UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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

For the fiscal year ended December 31, 2004

Commission file number    0-19825



SciClone Pharmaceuticals, Inc.



|Delaware                                                       | 94-3116852                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

901 Mariner's Island Boulevard
San Mateo, California      94404

(650) 358-3456

Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:Common Stock, $0.001 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  
x    No

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

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

The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $221,926,033 as of June 30, 2004, 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 9, 2005, there were 44,696,701 shares of the
Registrant's Common Stock outstanding.

Part III incorporates by reference from the definitive proxy
statement for the Registrant's 2005 Annual Meeting of Stockholders 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.




SciClone Pharmaceuticals, Inc.

                        2004 ANNUAL REPORT ON FORM 10-K
                               TABLE OF CONTENTS



|Part I.    |                                                                                                | Page
|---------- | ---------------------------------------------------------------------------------------------- | ----
|Item 1.    | Description of Business                                                                        | **  
|Item 2.    | Properties                                                                                     | **  
|Item 3.    | Legal Proceedings                                                                              | **  
|Item 4.    | Submission of Matters to a Vote of Security Holders                                            | **  
|Part II.   |                                                                                                |     
|Item 5.    | Market for Registrant's Common Stock and Related Stockholder Matters                           | **  
|Item 6.    | Selected Financial Data                                                                        | **  
|Item 7.    | Management's Discussion and Analysis of Financial Condition and Results of Operations          | **  
|Item 7a.   | Quantitative and Qualitative Disclosures About Market Risks                                    | **  
|Item 8.    | Financial Statements and Supplementary Data                                                    | **  
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           | **  
|Item 9A.   | Controls and Procedures                                                                        | **  
|Item 9B.   | Other Information                                                                              | **  
|Part III.  |                                                                                                |     
|Item 10.   | Directors and Executive Officers                                                               | **  
|Item 11.   | Executive Compensation                                                                         | **  
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | **  
|Item 13.   | Certain Relationships and Related Transactions                                                 | **  
|Item 14.   | Principal Accounting Fees and Services                                                         | **  
|Part IV.   |                                                                                                |     
|Item 15.   | Exhibits, Financial Statement Schedules                                                        | **  
|Signatures |                                                                                                | **  

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As used in this Annual Report, the terms "we,"
"us," "our," the "Company" and "SciClone" mean SciClone
Pharmaceuticals, Inc. and its subsidiaries (unless the context indicates a
different meaning).

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 business, industry, management's beliefs and
certain assumptions made by us. Words such as "anticipate," "expect," "intend,"
"plan," "believe" or similar expressions are intended to identify
forward-looking statements including those statements we make regarding our future
financial results; anticipated product sales and net sales and levels; the
timing and outcome of clinical trials and the timing of reporting of clinical
trial results; the timing of enrollment, treatment and follow-up for our
clinical trials; the prospects for and the preparation status of our Japanese
New Drug Application; the preparation and timing of our potential New Drug
Applications in the United States; projected increases in the number of
hepatitis C patients seeking treatment and re-treatment; ZADAXIN's ability to
complement existing therapies; prospects for ZADAXIN and our plans for its
enhancement and commercialization; future marketing efforts and their effect on
the Company's value; our ability to expand our product pipeline; partnering
prospects for ZADAXIN; research and development and other expense levels; future
inventory levels; levels of gross margin and cost of product sales 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. is a biopharmaceutical
company engaged in the development and commercialization of therapeutics to
treat life-threatening diseases. Our lead product ZADAXIN® is
currently being evaluated in two phase 3 hepatitis C virus (hepatitis C or HCV)
clinical trials in the United States and we expect to report data from both
trials by the early part of 2006. ZADAXIN is also being evaluated in other
late-stage clinical trials for the treatment of hepatitis B virus (hepatitis B or
HBV) and certain cancers. Our other proprietary drug development candidate is
SCV-07, which is currently in pre-clinical studies for the treatment of viral
and other infectious diseases. We expect to file an Investigational New Drug
(IND) application for SCV-07 in the first half of 2005.

ZADAXIN currently is approved for sale in over 30 countries
internationally, primarily in Asia, the Middle East and Latin America, and is
marketed through our wholly-owned subsidiary SciClone Pharmaceuticals
International Ltd. (SPIL). In 2004, revenues from the sale of ZADAXIN totaled
$22,765,000, of which 91% were to China.

SciClone Pharmaceuticals, Inc. was organized in 1990 as a California
corporation and reincorporated in Delaware in 2003. Our corporate headquarters
are located in San Mateo, California. For information about our revenues from
external customers, measures of our profit and loss, our total assets and other
financial matters, you should read our Consolidated Financial Statements
provided in Part II, Item 8 of this Form 10-K.

STRATEGY

Our goal is to develop and commercialize therapeutics
targeting indications that represent significant unmet market needs. To meet
this objective, our strategy focuses on developing and commercializing our lead
product ZADAXIN, expanding our product pipeline, and selectively building our
international sales capabilities. Our specific near-term strategic objectives
include the following:

- Secure Regulatory Approvals for ZADAXIN. We expect
to report data from our two phase 3 HCV clinical trials by the early part of
2006 and, if the data are favorable, submit a New Drug Application (NDA) to the
Food and Drug Administration (FDA) by the end of 2006. We anticipate that our
European marketing and development partner Sigma-Tau would use these data for an
NDA submission to the European Medicines Agency (EMEA). In addition to
addressing and gaining access to major pharmaceutical markets, we believe that
an approval in the United States or Europe would increase ZADAXIN sales in
international markets where the drug is currently approved and facilitate
approvals in additional international markets.
- Achieve Broad Penetration of the Hepatitis C Market.
We estimate the worldwide market for HCV therapeutics will grow from
approximately $3 billion in 2004 to over $8 billion in 2012. To ensure broad
market penetration, we are developing a marketing strategy that could include
partnering with other pharmaceutical companies.
- Develop Product Pipeline. We intend to expand our product pipeline by developing SCV-07 and a pegylated form
of ZADAXIN.  We expect to file an IND application for SCV-07 in the first half of 2005.  In addition, we are
pursuing opportunities to in-license or acquire other product candidates.
- Selectively Build International Sales Capabilities.
Currently approved for sale in over 30 countries internationally, ZADAXIN
generated sales revenues of $22,765,000 in 2004, of which 91% were to China. As
one of the few emerging biopharmaceutical companies with successful sales
operations, we believe we can leverage our expertise by adding new products to
increase international sales. With our existing team of approximately 90 medical
representatives in China who have strong relationships with leading physicians
in the country, we believe we could effectively and efficiently market other
products, in addition to ZADAXIN, without incurring a significant incremental
cost.

