | )
|      | Basic and diluted net loss per share                            |                    |   | (0.07      | ) |              |   | (0.10       | ) |  |   | (0.05      | ) |  |   | (0.07      | )
|2001: |                                                                 |                    |   |            |   |              |   |             |   |  |   |            |   |  |   |           
|      | Product sales                                                   |                    |   | 3,113,000  |   |              |   | 3,250,000   |   |  |   | 3,580,000  |   |  |   | 3,888,000  |  
|      | Cost of product sales                                           |                    |   | 598,000    |   |              |   | 636,000     |   |  |   | 714,000    |   |  |   | 794,000    |  
|      | Gross margin                                                    |                    |   | 2,515,000  |   |              |   | 2,614,000   |   |  |   | 2,866,000  |   |  |   | 3,094,000  |  
|      | Income from payment on notes receivable from
    former officer |                    |   |           |   |              |   |            |   |  |   | 3,497,000  |   |  |   |           |  
|      | Net loss                                                        |                    |   | (2,125,000 | ) |              |   | (2,219,000  | ) |  |   | (173,000   | ) |  |   | (1,715,000 | )
|      | Basic and diluted net loss per share                            |                    |   | (0.07      | ) |              |   | (0.07       | ) |  |   | (0.01      | ) |  |   | (0.05      | )



|          |                  
|--------- | -----------------
|Note 11  | Subsequent Events

In January 2003, SciClone completed a direct
placement to affiliates of Sigma-Tau, in reliance upon
Regulation D of the Securities Act of 1933, as amended. The
affiliates purchased 504,938 shares of the Companys
common stock at $3.5648 per share. The shares issued were
restricted securities, and Sigma Tau and its affiliates are not
permitted to sell any of the shares purchased in this private
placement until January 24, 2004. Prior to this
transaction, warrants held by Sigma-Tau to purchase 400,000
shares of SciClones common stock were cancelled.

55



---



##### 





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

Not Applicable.

PART III



|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by Item 401 of
Regulation S-K is incorporated by reference from the
definitive proxy statement for the Companys 2003 Annual
Meeting of Shareholders to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this Form (the Proxy
Statement) under the caption ELECTION OF
DIRECTORS  Nominees. Information relating to
the executive officers of the Company is set forth in
Part I of this Report under the caption Executive
Officers of the Registrant.

The information required by Item 405 of
Regulation S-K is incorporated by reference from the Proxy
Statement under the caption EXECUTIVE COMPENSATION AND
OTHER MATTERS  Section 16(a) Beneficial
Ownership Reporting Compliance.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item is
incorporated by reference from the Proxy Statement under the
captions EXECUTIVE COMPENSATION AND OTHER MATTERS,
COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION, ELECTION OF DIRECTORS 
Compensation of Directors and STOCK PERFORMANCE
GRAPH.

56



---



##### 





|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder
    Matters

Equity Compensation Plan Information

We currently maintain five compensation plans
that provide for the issuance of our common stock to officers
and other employees, directors and consultants. These consist of
the 1991 Stock Plan, the 1992 Stock Plan, the 1995 Equity
Incentive Plan, the Nonemployee Director Stock Option Plan and
the 1996 Employee Stock Purchase Plan, which plans have all been
approved by the Companys shareholders. The Company does
not currently maintain any compensation plans that have not been
approved by the Companys shareholders. The following table
sets forth information regarding outstanding options and shares
reserved for future issuance under the foregoing plans as of
December 31, 2002:

|                                                        |                                             |                   |           |                   |  |                          |        |        |  |  |           |           |    
|------------------------------------------------------- | ------------------------------------------- | ----------------- | --------- | ----------------- |  | ------------------------ | ------ | ------ |  |  | --------- | --------- | ---
|                                                        |                                             | Number of Shares  |           | Weighted-         |  | Number of Shares        
|                                                        |                                             | to be Issued Upon |           | Average Exercise  |  | Remaining Available for 
|                                                        |                                             | Exercise of       |           | Price of          |  | Future Issuance Under   
|                                                        |                                             | Outstanding       |           | Outstanding       |  | Equity Compensation     
|                                                        |                                             | Options, Warrants |           | Options, Warrants |  | Plans (excluding shares 
|                                                        |                                             | and Rights        |           | and Rights        |  | reflected in column (a))
|Plan Category                                           |                                             | (a)               |           | (b)               |  | (c)                     
|                                                        |                                             |                   |           |                   |  |                         
|Equity compensation plans approved by
    shareholders: |                                             |                   |           |                   |  |                          |        |        |  |  |           |          
|                                                        | 1991 Stock Plan                             |                   |           | 1,484,662         |  |                          | $      | 5.1831 |  |  |           | 0         |    
|                                                        | 1992 Stock Plan                             |                   |           | 102,667           |  |                          | $      | 4.9801 |  |  |           | 0         |    
|                                                        | 1995 Equity Incentive Plan                  |                   |           | 3,052,653         |  |                          | $      | 4.3635 |  |  |           | 1,768,806 |    
|                                                        | 1995 Nonemployee Director Stock Option Plan |                   |           | 457,500           |  |                          | $      | 6,0269 |  |  |           | 285,000   |    
|                                                        | 1996 Employee Stock Purchase Plan           |                   |           |                   |  |                          |        |        |  |  |           | 137,804   | (1)
|                                                        |                                             |                   |           |                   |  |                          |        |        |  |  |           |          
|Total                                                   |                                             |                   | 5,097,482 |                   |  | $                        | 5.1384 |        |  |  | 2,191,610 |          
|                                                        |                                             |                   |           |                   |  |                          |        |        |  |  |           |          



---



|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 1996 Employee Stock Purchase Plan is a voluntary
    plan open to all employees. This plan allows employees to elect
    payroll deductions which are used to purchase SciClones
    common stock directly from the Company.

The information required by Item 403 of
Regulation S-K is incorporated by reference from the Proxy
Statement under the caption STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this Item is
incorporated by reference from the Proxy Statement under the
caption EXECUTIVE COMPENSATION AND OTHER
MATTERS  Certain Relationships and Related
Transactions.

PART IV



|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our filings under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is
accumulated and communicated to management, including the Chief
Executive Officer and the Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.

57



---



##### 



Our Chief Executive Officer and the Chief
Financial Officer, with the assistance of other members of our
management, have evaluated our disclosure controls and
procedures as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934, within 90 days of the
filing date of this report, and have concluded based on that
evaluation that those disclosure controls and procedures are
effective. Since the date of that evaluation, there have been no
significant changes (including corrective actions with regard to
significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect
those controls.



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) The following documents are filed as
part of this Report:



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Financial Statements. The
    following financial statements of the Company are contained on
    pages 36-55 of this Report on Form 10-K:

Report of Ernst & Young LLP, Independent
Auditors.

Consolidated Balance Sheets at December 31,
2002 and 2001.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Operations for each of
    the three years in the period ended December 31, 2002.             
|
| | Consolidated Statement of Shareholders
    Equity for each of the three years in the period ended
    December 31, 2002.
|
| | Consolidated Statements of Cash Flows for each of
    the three years in the period ended December 31, 2002.             

Notes to Consolidated Financial Statements.



| |                                  
| | ---------------------------------
| | (2) Financial Statement Schedules



| |                                                                   
| | ------------------------------------------------------------------
| | The following schedule is contained on
    page 66 of this Report:

Schedule II  Valuation and
Qualifying Accounts for each of the three years in the period
ended December 31, 2002.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other schedules have been omitted because
    they are either inapplicable or the required information has
    been given in the consolidated financial statements or the notes
    hereto.



| |              
| | -------------
| | (3) Exhibits.



| |                           
| | --------------------------
| | Refer to Item 15(c) below.