SciClone's Lead Product ZADAXIN

ZADAXIN is a pure synthetic preparation of thymosin alpha
1, generically referred to as thymalfasin, a natural substance that circulates
in the body and is instrumental in the immune response to viral infections and
certain cancers. After the administration of a single, standard 1.6 mg
subcutaneous dosage of ZADAXIN, the circulating levels of thymosin alpha 1 are
temporarily increased 50 to 100 times its normal level in the body. Published
scientific and clinical studies have shown that ZADAXIN helps stimulate and
direct the body's immune response to eradicate HCV, HBV, other infectious
diseases and certain cancers. ZADAXIN has not produced any reported significant
side effects or toxicities.

ZADAXIN elicits a variety of immune system responses against
viruses and cancer cells. One such response is an increase in white blood cell
production and their differentiation into CD-4 helper-cells, specifically
towards differentiation of T helper 1 cells (Th1 cells secrete cytokines such as
interleukin-2 (IL-2) and gamma interferon). Studies have shown that a
Th1-directed immune response is fundamental to the eradication of certain viral
diseases, such as HCV and HBV as well as certain cancers. Moreover, as ZADAXIN
increases Th1 cells, it also decreases production of Th2 cytokines, such as
IL-4, which are associated with persistence of viral infection.

Similarly, ZADAXIN helps increase the production of CD-8 and
NK, or natural killer, cells that are able to directly attack and kill
virally-infected and certain cancer cells. In addition, ZADAXIN has recently been shown
to stimulate the "innate" immune system through effects on Toll-like receptors
(TLRs). Both of these activities are important in mounting an effective immune
response to an HCV infection. Moreover, ZADAXIN reduces T-cell apoptosis, or
programmed cell death, which allows these beneficial cells to circulate for a
longer period of time. ZADAXIN also exhibits direct antiviral effects by
enhancing the expression of surface-marker proteins (antigens) on
virally-infected and certain cancer cells. These surface markers help the body's immune
system recognize and target both virally infected and cancer cells for
eradication.

Hepatitis C: The Need for Improved Therapeutic
Options

HCV is one of the world's most prevalent blood borne
chronic infectious diseases and causes inflammation of the liver, which can
eventually lead to fibrosis, cirrhosis and hepatocellular carcinoma or liver
cancer. The World Health Organization estimates that 170 million people
worldwide are infected with HCV. In the United States, 2.7 million people are
chronically infected with HCV, according to the Centers for Disease Control and
Prevention.

We estimate that the worldwide market for HCV therapies could
grow from approximately $3 billion in 2004 to over $8 billion in 2012. This
projection is based on an expected significant increase in the number of
patients seeking treatment for the first time or re-treatment after failing
therapy. Most carriers contracted HCV before blood screening for the virus was
developed in 1990. Once a person is infected with HCV, 20 years or more can pass
before life-threatening complications from liver damage arise. Due to these
factors, the number of individuals diagnosed with HCV and seeking treatment for
the first time is expected to increase and reach a peak in 2010. Since
approximately 50% of patients fail current HCV therapies, the number of patients
seeking re-treatment is also expected to increase.

HCV is a systemic disease localized in the liver, and for the
majority of patients, can lead to serious complications, including cirrhosis of
the liver, liver failure and hepatocellular carcinoma or liver cancer. Most
people are unaware that they are infected with the disease because early
symptoms, if present at all, are typically mild and nonspecific. The disease
progresses slowly, and consequently it can be up to 20 years after infection
before a patient is diagnosed with HCV, at which point serious deterioration of
liver function is already typically observed. The American Liver Foundation
estimates that the number of deaths in the United States caused by HCV is
currently between 8,000 and 10,000 annually and may increase to 30,000 annually
in the next ten to twenty years.

Although there is currently no vaccine available to prevent
HCV, interferon alpha (both in its standard and pegylated formulations) and
ribavirin are approved for the treatment of the disease. Interferon alpha can be
used alone as a monotherapy or in combination therapy with ribavirin, but
studies show that ribavirin is only effective in combination with interferon
alpha. Many patients cannot tolerate the serious side effects and toxicities
associated with either or both interferon alpha or ribavirin and often require
dose reductions or even early termination of therapy. The current standard of
care typically consists of a 48-week treatment of pegylated interferon alpha,
most often with ribavirin, followed by a 24-week follow-up observation to
determine sustained virologic response (SVR). SVR is defined as the absence of
HCV RNA from the bloodstream, measured by qualitative tests such as polymerase
chain reaction (PCR) 24 weeks after the completion of 48 weeks of therapy.
Patients who achieve an SVR are typically considered to be cured of HCV.

A patient's response to therapy varies based on the viral
load, genotype (strain) of the virus, presence of cirrhosis of the liver and
ethnicity. There are at least 6 different major genotypes present worldwide,
with genotype 1 being the most common in the major pharmaceutical markets of the
United States, Europe and Japan. Approximately 75% of HCV carriers in the United
States are infected with the genotype 1 strain of the virus, according to the
National Institutes of Health. Unfortunately, genotype 1 patients are the least
likely to respond to current therapy. For naïve patients (those who have
never received therapy), only 41% of patients infected with genotype 1 will
achieve an SVR after therapy with pegylated interferon alpha and ribavirin. This
compares to 75% of the much fewer patients with genotypes 2 through 6, and 52%
of all patients. However, response rates according to genotype vary widely
between ethnic groups. For example, among Hispanic patients the response rate
for genotype 2 patients is as low as that of the genotype 1 patients. The
following chart comprised of information obtained from package insert
information for pegylated interferon alpha and ribavirin, summarizes the SVR
rates by genotype:



|Naïve Patients (n=511) | % of Patients | Response Rate
(SVR)
|---------------------- | ------------- | -------------------
|Genotype 1             | 75%           | 41%                
|Genotypes 2-6          | 25%           | 75%                
|All Genotypes          | 100%          | 52%                

Source: Package insert information, pegylated
interferon and ribavirin

Once a naïve patient fails to respond to therapy, he or
she is commonly referred to as a non-responder and is even less likely to
respond to re-treatment with current therapy. A non-responder patient's response
rate to re-treatment varies based on the viral load, genotype, type and length
of prior therapy (interferon alpha/pegylated interferon alpha monotherapy or
interferon alpha/pegylated interferon alpha in combination therapy with
ribavirin), presence of cirrhosis of the liver and ethnicity. Given the large
proportion of genotype 1 patients and their relatively low response to therapy,
the vast majority of non-responders consist of genotype 1 patients.

Re-treatment of non-responders with current therapy has a low
rate of success. Among the factors affecting response rates are the patients'
ability to tolerate ribavirin or endure the full dose of pegylated interferon
alpha. For example, ribavirin intolerant patients re-treated with pegylated
interferon alpha are unlikely to achieve an SVR. Lowering the dosage of
pegylated interferon alpha lowers the chances of an SVR. In treatment with
pegylated interferon alpha and ribavirin, 9% of patients who can tolerate only a
low dose of pegylated interferon alpha, defined as less than 80% of the
recommended dose, achieve an SVR, compared to 17% of patients able to tolerate a
full dose, 80% to 100% of the recommended dose of pegylated interferon
alpha.



|Genotype 1 Non-Responders  (to previous therapy of interferon alpha with or without ribavirin) | Response Rate
(SVR)
|---------------------------------------------------------------------------------------------- | -------------------
|All (n=939)                                                                                    | 14%                
|Re-treated with pegylated interferon alpha
without ribavirin (n=70)                            | 0%                 
|Re-treated with low dose (<80%) pegylated
interferon alpha and with ribavirin (n=222)          | 9%                 
|Re-treated with full dose (>80%) pegylated
interferon alpha and with ribavirin (n=647)         | 17%                

Source: Shiffman, Mitchell L., HALT-C trial data
presented at the
  American Association for the Study of Liver Disease meeting,
October 2004.

Given the large and growing number of patients who fail
current therapy, as well as those who are intolerant to ribavirin or the full
dose of pegylated interferon alpha, a serious need exists for improved treatment
options for non-responder HCV patients. This need is particularly acute for the
largest group of patients, those with genotype 1.

ZADAXIN as a Novel Therapy for Hepatitis C

We are currently evaluating ZADAXIN in combination
with pegylated interferon alpha in HCV non-responder patients in two phase 3
trials in the United States. The two trials are multi-center, double-blinded,
randomized and placebo-controlled. Both trials have been fully enrolled and we
expect that the latest enrolled patients will have completed 48 weeks of
treatment and 24 weeks of follow-up observation by the end of 2005. We
anticipate that data from both trials will be available by the early part of
2006, and if the data are favorable, we expect to submit an NDA to the FDA by
the end of 2006.

If ZADAXIN in combination with pegylated interferon alpha is
approved by the FDA, we believe that ZADAXIN could be beneficial in combination
with the current standard of care (pegylated interferon alpha with or without
ribavirin) as a first line of therapy for all HCV patients, particularly
genotype 1 patients who are less likely to respond to current therapy.
Additionally, if the data are favorable, our European marketing and development
partner Sigma-Tau intends to use these data to file an NDA with the EMEA for
regulatory approval in Europe.

Over 500 patients have been enrolled in each trial. The first
trial enrolled HCV non-responder patients without cirrhosis of the liver and the
second trial enrolled HCV non-responder patients with early cirrhosis. The
principle investigators for these trials are Dr. Adrian Di Bisceglie, Chief of
Hepatology at the Saint Louis University and Medical Director of the American
Liver Foundation, and Dr. Kenneth Sherman, Associate Professor of Medicine and
Director of Clinical Trials at the Liver Unit of the University of Cincinnati
Medical Center.

Patients in both trials are receiving a 48-week course of
therapy of either ZADAXIN (1.6 mg, twice a week) and pegylated interferon alpha
(180 mcg, once a week) or placebo and pegylated interferon alpha followed by a
24-week observation period. These treatment and follow-up periods are designed
to be consistent with the FDA standard for demonstrating sustained response to
HCV therapy. The primary endpoints of each trial are the achievement of SVR
measured at week 72 by PCR assay (24 weeks after completing 48 weeks of
therapy), and an improvement in the liver histological activity index assessed
by liver biopsy at week 72. The secondary endpoints are normalization of ALT (an
enzyme that indicates liver damage when present in elevated levels in the liver)
measured at week 72, and the end of therapy response rate (ETR) measured at week
48.

Previously published data indicate that ZADAXIN in
combination with pegylated interferon alpha has the potential to benefit HCV
non-responder patients. In a 12-week dose-ranging study, a group of 31
non-responder patients, all with a high viral load of genotype 1, received 3
different ZADAXIN doses (0.8 mg, 1.6 mg and 3.2 mg, twice a week) in combination
with the standard pegylated interferon alpha dose (180 mcg, once a week). The
data showed an early virologic response (EVR; defined as a 2 log or greater
reduction in HCV RNA measured after 12 weeks of therapy) for patients in each
dosing regimen, ranging from 20 to 36 percent across the groups. A patient who
demonstrates an EVR may or may not achieve a SVR, and therefore EVR may not be
predictive of a successful outcome, especially for a non-responder patient.
However, without an EVR, a patient is highly unlikely to achieve an SVR.

ZADAXIN as Part of a Hepatitis C Triple Therapy
Combination

Given the need for better HCV therapies, particularly
for non-responder patients or those with the difficult-to-treat genotype 1, we
are evaluating ZADAXIN's use as part of a triple therapy combination with
pegylated interferon alpha and ribavirin. Concurrent with our U.S. phase 3 HCV
clinical trials targeting regulatory approval, Sigma-Tau, which has exclusive
marketing rights for ZADAXIN in most Western European countries, is conducting a
phase 3 triple therapy clinical trial in Europe with a planned enrollment of 550
genotype 1 non-responder patients. Sigma-Tau began enrollment in December 2004
and data from this trial may be available by the end of 2007.

This triple therapy phase 3 clinical trial is multi-center,
double-blinded, randomized and placebo-controlled and Sigma-Tau plans to conduct
the trial in 40 sites throughout Europe. Professor Mario Rizzetto, Professor of
Gastroenterology at the University of Turin in Italy, is the lead investigator
for this clinical trial. Patients will be randomized to receive either ZADAXIN
(1.6 mg, twice a week) or a placebo (twice a week) and all patients will receive
pegylated interferon alpha (180 mcg, once a week) and standard dose of ribavirin
(1,000 to 1,200 mg, daily, according to body weight). After completing 48 weeks
of treatment, patients will be monitored for a 24-week observation period. The
primary endpoint is SVR measured at week 72 at the end of the 24-week
observation period. The secondary endpoints are normalization of ALT measured at
the end of weeks 48 and 72, absence of HCV RNA measured at week 48, and an
improvement in the liver biopsy.

The design of Sigma-Tau's phase 3 triple therapy clinical
trial is supported by encouraging results achieved from a small, single-arm
triple therapy pilot trial conducted by our licensee in Mexico. Final endpoint
results from this 25-patient trial were reported at the annual meeting of the
American Association for the Study of Liver Diseases (AASLD) in October 2004 and
showed that 19% of genotype 1 non-responder patients achieved an SVR.
All of these patients were non-responders to previous therapy of interferon alpha with ribavirin.
These data
compare favorably to the 9% SVR reported from a separate, unrelated trial that
treated genotype 1 non-responder patients with pegylated interferon and a low
dose of ribavirin but without ZADAXIN. Although it is difficult to draw
conclusions from two separate, unrelated trials, we believe the results achieved
from this pilot triple therapy trial are encouraging.

Hepatitis B: Worldwide Market and Current Therapy
Options

The World Health Organization estimates that more
than 350 million people are chronically infected with the hepatitis B virus
worldwide. HBV is most prevalent in sub-Saharan Africa, Asia and the Pacific. We
estimate that the worldwide market for hepatitis B therapeutics was
approximately $480 million in 2004.