(b) Reports on Form 8-K.



| |     
| | ----
| | None

(c) Exhibits.



| |                                                                       
| | ----------------------------------------------------------------------
| | Exhibits (numbered in accordance with
    Item 601 of Regulation S-K):

|        |            |             |  |                                                                                                                        
|------- | ---------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------
|Exhibit |            |            
|Number  |            | Description
|        |            |            
|        | 3(i).1(1)  |             |  | Restated Articles of Incorporation.                                                                                    
|        | 3(i).2(2)  |             |  | Certificate of Amendment of Restated Articles of
    Incorporation.                                                    
|        | 3(i).3(14) |             |  | Certificate of Determination.                                                                                          
|        | 3(i).4(20) |             |  | Certificate of Determination Regarding the terms
    of the Series C Preferred Stock.                                  
|        | 3(ii).1(1) |             |  | Bylaws.                                                                                                                
|        | 3(ii).2(2) |             |  | Certificate of Amendment of Bylaws.                                                                                    
|        | 4.1(14)    |             |  | Rights Agreement dated as of July 25, 1997
    between the Registrant and Chase Mellon Shareholder Services,
    L.L.C.

58



---



##### 



|        |           |             |  |                                                                                                                                                                                                                    
|------- | --------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 4.2(21)*  |             |  | 6% Convertible Note dated as of December 7,
    2000 by the Registrant in favor of UBS AG, London Branch.                                                                                                          
|        | 4.3(21)*  |             |  | Option Agreement dated as of October 26,
    2000 by and between the Registrant and UBS AG, London Branch.                                                                                                         
|        | 4.4(21)*  |             |  | Amendment No. 1 to Option Agreement dated as
    of December 19, 2000 by and between the Registrant and UBS
    AG, London Branch.                                                                                 
|        | 4.5(22)*  |             |  | 6% Convertible Note dated as of March 21,
    2001 by the Company in favor of UBS AG, London Branch.                                                                                                               
|        | 4.6(22)*  |             |  | Option Agreement dated as of February 16,
    2001 by and between the Company and UBS AG, London Branch.                                                                                                           
|        | 4.7(22)*  |             |  | Amendment No. 1 to Option Agreement dated as
    of March 21, 2001 by and between the Company and UBS AG,
    London Branch.                                                                                       
|        | 10.1(2)** |             |  | Registrants 1991 Stock Plan, together with
    forms of agreements thereunder.                                                                                                                                    
|        | 10.2(1)** |             |  | Registrants 1992 Stock Plan, together with
    forms of agreements thereunder.                                                                                                                                    
|        | 10.3(1)   |             |  | Lease, dated September 10, 1991, between the
    Registrant and Spieker-Singleton68 concerning property, located
    at 901 Mariners Island Boulevard, San Mateo, California, as
    amended (the Spieker Lease).
|        | 10.4(7)   |             |  | Amendment No. 4 to Spieker Lease, dated
    October 4, 1994.                                                                                                                                                       
|        | 10.5(9)   |             |  | Amendment No. 7 to Spieker Lease, dated
    November 14, 1995.                                                                                                                                                     
|        | 10.6(8)** |             |  | Registrants 1995 Equity Incentive Plan,
    together with forms of agreement thereunder.                                                                                                                          
|        | 10.7(8)** |             |  | Registrants 1995 Nonemployee Director Stock
    Option Plan, together with forms of agreement thereunder.                                                                                                         
|        | 10.8(24)* | *           |  | Registrants 1996 Employee Stock Purchase
    Plan, together with forms of agreement thereunder.                                                                                                                   
|        | 10.9(21)  |             |  | Second Amendment of Employment Agreement dated
    December, 2000 between the Registrant and Donald R. Sellers.                                                                                                    
|        | 10.10(10) |             |  | License Agreement effective April 19, 1996
    between the Registrant and the National Institute of Health
    Office of Technology Transfer.                                                                      
|        | 10.11(11) |             |  | Amendment No. 8 to Spieker Lease, dated
    August 26, 1996.                                                                                                                                                       
|        | 10.12(21) |             |  | Amendment No. 14 to Spieker Lease dated
    November 21, 2000.                                                                                                                                                     
|        | 10.13(15) |             |  | Alpha Rights Acquisition Agreement by and between
    the Registrant and Alpha 1 Biomedicals, Inc., dated
    December 17, 1997.                                                                                   
|        | 10.14(16) | *           |  | Expanded and Amended Thymosin Alpha 1 License,
    Distributorship and Supply Agreement by and between the Company
    and Sigma-Tau Industrie Farmadeutiche Riunite S.p.A. dated as of
    March 3, 2000.         
|        | 10.15(17) |             |  | Preferred Stock Investment Agreement by and among
    the Company, Halifax Fund, L.P., Themis Partners L.P. and
    Heracles Fund dated as of March 27, 1998.                                                      
|        | 10.16(17) |             |  | Registration Rights Agreement by and among
    Registrant, Halifax Fund, L.P., Themis Partners L.P. and
    Heracles Fund dated as of April 1, 1998.                                                               
|        | 10.17(18) |             |  | Warrant to purchase up to 200,000 shares of
    Common Stock of the Company issued to Cheyenne LLC dated as of
    June 30, 1998.                                                                                  
|        | 10.18(18) |             |  | Registration Rights Agreement by and between the
    Company and Cheyenne LLC dated as of June 30, 1998.                                                                                                           
|        | 10.19(19) |             |  | Acquisition Agreement between the Company and
    Sclavo S.p.A. dated April 20, 1998.                                                                                                                              