Currently, interferon alpha (both in its standard and
pegylated formulations), lamivudine and adefovir dipivoxil are approved for the
treatment of HBV. Patients are considered to be successfully cured of HBV if
they achieve a sustained seroconversion, a process that is indicated by the
disappearance of the marker called hepatitis B e-antigen (HBeAg) and the
detection of the antibody to the HBeAg. Interferon alpha is the most effective
therapy in eliminating the virus and producing a sustained seroconversion.
Lamivudine and adefovir dipivoxil are effective in suppressing the virus, but
studies show that prolonged use of lamivudine can cause serious viral mutations
that eventually lead to drug resistance. After 5 years of lamivudine therapy,
69% of patients have lamivudine-resistant viral mutations.

ZADAXIN for the Treatment of Hepatitis B

We completed a phase 3 clinical trial in Japan using
ZADAXIN as a monotherapy to treat patients chronically infected with HBV. The
study showed that 20% of patients treated with ZADAXIN for 6 months achieved a
sustained seroconversion and no significant side effects were noted. We are
pleased by these results, which will be published in a peer-reviewed,
MEDLINE-indexed medical journal in the spring of 2005.
In addition, as part of a meta-analysis, earlier ZADAXIN monotherapy HBV studies showed seroconversion rates of 25% to 41%.

These results compare favorably to the data achieved from
separate studies using other HBV therapies. Although 12 months of pegylated
interferon alpha therapy is successful in inducing a sustained seroconversion in
32% of HBV patients, this therapy also causes severe adverse side-effects for
many patients. Lamivudine and adefovir dipivoxil are effective in suppressing
the virus but are not considered a cure for most patients. These therapies
produce a seroconversion in 16% and 12% of patients, respectively. Additionally,
studies show that prolonged use of lamivudine can cause serious viral mutations
and eventually lead to drug resistance.

The following chart summarizes sustained seroconversion rates
for various therapies, which include the results for ZADAXIN from our Japanese
phase 3 clinical trial:



|HBV Therapy                         | Sustained seroconversion
|----------------------------------- | ------------------------
|Pegylated interferon alpha
(n=271)1 | 32%                     
|ZADAXIN (n=316)2                    | 20%                     
|Lamivudine (n=140)3                 | 16%                     
|Adefovir dipivoxil
(n=171)4         | 12%                     



2

3

4

Despite the favorable data from our phase
3 clinical trial, we may be unable to file a Japanese New Drug Application
(JNDA) for ZADAXIN as a therapy for HBV. A JNDA filing requires complete
documentation from the phase 1 and phase 2 as well as the phase 3 clinical
trials. The phase 1 and phase 2 clinical trials were conducted and sponsored by
Schering Plough KK (SPKK), a pharmaceutical company in Japan under a development
agreement with SciClone. As we began to prepare the submission necessary for the
JNDA, we discovered that we had not received all of the documentation necessary
for the submission. After several months of soliciting from SPKK the data and
documentation necessary to proceed with the filing in Japan, and after receiving
some additional documentation, we have determined that certain information and
documentation from earlier stages of the development process has still not been
delivered. Furthermore, SciClone is concerned that some of the necessary
documentation may not be available at all, and that certain administrative
formalities may not have been observed in the drug development process. If the
necessary documentation can be obtained or reproduced in the near future, we
intend to proceed with the JNDA. We are reviewing our legal rights and remedies
with respect to third parties. We continue to seek a resolution of this matter with
SPKK.

We cannot assure that a JNDA can be filed, or what the
outcome of any legal action by us might be, but we intend to assert our rights
vigorously.

Currently, we are enrolling up to 120 patients in a clinical
trial in Taiwan using ZADAXIN in combination with lamivudine for the treatment
of HBV. Previously reported data from small pilot clinical trials suggest that
ZADAXIN combination therapy could increase the response rates for patients
taking lamivudine or interferon alone. We expect to report results from this
18-month Taiwanese clinical trial in late 2006.

In 1994, Alpha 1 Biomedicals Inc., from which we acquired
certain rights to thymosin alpha 1, completed their 99 patient U.S. phase 3
clinical trial of thymosin alpha 1 as a monotherapy for HBV. After six months of
therapy and six months of follow up observation, 25% of patients treated with
thymosin alpha 1 achieved the endpoints of the study, negative HBV DNA and loss
of the hepatitis B e-antigen, compared to 13% of patients in the placebo control
arm. Although nearly twice the number of patients treated with thymosin alpha 1
achieved the endpoints versus the placebo control arm, the small number of
patients did not provide enough power to achieve statistical significance.
Consequently, Alpha 1 Biomedicals Inc. never submitted these data to the FDA.

Hepatitis Advisory Board

Our Hepatitis Advisory Board provides advice for the
research and clinical development of ZADAXIN. The Board includes highly
respected thought leaders in the field of hepatology and basic science. As of
December 31, 2004, the members of our Hepatitis Advisory Board included the
following:



|Name                    | Institution                                                                                              
|----------------------- | ---------------------------------------------------------------------------------------------------------
|Jules Dienstag, M.D.    | Harvard University, Massachusetts General Hospital                                                       
|Michael Karin, Ph.D.    | University of California, San Diego                                                                      
|Willis Maddrey, M.D.    | University of Texas Southwestern Medical Center at
Dallas                                                
|John McHutchinson, M.D. | Duke University Medical Center                                                                           
|Eugene Schiff, M.D.     | University of Miami School of
Medicine                                                                   
|Teresa Wright, M.D.     | University of California, San Francisco, Veterans Administration Medical Center, GI
Center, San Francisco

ZADAXIN as a Therapy for Certain Cancers

In addition to ZADAXIN's potential use for the
treatment of infectious diseases, we believe that ZADAXIN's role in activating
and directing the body's immune response may also be valuable for the treatment
of certain cancers. To that end, there are currently two ongoing trials
evaluating ZADAXIN in combination with currently approved therapies for the
treatment of malignant melanoma and hepatocellular carcinoma, or liver
cancer.

The rate of new cases of malignant melanoma has been steadily
increasing since the 1970s. The American Cancer Society estimates that in 2005
there will be 59,580 new cases and about 7,770 estimated deaths from malignant
melanoma in the United States alone. If diagnosed early, the cure rate is high
for malignant melanoma, however, if the melanoma has spread beyond the skin, the
survival time is generally less than five months. Currently interferon alpha and
the chemotherapy agent dacarbazine (DTIC) are approved to treat malignant
melanoma.

Our partner in Europe, Sigma-Tau, is currently enrolling a
targeted 320 stage 4 (metastatic) malignant melanoma patients in a phase 2
clinical trial in over 60 sites throughout Europe. Sigma-Tau estimates that
enrollment should be completed by mid-2005.

This trial, funded and conducted by Sigma-Tau, is designed to
demonstrate a clinical benefit from using ZADAXIN in combination with standard
chemotherapy and low-dose interferon alpha. All patients in this four-arm study
are receiving DTIC chemotherapy. In addition to receiving DTIC, each patient is
randomly assigned to receive ZADAXIN, interferon alpha, or ZADAXIN (in specific
doses, either 1.6 mg or 3.2 mg) plus interferon alpha. Patients are receiving
six cycles of therapy for 6 months 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.

Additionally, we are conducting two phase 2 proof-of-concept
trials in the U.S. to evaluate ZADAXIN's effectiveness in the treatment of
hepatocellular carcinoma. We intend to gather data from these trials to report
by the end of 2005. The first liver cancer pilot trial is evaluating ZADAXIN
with chemoembolization, or TACE. The second trial, using radiofrequency
ablation, or RFA, with ZADAXIN has enrolled very slowly due to the fact that the
type of patient that had previously been considered a potential candidate for
RFA, and would therefore qualify for our protocol, is now being placed on the
liver transplantation list. At the time this trial began, RFA appeared to be a
promising protocol treatment, but this has not proven to be true. Consequently,
we will continue the first trial using TACE plus ZADAXIN, and we may incorporate
the data from the RFA trial into that of the TACE protocol for final data
analysis.

SCV-07

Our other proprietary drug development candidate SCV-07
is currently in the pre-clinical stages of development for the treatment of
viral and other infectious diseases. Our objective is to identify a target
indication and file an IND application for SCV-07 in the first half of 2005.

SCV-07 is a synthetic dipeptide that has demonstrated
immunomodulatory activity by increasing T-cell differentiation and function,
biological processes that are necessary for the body to fight off infection. We
acquired exclusive worldwide rights, outside of Russia, to SCV-07 from Verta,
Ltd., a biotechnology company located in St. Petersburg, Russia.

In September 2002, we reported final results from a phase 2
clinical study conducted by Verta in Russia of SCV-07 in tuberculosis at the
Interscience Conference on Antimicrobial Agents and Chemotherapy (ICAAC). After
3 months, 80% (35/44) of tuberculosis patients treated with a five-day regimen
of SCV-07 therapy in combination with anti-tuberculosis chemotherapy were no
longer contagious, as measured by negative sputum cultures, compared to 37%
(10/27) of patients whose treatment did not include SCV-07.

Pegylated ZADAXIN

In May 2004, we entered into a collaborative agreement
with Nektar Therapeutics to develop a pegylated formulation of ZADAXIN. Nektar
will apply its Advanced PEGylation technology to ZADAXIN with the objective of
improving the therapeutic use (less frequent dosing) and potential efficacy
(through a higher concentration level in the body for a longer period of time).
If the formulation is successful, pegylated ZADAXIN could lead to improved
patient compliance due to less frequent dosing and would allow the drug to
remain in the body at a higher concentration level for a longer period of time.
In addition to potentially enhancing the use of ZADAXIN in the treatment of
hepatitis C and hepatitis B, we believe that a pegylated formulation also could
broaden the potential application of ZADAXIN in cancer therapy.

Intellectual Property and Proprietary Rights

Patents

We seek regulatory approval for our products in
disease areas with unmet medical need, significant market potential and where we
have a proprietary position through patents covering use, process, or
composition of matter for our products. For our lead product ZADAXIN, we are the
licensee or owner of patents relating to the use of thymosin alpha 1 for certain
diseases and its process of manufacture.

We are the exclusive licensee or owner of patents relating to
the use of ZADAXIN as a therapy for HCV that do not expire until 2015 in the
United States and until 2012 in Japan and the major commercial markets in
Europe. In addition, patents relating specifically to the use of thymosin alpha
1 in treating HCV in non-responders to interferon alpha treatment have been
issued to us in the United States and various international markets. In the
United States, certain European countries and Japan, the period of patent
protection may be extended depending on the relevant dates of patent grant and
market authorization, and we may, depending on the timing of any future
approval, be eligible for such an extension.

We are the exclusive licensee or owners of patents that have
been issued in the United States, Japan, China and other international markets
relating to the treatment of HBV using thymosin alpha 1. We are the licensee or
owner of patents relating to the use of ZADAXIN as a therapy for HBV that do not
expire until 2019 in the United States and Europe and 2012 in Japan. We are also
the exclusive licensee of patents that have been issued in the United States, a
majority of European countries, Japan, and other international markets that
relate to 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 United States, 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 analogues and derivatives of
thymosin alpha 1 which have been granted in the United States and in important
international markets. Our commercialized product, and the product we are using
in our clinical trials, is thymosin alpha 1 and not an analogue or derivative.
However, we continue to seek additional proprietary rights relating to the use
of thymosin alpha 1. We are the exclusive licensee of an issued U.S. patent
relating to 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 may pursue marketing
exclusivity periods that are available under regulatory provisions in certain
countries including the United States, Europe and Japan.

Orphan drug protection has been or may 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 in the United States and Europe.

We have filed trademark applications worldwide 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 implemented anti-counterfeiting measures on
commercial packaging and we are registering the packaging with customs
departments in countries where such procedures exist. We 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.

Marketing and Sales

We, or our distributors on our behalf, have received
approvals from the ministries of health to market and sell ZADAXIN in over 30
countries primarily in Asia, the Middle East and Latin America. ZADAXIN's
approvals are principally for the treatment of HBV, with additional approvals in
certain countries for the treatment of HCV, as a vaccine adjuvant, or as a
chemotherapy adjuvant for cancer patients with weakened immune systems. We sell
ZADAXIN in various international markets through our wholly owned subsidiary,
SciClone Pharmaceuticals International Ltd. (SPIL).

China is currently our largest single market for ZADAXIN and
accounted for 91%, 88% and 88% of ZADAXIN sales for the years ended
December 31, 2004, 2003 and 2002, respectively. China is the world's most
populous nation that accounts for approximately one third of the 350 million
chronic HBV cases and approximately one fourth of the 170 million chronic HCV
cases worldwide. We position ZADAXIN as a high quality, imported, premium priced
product and market if for use by hospitals and pharmacies in the major
metropolitan areas. SPIL employs approximately 90 medical representatives in
China to promote physicians' knowledge and use of ZADAXIN. SPIL is an active
participant in regional and international liver disease related medical
conferences. To leverage our existing marketing capabilities, we are seeking to
expand our product offerings by in-licensing or acquiring the marketing rights
to other products that can be effectively and efficiently marketed to physicians
by our medical representatives.

In China, the physicians' and their hospital pharmacies'
orders for ZADAXIN are fulfilled by licensed ZADAXIN distributors who purchase
their supplies from our selected importing agents. SPIL sells ZADAXIN to these
well-established, government-licensed importing agents. Our sales are made on a
no-return basis, except under limited terms regarding product quality. Sales
terms to the importing agents in China typically are for payment in six months
to accommodate the importing agents' costs of importation including duties and
quality assurance testing fees and the long collection cycle associated with
sales within the country. In 2004, China National Pharmaceutical Foreign Trade
Corporation, China Meheco Corporation and Guang Dong South Pharaceutical Foreign
Trade Co., Ltd accounted for 32%, 29% and 23% of our sales, respectively. No
other customer accounted for more than 10% of sales in 2004. In 2003, China
National Pharmaceutical Foreign Trade Corporation and China Meheco Corporation
accounted for 52% and 14% of sales, respectively. No other customers accounted
for more than 10% of sales in 2003. In 2002, China National Pharmaceutical
Foreign Trade Corporation and Edward Keller Shanghai Ltd. accounted for 41% and
27% of sales, respectively. No other customers accounted for more than 10% of
sales in 2002.