59



---



##### 



|        |           |             |  |                                                                                                                                                                                                                            
|------- | --------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 10.20(19) |             |  | First Amendment to Acquisition Agreement between
    the Company and Sclavo S.p.A., dated April 20, 1998.                                                                                                                  
|        | 10.21(22) | *           |  | Registration Rights Agreement by and between the
    Company and UBS AG, London Branch dated as of February 16,
    2001.                                                                                                  
|        | 10.22(21) |             |  | Change in Control Agreement between the Company
    and Alfred Rudolph dated as of November 19, 1999.                                                                                                                      
|        | 10.23(21) |             |  | Change in Control Agreement between the Company
    and Donald R. Sellers dated as of November 19, 1999.                                                                                                                   
|        | 10.24(23) |             |  | Change in Control Agreement between the Company
    and Richard A. Waldron dated as of April 30, 2001.                                                                                                                     
|        | 10.25(24) | *           |  | Amendment No. 1 to the Expanded and Amended
    Thymosin Alpha 1 License, Distributorship and Supply Agreement
    by and between the Company and Sigma-Tau Farmadeutiche Riunite
    S.p.A. dated as of December 19, 2001.
|        | 10.26(24) | *           |  | Common Stock Purchase Agreement between the
    Company and each of Defiante Farmaceutica Ld.A. and Aptafin
    S.p.A. dated as of January 21, 2003.                                                                       
|        | 21.1(23)  |             |  | Subsidiaries of Registrant.                                                                                                                                                                                                
|        | 23.1(24)  |             |  | Consent of Ernst & Young LLP, Independent
    Auditors.                                                                                                                                                                    
|        | 24.1(24)  |             |  | Powers of Attorney. See page 62.                                                                                                                                                                                           
|        | 99.1(24)  |             |  | Certification of Chief Executive Officer.                                                                                                                                                                                  
|        | 99.2(24)  |             |  | Certification of Chief Financial Officer.                                                                                                                                                                                  



---



| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Certain information in this exhibit has been
    omitted and filed separately with the Securities and Exchange
    Commission pursuant to a confidential treatment request under 17
    C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.



| |    |                                             
| | -- | --------------------------------------------
| | ** | Management compensatory plan or arrangement.



| |     |                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference from the Companys
    Registration Statement on Form S-l (No. 33-45446),
    declared effective by the Commission on March 17, 1992.
|
| | (2) | Incorporated by reference from the Companys
    Registration Statement on Form S-8 (No. 33-66832)
    filed with the Commission on August 3, 1993.            
|
| | (7) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1994.                                          
|
| | (8) | Incorporated by reference from the Companys
    Registration Statement on Form S-8 (No. 33-80911)
    filed with the Commission on December 28, 1995.         
|
| | (9) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1995.                                          



|     |                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 1996.
|    
|(11) | Incorporated by reference from the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 1996. 
|    
|(14) | Incorporated by reference from the Companys
    Current Report on Form 8-K filed on October 14, 1997.                  
|    
|(15) | Incorporated by reference from the Companys
    Current Report on Form 8-K filed on January 26, 1998.                  
|    
|(16) | Incorporated by reference from the Companys
    Form 8-K filed on April 20, 2000.                                      
|    
|(17) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1998.   
|    
|(18) | Incorporated by reference to the Companys
    Current Report on Form 8-K filed on July 23, 1998.                       

60



---



##### 





|     |                                                                                                                      
|---- | ---------------------------------------------------------------------------------------------------------------------
|(19) | Incorporated by reference from the Companys
    Quarterly Report on Form 10-Q on November 17, 1998.                 
|    
|(20) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1997.
|    
|(21) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 2000.
|    
|(22) | Incorporated by reference from the Companys
    Quarterly Report on Form 10-Q on May 15, 2001.                      
|    
|(23) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended December 31,
    2001.
|    
|(24) | Filed herewith.                                                                                                      

61



---



##### 



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.



| |                               
| | ------------------------------
| | SCICLONE PHARMACEUTICALS, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/DONALD R. SELLERS

| |                                          
| | -----------------------------------------
| | Donald R. Sellers                        
| | President and Chief Executive
    Officer

Date: March 26, 2003

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Donald R. Sellers and Richard A. Waldron, and each of them, his
attorneys-in-fact and agents, each with the power of
substitution and resubstitution, for him in any and all
capacities, to sign this Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, granting to said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary, to be done in
connection therewith, as fully as to all intents and purposes as
he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or either of them,
or their or his substitute or substitutes, may do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                                 |  |                                                                                 |  |               
|------------------------------------------------ |  | ------------------------------------------------------------------------------- |  | --------------
|Signature                                        |  | Title                                                                           |  | Date          
|                                                 |  |                                                                                 |  |               
|/s/ DONALD R. SELLERS(Donald R. Sellers)         |  | President and Chief Executive Officer, Director
    Principal Executive Officer |  | March 26, 2003
|                                                
|/s/ RICHARD A. WALDRON(Richard A. Waldron)       |  | Chief Financial Officer Principal Financial
    Officer                         |  | March 26, 2003
|                                                
|/s/ IVAN B. HUI(Ivan B. Hui)                     |  | Corporate Controller Principal Accounting Officer                               |  | March 26, 2003
|                                                
|/s/ JOHN D. BAXTER, M.D.(John D. Baxter, M.D.)   |  | Director                                                                        |  | March 26, 2003
|                                                
|/s/ EDWIN C. CADMAN, M.D.(Edwin C. Cadman, M.D.) |  | Director                                                                        |  | March 26, 2003
|/s/ JERE E. GOYAN, PH.D(Jere E. Goyan, Ph.D.)    |  | Chairman of Board of Directors                                                  |  | March 26, 2003
|                                                
|/s/ ROLF H. HENEL(Rolf H. Henel)                 |  | Director                                                                        |  | March 26, 2003
|                                                
|/s/ JON S. SAXE(Jon S. Saxe)                     |  | Director                                                                        |  | March 26, 2003
|                                                
|/s/ DEAN S. WOODMAN(Dean S. Woodman)             |  | Director                                                                        |  | March 26, 2003

62



---



##### 



CERTIFICATIONS

I, Donald R. Sellers, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this Annual Report on Form 10-K of SciClone
    Pharmaceuticals, Inc. (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 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;
|
| | 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;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                        
| | -----------------------
| | /s/DONALD R. SELLERS   
| |                        
| | Donald R. Sellers      
| | Chief Executive Officer