SPIL is registered in the Cayman Islands and has offices in
Hong Kong, Beijing, Shanghai, Singapore and Sao Paulo. SPIL orders ZADAXIN from
our European manufacturer and contracts with a third party for the storage of
our finished goods inventory at warehousing facilities in Hong Kong. SPIL then
distributes our product worldwide from these warehousing facilities based on
purchase orders from our customers. Under our established distribution
arrangements, local importers and distributors are responsible for the
importation, inventory, distribution and invoicing of ZADAXIN.

Manufacturing

ZADAXIN is manufactured for us by third parties under
exclusive contract manufacturing and supply agreements. We closely monitor
production runs of ZADAXIN and regularly conduct our own quality assurance audit
programs. We believe the manufacturing facilities of our contract suppliers are
in compliance with the FDA's current Good Manufacturing Practices, and the
Japanese or European equivalents of such standards.

Contract suppliers in the United States manufacture ZADAXIN
for process validation and for our phase 3 clinical trials in the United States.
Contract suppliers in Europe manufacture ZADAXIN for our phase 2 and 3 clinical
trials in Europe and for sale in other international markets where approved.

In the event of the termination of an agreement with any
single supplier, we believe that we would be able to enter into arrangements
with other suppliers with similar terms. We do not intend at this time to
acquire or establish our own dedicated manufacturing facilities for any of our
products. We believe that our current manufacturing partners have enough
manufacturing capacity to meet potential market demand should ZADAXIN be
approved in the major pharmaceutical markets of the United States, Europe and
Japan.

Competition

Our competitors include biopharmaceutical companies,
biotechnology firms, universities and other research institutions, both in the
United States and abroad, that are actively engaged in research and development
or marketing of products in the therapeutic areas we are pursing, particularly
HCV, HBV and cancer. Currently, competitors are marketing drugs for HCV, HBV and
cancer, or have products in clinical trials. We believe that the principal
competitive factors in this industry for a marketed drug include the efficacy,
safety, price, therapeutic regimen, manufacturing, quality assurance and
associated patents and the capabilities of its marketer.

In addition, most of our competitors, particularly large
biopharmaceutical companies, have substantially greater financial, technical,
regulatory, manufacturing, marketing and human resource capabilities than
SciClone. Most of them also have extensive experience in undertaking the
pre-clinical 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.

For the treatment of HCV, the only products approved by the
FDA are interferon alpha, in both standard and pegylated forms, and ribavirin,
which is useful only in combination with interferon alpha. There are currently
two versions of pegylated interferon alpha being marketed, one by
Schering-Plough under the trade name "Peg-Intron," the other by Roche under the trade
name "PEGASYS." Schering-Plough markets ribavirin under the trade name "Rebetol"
and Roche sells a separate brand of ribavirin under the trade name
"COPEGUS."

In the United States, our product ZADAXIN is being evaluated
in combination with pegylated interferon alpha for the treatment of HCV patients
who have failed to respond to prior therapy with interferon alpha (standard or
pegylated) plus ribavirin or with either form of interferon alpha alone. In
Europe, ZADAXIN is being evaluated as part of a triple therapy of ZADAXIN,
pegylated interferon alpha and ribavirin for the treatment of HCV genotype 1
non-responder patients. Each of the ZADAXIN HCV clinical trials is using the
PEGASYS as the pegylated interferon alpha component. We intend to position
ZADAXIN as a beneficial addition to current therapy, although we may not be
successful.

For the treatment of HBV, current therapies being marketed by
competitors include interferon alpha, in both standard and pegylated forms,
marketed primarily by Schering-Plough and Roche, nucleoside analogues such as
lamivudine, marketed by GlaxoSmithKline, and the nucleotide analogue adefovir,
marketed by GlaxoSmithKline and Gilead Sciences. Other potentially competitive
products currently under development include Bristol-Myers Squibb's nucleoside
analogue,

Other companies are researching, developing, or marketing
other products for use alone or in combination with standard or pegylated
interferon alpha for clinical indications including HCV and HBV. Such
competitive products include ribavirin, potentially improved ribavirin molecules
and other products not yet in late stage clinical trials such as therapeutic
vaccines, protease, polymerase and reverse transcriptase inhibitors. In
addition, we expect continuing advancements in and increasing awareness of the
use of therapeutics which boost the immune system to fight cancer and infectious
diseases. These developments may create new competitors. Future clinical trials
may or may not show ZADAXIN to have advantages or clinically significant
synergistic value over such existing or future competitive products.

For the treatment of cancer, many companies are researching,
developing, or marketing other products for use alone or in combination with
other therapies.

Research and Development

A major portion of our operating expenses to date is
related to research and development (R&D). R&D expenses consist of
independent R&D costs and costs associated with collaborative R&D and
in-licensing arrangements. R&D expenses were $17,994,000, $18,949,000 and
$11,647,000 for the years ended December 31, 2004, 2003, and 2002, respectively.
We intend to maintain our strong commitment to R&D as an essential component
of our product development effort. Licensed technology developed by outside
parties is an additional source of potential products.

Employees

As of December 31, 2004, we had 143 employees, 29 in the
United States and 114 in foreign offices. The increase during 2004 is largely
attributable to the hiring of additional medical representatives in China. From
time to time, we engage the services of 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.

Government Regulation

Regulation by governmental authorities in the United
States 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 pre-clinical and clinical trials and testing related to our
products. When our products are manufactured, tested or sold in the United
States, 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
manufacturing establishment must be registered with the FDA. 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 (cGMP). In complying with cGMP standards, manufacturers must continue
to expend time, money and effort in the area of production and quality assurance
to ensure full technical compliance.

The steps required before a new drug or biological product
may be distributed commercially in the United States generally include:

- conducting appropriate pre-clinical laboratory evaluations,
including animal studies, in compliance with the FDA's Good Laboratory Practice
(GLP) requirements, to assess the potential safety and efficacy of the product,
and to characterize and document the product's chemistry, manufacturing
controls, formulation and stability;
- submitting the results of these evaluations and tests to
the FDA, along with manufacturing information and analytical data, in an IND,
and receiving approval from the FDA that the studies proposed under the IND are
allowed to proceed;
- obtaining approval of Institutional Review Boards (IRBs) to
introduce the drug into humans in clinical studies;
- conducting adequate and well-controlled human clinical
trials in compliance with the FDA's Good Clinical Practice (GCP) requirements
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;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;
- 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;
- 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 pre-clinical studies,
clinical studies, and adequate data on chemistry, manufacturing and control
information to ensure reproducible product quality batch after batch, in an NDA
or Biologics License Application (BLA); and
- obtaining FDA approval of the NDA or BLA, including
inspection and approval of the product manufacturing facility as compliant with
cGMP requirements, 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.