Date: March 26, 2003

63



---



##### 



CERTIFICATIONS

I, Richard A. Waldron, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this Annual Report on Form 10-K of SciClone
    Pharmaceuticals, Inc. (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 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;
|
| | 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;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                               
| | ----------------------------------------------
| | /s/ RICHARD A. WALDRON                        
| |                                               
| | Richard A. Waldron                            
| | Chief Financial Officer                       
| | (Principal Financial & Accounting
    Officer)

Date: March 26, 2003

64



---



##### 



SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

SCICLONE PHARMACEUTICALS INC.

|                             |                                                           |                                      |  |            |         |            |  |               |         |  |  |   |         |  |  |   |         | 
|---------------------------- | --------------------------------------------------------- | ------------------------------------ |  | ---------- | ------- | ---------- |  | ------------- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                             |                                                           | Balance at                           |  | Charged to |         |            |  |              
|                             |                                                           | Beginning of                         |  | Costs and  |         |            |  | Balance at   
|Description                  |                                                           | Period                               |  | Expenses   |         | Deductions |  | End of Period
|                             |                                                           |                                      |  |            |         |            |  |              
|Year Ended December 31, 2002 |                                                           |                                      |  |            |         |            |  |               |         |  |  |   |         |  |  |  
|                             | Reserves and allowances deducted from asset
    accounts: |                                      |  |            |         |            |  |               |         |  |  |   |         |  |  |   |        
|                             |                                                           | Allowance for uncollectable accounts |  | $          | 638,000 |            |  | $             |        |  |  | $ |        |  |  | $ | 638,000 | 
|                             |                                                           | Inventory reserve                    |  | $          | 400,000 |            |  | $             |        |  |  | $ | 210,000 |  |  | $ | 190,000 | 
|Year Ended December 31, 2001 |                                                           |                                      |  |            |         |            |  |               |         |  |  |   |         |  |  |  
|                             | Reserves and allowances deducted from asset
    accounts: |                                      |  |            |         |            |  |               |         |  |  |   |         |  |  |   |        
|                             |                                                           | Allowance for uncollectable accounts |  | $          | 394,000 |            |  | $             | 244,000 |  |  | $ |        |  |  | $ | 638,000 | 
|                             |                                                           | Inventory reserve                    |  | $          | 230,000 |            |  | $             | 170,000 |  |  | $ |        |  |  | $ | 400,000 | 
|Year Ended December 31, 2000 |                                                           |                                      |  |            |         |            |  |               |         |  |  |   |         |  |  |  
|                             | Reserves and allowances deducted from asset
    accounts: |                                      |  |            |         |            |  |               |         |  |  |   |         |  |  |   |        
|                             |                                                           | Allowance for uncollectable accounts |  | $          | 74,000  |            |  | $             | 320,000 |  |  | $ |        |  |  | $ | 394,000 | 
|                             |                                                           | Inventory reserve                    |  | $          | 81,000  |            |  | $             | 149,000 |  |  | $ |        |  |  | $ | 230,000 | 

65



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##### 



INDEX TO EXHIBITS

|        |            |         |  |                                                                                                                                                                                                                   
|------- | ---------- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |            |        
|Number  |            | Exhibit
|        |            |        
|        | 3(i).1(1)  |         |  | Restated Articles of Incorporation                                                                                                                                                                                
|        | 3(i).2(2)  |         |  | Certificate of Amendment of Restated Articles of
    Incorporation                                                                                                                                                
|        | 3(i).3(14) |         |  | Certificate of Determination                                                                                                                                                                                      
|        | 3(i).4(20) |         |  | Certificate of Determination Regarding the terms
    of the Series C Preferred Stock                                                                                                                              
|        | 3(ii).1(1) |         |  | Bylaws                                                                                                                                                                                                            
|        | 3(ii).2(2) |         |  | Certificate of Amendment of Bylaws                                                                                                                                                                                
|        | 4.1(14)    |         |  | Rights Agreement dated as of July 25, 1997
    between the Registrant and Chase Mellon Shareholder Services,
    L.L.C.                                                                                           
|        | 4.2(21)*   |         |  | 6% Convertible Note dated as of December 7,
    2000 by the Registrant in favor of UBS AG, London Branch                                                                                                          
|        | 4.3(21)*   |         |  | Option Agreement dated as of October 26,
    2000 by and between the Registrant and UBS AG, London Branch                                                                                                         
|        | 4.4(21)*   |         |  | Amendment No. 1 to Option Agreement dated as
    of December 19, 2000 by and between the Registrant and UBS
    AG, London Branch                                                                                 
|        | 4.5(22)*   |         |  | 6% Convertible Note dated as of March 21,
    2001 by the Company in favor of UBS AG, London Branch                                                                                                               
|        | 4.6(22)*   |         |  | Option Agreement dated as of February 16,
    2001 by and between the Company and UBS AG, London Branch                                                                                                           
|        | 4.7(22)*   |         |  | Amendment No. 1 to Option Agreement dated as
    of March 21, 2001 by and between the Company and UBS AG,
    London Branch                                                                                       
|        | 10.1(2)**  |         |  | Registrants 1991 Stock Plan, together with
    forms of agreements thereunder                                                                                                                                    
|        | 10.2(1)**  |         |  | Registrants 1992 Stock Plan, together with
    forms of agreements thereunder                                                                                                                                    
|        | 10.3(1)    |         |  | Lease, dated September 10, 1991, between the
    Registrant and Spieker-Singleton68 concerning property, located
    at 901 Mariners Island Boulevard, San Mateo, California, as
    amended (the Spieker Lease)
|        | 10.4(7)    |         |  | Amendment No. 4 to Spieker Lease, dated
    October 4, 1994                                                                                                                                                       
|        | 10.5(9)    |         |  | Amendment No. 7 to Spieker Lease, dated
    November 14, 1995                                                                                                                                                     
|        | 10.6(8)**  |         |  | Registrants 1995 Equity Incentive Plan,
    together with forms of agreement thereunder                                                                                                                          
|        | 10.7(8)**  |         |  | Registrants 1995 Nonemployee Director Stock
    Option Plan, together with forms of agreement thereunder                                                                                                         
|        | 10.8(24)*  | *       |  | Registrants 1996 Employee Stock Purchase
    Plan, together with forms of agreement thereunder                                                                                                                   
|        | 10.9(21)   |         |  | Second Amendment of Employment Agreement dated
    December, 2000 between the Registrant and Donald R. Sellers                                                                                                    
|        | 10.10(10)  |         |  | License Agreement effective April 19, 1996
    between the Registrant and the National Institute of Health
    Office of Technology Transfer                                                                      
|        | 10.11(11)  |         |  | Amendment No. 8 to Spieker Lease, dated
    August 26, 1996                                                                                                                                                       
|        | 10.12(21)  |         |  | Amendment No. 14 to Spieker Lease dated
    November 21, 2000                                                                                                                                                     
|        | 10.13(15)  |         |  | Alpha Rights Acquisition Agreement by and between
    the Registrant and Alpha 1 Biomedicals, Inc., dated
    December 17, 1997                                                                                   
|        | 10.14(16)  | *       |  | Expanded and Amended Alpha 1 License,
    Distributorship and Supply Agreement by and between the Company
    and Sigma-Tau Industrie Farmadeutiche Riunite S.p.A. dated as of
    March 3, 2000                  