The process of obtaining regulatory approval is lengthy,
uncertain, and requires the expenditure of substantial resources. Each NDA or
BLA must be accompanied by a user fee, pursuant to the requirements of the
Prescription Drug User Fee Act, or PDUFA, and its amendments. According to the
FDA's fee schedule, effective through September 30, 2005, the user fee for an
application requiring clinical data, such as an NDA or BLA, is $672,000. The FDA
adjusts the PDUFA user fees on an annual basis. PDUFA also imposes an annual
product fee for prescription drugs and biologics ($41,710 for the fiscal year
2005), and an annual establishment fee ($262,000) on facilities used to
manufacture prescription drugs and biologics. Fee waivers or reductions are
available in certain circumstances, including a waiver of the application fee
for the first application filed by a small business. Additionally, no user fees
are assessed on NDAs or BLAs for products designated as orphan drugs, unless the
drug also includes a non-orphan indication, and if a contract manufacturer is
used, the contract manufacturer is responsible for the establishment fee.

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,
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, an NDA or BLA
supplement may be required to be submitted to the FDA.

Additionally, after the FDA has authorized a drug product to
enter commercial distribution, numerous regulatory requirements apply. These
include, among others, the cGMPs, which require manufacturers to follow
extensive design, testing, control, documentation and other quality assurance
procedures during the manufacturing process; labeling regulations; the FDA's
general prohibition against promoting drug products for unapproved or
"off-label" uses; and adverse event reporting regulations, which require that
manufacturers report to the FDA if their drug may have caused or contributed to
a death or serious injury. The FDA has broad post-market and regulatory and
enforcement powers. Failure to comply with the applicable U.S. drug regulatory
requirements could result in, among other things, warning letters, fines,
injunctions, consent decrees, civil penalties, refunds, recalls or seizures of
products (which would result in the cessation or reduction of production
volume), total or partial suspension of production, withdrawals or suspensions
of current product applications, and criminal prosecution. Adverse events
related to a drug product in any existing or future markets could cause
regulatory authorities to withdraw market approval for such product.

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 is required to 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 the 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 suppliers to develop and supply drugs for the
treatment of rare diseases, currently defined as diseases that affect fewer than
200,000 individuals in the United States or, for a disease that affects more
than 200,000 individuals in the United States, where the sponsor does not
realistically anticipate its product becoming profitable. Under these
provisions, a supplier 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. 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 hepatocellular
carcinoma.

In the European Union, incentives for suppliers to develop
medicinal products for the treatment of rare diseases are provided pursuant to
the Orphan Medicinal Products Regulation (Regulation (EC) 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 the treatment
of cystic fibrosis. However, it should be noted that, as in the United States,
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 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 suppliers 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 U.S. Patent and Trademark Office, in
consultation with the FDA, reviews and approves the application for the patent
term extension.

The 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. The
Pediatric Research Equity Act authorizes FDA to require pediatric studies for
drugs and biological products to ensure the drugs' or products' safety and
effectiveness in children. This Act required that new NDAs, BLAs or supplements
to NDAs or BLAs contain data assessing the safety and effectiveness for the
claimed indication in all relevant pediatric subpopulations. Dosing and
administration must be supported for each pediatric subpopulation for which the
drug is safe and effective. The FDA may grant deferrals for submission of data,
or full or partial waivers.

We may seek the benefits of additional orphan, exclusivity,
patent term extension, or fast track provisions, with respect to ZADAXIN 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 pre-clinical
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 United States, 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 United States. In general, a drug that has been approved for commercial
sale in the United States 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 United States
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 United States for clinical trial purposes, and will
seek to obtain FDA approval, where necessary, for any future shipments from the
United States to any unlisted country.

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 and could prevent or delay regulatory
approval of any of our products.

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. Our ability to
commercialize future products will depend in part on the extent to which
coverage and reimbursement for the products will be available from government
and health administration authorities, private health insurers, and other
third-party payors.

Third-Party Reimbursement

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. In most of the markets in which we are currently approved to
sell ZADAXIN, reimbursement for ZADAXIN under government or private health
insurance programs is not yet widely available, and in many of these countries
government resources and per capita income may be so low that our products will
be prohibitively expensive. In the United States, Europe and Japan, proposed
health care reforms could limit the amount of governmental or third-party
reimbursement available for our products should they be approved for sale in
these markets. Various governments and third-party payors are trying to contain
or reduce the costs of health care through various means. We expect that there
will continue to be legislative efforts and proposals to implement such
government controls.

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 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 filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act (15 U.S.C. 78m(a) or 78o(d)) 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 March 9, 2005, 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                                                      
|---------------------- | --- | --------------------------------------------------------------
|Alfred R. Rudolph, M.D | 57  | Chief Operating Officer                                       
|Richard A. Waldron     | 51  | Chief Financial Officer and Secretary                         
|Hans P. Schmid         | 53  | Managing Director, SciClone Pharmaceuticals
International Ltd.

Alfred R. Rudolph, M.D.

Richard A. Waldron has served as our Chief Financial
Officer since 2001. In July 2004, Mr. Waldron and Dr. Rudolph were appointed
jointly to the Office of the President. Mr. Waldron has over 20 years of
experience in the finance and management of biotechnology companies. Prior to
joining us in March 2001, he was Vice President and Chief Financial Officer from
June 1999 to August 2000 for Genelabs Technologies, Inc. and from July 1995
through March 1999, he was Vice President and Chief Financial Officer of
GeneMedicine, Inc. 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.

Hans P. Schmid has served as Managing Director for
SciClone Pharmaceuticals International Ltd. since July 2004. He previously
served as Vice President, Finance, Administration and Business Development since
joining SciClone in May 2001. He has over 25 years of financial and
pharmaceutical experience in the U.S. and international markets. Prior to
joining SciClone, Mr. Schmid was Chief Financial Officer from December 1999 to
April 2001 for Questcor Pharmaceuticals, Inc. and Senior Vice President,
International Business Development from February 1997 to September 1999 for
Oread, Inc., a contract pharmaceutical company. From 1985 to 1997 he worked at
Syntex Corporation as Vice President of Finance and Administration for
Pharmaceutical Operations Asia/Pacific region and at F. Hoffmann-LaRoche as
Senior Vice President, Finance and Head of Administrative Services for Roche
Bioscience. Previously he held financial and operational positions with Itel
Corporation in Germany, Japan, England and the United States. He received his
B.A. degree from the Commercial Trade School, Lucerne, Switzerland, and has
studied International Business Management and Finance at San Francisco State
University.