---



##### 



|        |           |         |  |                                                                                                                                                                                                                           
|------- | --------- | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |        
|Number  |           | Exhibit
|        |           |        
|        | 10.15(17) |         |  | Preferred Stock Investment Agreement by and among
    the Company, Halifax Fund, L.P., Themis Partners L.P. and
    Heracles Fund dated as of March 27, 1998                                                              
|        | 10.16(17) |         |  | Registration Rights Agreement by and among
    Registrant, Halifax Fund, L.P., Themis Partners L.P. and
    Heracles Fund dated as of April 1, 1998                                                                       
|        | 10.17(18) |         |  | Warrant to purchase up to 200,000 shares of
    Common Stock of the Company issued to Cheyenne LLC dated as of
    June 30, 1998                                                                                          
|        | 10.18(18) |         |  | Registration Rights Agreement by and between the
    Company and Cheyenne LLC dated as of June 30, 1998                                                                                                                   
|        | 10.19(19) |         |  | Acquisition Agreement between the Company and
    Sclavo S.p.A. dated April 20,1998                                                                                                                                       
|        | 10.20(19) |         |  | First Amendment to Acquisition Agreement between
    the Company and Sclavo S.p.A., dated April 20, 1998                                                                                                                  
|        | 10.21(22) | *       |  | Registration Rights Agreement by and between the
    Company and UBS AG, London Branch dated as of February 16,
    2001                                                                                                  
|        | 10.22(21) |         |  | Change in Control Agreement between the Company
    and Alfred Rudolph dated as of November 19, 1999                                                                                                                      
|        | 10.23(21) |         |  | Change in Control Agreement between the Company
    and Donald R. Sellers dated as of November 19, 1999                                                                                                                   
|        | 10.24(23) |         |  | Change in Control Agreement between the Company
    and Richard A. Waldron dated as of April 30, 2001                                                                                                                     
|        | 10.25(24) | *       |  | Amendment No. 1 to the Expanded and Amended
    Thymosin Alpha 1 License, Distributorship and Supply Agreement
    by and between the Company and Sigma-Tau Farmadeutiche Riunite
    S.p.A. dated as of December 19, 2001
|        | 10.26(24) | *       |  | Common Stock Purchase Agreement between the
    Company and each of Defiante Farmaceutica Ld.A. and Aptafin
    S.p.A. dated as of January 21, 2003                                                                       
|        | 21.1(23)  |         |  | Subsidiaries of Registrant                                                                                                                                                                                                
|        | 23.1(24)  |         |  | Consent of Ernst & Young LLP, Independent
    Auditors                                                                                                                                                                    
|        | 24.1(24)  |         |  | Powers of Attorney                                                                                                                                                                                                        
|        | 99.1(24)  |         |  | Certification of Chief Executive Officer                                                                                                                                                                                  
|        | 99.2(24)  |         |  | Certification of Chief Financial Officer                                                                                                                                                                                  



---



| |   |                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Certain information in this exhibit has been
    omitted and filed separately with the Securities and Exchange
    Commission pursuant to a confidential treatment request under 17
    C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.



| |    |                                             
| | -- | --------------------------------------------
| | ** | Management compensatory plan or arrangement.



| |     |                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference from the Companys
    Registration Statement on Form S-l (No. 33-45446),
    declared effective by the Commission on March 17, 1992.
|
| | (2) | Incorporated by reference from the Companys
    Registration Statement on Form S-8 (No. 33-66832)
    filed with the Commission on August 3, 1993.            
|
| | (7) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1994.                                          



---



##### 





| |     |                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | (8) | Incorporated by reference from the Companys
    Registration Statement on Form S-8 (No. 33-80911)
    filed with the Commission on December 28, 1995.
|
| | (9) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1995.                                 



|     |                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 1996.
|    
|(11) | Incorporated by reference from the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 1996. 
|    
|(14) | Incorporated by reference from the Companys
    Current Report on Form 8-K filed on October 14, 1997.                  
|    
|(15) | Incorporated by reference from the Companys
    Current Report on Form 8-K filed on January 26, 1998.                  
|    
|(16) | Incorporated by reference from the Companys
    Form 8-K filed on April 20, 2000.                                      
|    
|(17) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1998.   
|    
|(18) | Incorporated by reference to the Companys
    Current Report on Form 8-K filed on July 23, 1998.                       
|    
|(19) | Incorporated by reference from the Companys
    Quarterly Report on Form 10-Q on November 17, 1998.                    
|    
|(20) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1997.   
|    
|(21) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 2000.   
|    
|(22) | Incorporated by reference from the Companys
    Quarterly Report on Form 10-Q on May 15, 2001.                         
|    
|(23) | Incorporated by reference from the Companys
    Annual Report on Form 10-K for the year ended December 31,
    2001.   
|    
|(24) | Filed herewith.