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

Item 2.Properties

We currently lease approximately 22,000 square feet
of office space at our headquarters in San Mateo, California and limited office
space in Beijing, Hong Kong, Shanghai, Singapore, Tokyo and Sao Paulo. 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, 2004.

PART II

Item 5.Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchase of Equity Securities

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 RangeCommon Stock
|--------------- | -----------------------
|                | High                   
|20044th quarter | $ 4.86                 
|3rd quarter     | 5.17                   
|2nd quarter     | 5.88                   
|1st quarter     | 8.19                   
|20034th quarter | $ 9.01                 
|3rd quarter     | 9.76                   
|2nd quarter     | 9.10                   
|1st quarter     | 6.12                   

Stockholders

As of March 9, 2005, there were approximately 400 holders
of record of our common stock and 44,696,701 shares of common stock issued and
outstanding.

Dividends

We have not paid any dividends on our common stock during
the fiscal years ended December 31, 2004, 2003, and 2002 and currently intend to
retain any future earnings for use in our business.

Securities Authorized for Issuance Under Equity
Compensation Plans

The information required by Item 201(d) of Regulation S-K
is incorporated by reference from the section entitled "Equity Compensation Plan
Information" in Part III, Item 12 of this Form 10-K.

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,
                                               --------------------------------------------------------------------
                                                   2004          2003          2002          2001          2000
                                               ------------  ------------  ------------  ------------  ------------
Statement of Operations data:                                                                                      
Product sales................................ $ 22,765,000  $ 31,732,000  $ 17,101,000  $ 13,831,000  $ 15,357,000
Contract revenue.............................    1,631,000       806,000       671,000            --            --
                                               ------------  ------------  ------------  ------------  ------------
    Total revenues...........................   24,396,000    32,538,000    17,772,000    13,831,000    15,357,000
Cost of product sales........................    4,577,000     5,636,000     3,487,000     2,742,000     3,113,000
                                               ------------  ------------  ------------  ------------  ------------
Gross margin.................................   19,819,000    26,902,000    14,285,000    11,089,000    12,244,000
                                               ------------  ------------  ------------  ------------  ------------
Operating expenses:
Research and development.....................   17,994,000    18,949,000    11,647,000     8,561,000     4,182,000
Sales and marketing..........................    9,665,000     9,018,000     8,724,000     8,764,000     7,720,000
General and administrative...................    6,311,000     4,134,000     3,902,000     3,897,000     3,538,000
                                               ------------  ------------  ------------  ------------  ------------
    Total operating expenses.................   33,970,000    32,101,000    24,273,000    21,222,000    15,440,000
                                               ------------  ------------  ------------  ------------  ------------
Loss from operations.........................  (14,151,000)   (5,199,000)   (9,988,000)  (10,133,000)   (3,196,000)
Income from payment on note receivable from
  former officer.............................           --            --            --     3,497,000       400,000
Interest and investment income(1)............    1,285,000       266,000       323,000       751,000     1,066,000
Interest expense.............................     (361,000)     (361,000)     (361,000)     (334,000)      (36,000)
Other income (expense), net..................      (51,000)       19,000       (11,000)      (13,000)       49,000
                                               ------------  ------------  ------------  ------------  ------------
Net loss..................................... $(13,278,000) $ (5,275,000) $(10,037,000) $ (6,232,000) $ (1,717,000)

Basic and diluted net loss per share......... $      (0.30) $      (0.13) $      (0.29) $      (0.19) $      (0.06)
                                               ============  ============  ============  ============  ============
Weighted average shares used in computing
  basic and diluted net loss per share.......   44,626,337    39,568,199    35,002,003    32,356,287    29,904,924
                                               ============  ============  ============  ============  ============`

(1) For the year ended December 31, 2004, interest and investment income included an
 approximate gain of $697,000 from sale of equity securities.
December 31,
                                               --------------------------------------------------------------------
                                                   2004          2003          2002          2001          2000
                                               ------------  ------------  ------------  ------------  ------------
Balance Sheet data:
Cash, cash equivalents and investments....... $ 51,299,000  $ 62,975,000  $ 21,150,000  $ 16,468,000  $ 22,497,000
Working capital..............................   55,427,000    72,950,000    29,116,000    26,930,000    30,281,000
Total assets.................................   69,709,000    83,822,000    37,111,000    32,096,000    36,167,000
Other long-term liabilities..................    1,044,000       900,000            --            --            --
Total stockholders' equity...................   55,123,000    68,250,000    23,354,000    22,774,000    28,077,000
Convertible notes payable....................    5,600,000     5,600,000     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 consolidated 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
Our current primary business objective is to obtain
regulatory approval for and commercialize ZADAXIN as part of combination therapy
for the treatment of HCV in the United States and in Europe. Our long term
business objective is to be a leading biopharmaceutical company engaged in the
development and commercialization of therapeutics to treat life-threatening
diseases.
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. Our primary focus has been
the clinical development of ZADAXIN as a part of a new combination therapy for
the treatment of hepatitis C. We believe that the worldwide market for HCV
therapies was approximately $3 billion in 2004 and could exceed $8 billion in
2012 and that the United States, Europe and Japan account for essentially all of
this market opportunity. Currently, there are only two approved and marketed
therapies for hepatitis C, interferon alpha (predominantly in pegylated forms)
and ribavirin in combination with interferon alpha. Two large pharmaceutical
companies, Schering-Plough and Roche, each market their brands of pegylated
interferon alpha and ribavirin and dominate the hepatitis C therapeutic market.
Our strategy is to develop ZADAXIN to be used in combination with and to improve
the efficacy of current therapy, and we are currently conducting in the United
States two phase 3 hepatitis C clinical trials of ZADAXIN in combination with
pegylated interferon alpha. We intend to complete these trials by the end of
2005 and, if the results are successful, file a NDA by the end of 2006.
We estimate the worldwide market for HBV therapeutics was
approximately $480 million in 2004 and it is expected to increase to over $2
billion in 2012. The largest market for hepatitis B therapies is Asia where we
have regulatory approval in several countries. Our commercialization and
marketing activities to date have been concentrated on China.
We manufacture ZADAXIN for sale, and for our clinical trials,
through third party contract manufacturers, and we conduct our research and
development efforts principally through arrangements with clinical research
sites, contract research organizations and universities.
From commencement of operations through December 31, 2004, we
have an accumulated deficit of approximately $152,000,000. At least over the
next few years, we expect net losses to increase due to increased operating
expenses 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 execution and successful completion
of ZADAXIN clinical trials and securing regulatory approvals for ZADAXIN in the
major pharmaceutical markets of the United States, Europe, and Japan, and, if
approved in those countries, the successful commercialization and marketing of
ZADAXIN. In addition, other factors may also impact our ability to achieve and
sustain operating profitability, including the pricing of ZADAXIN and its
manufacturing and marketing costs, our ability to compete in pharmaceutical
markets, the cost of long-term product development and commercialization
programs, the timing and costs of acquiring rights to additional drugs, our
ability to fund our operations and the entrance into and extension of agreements
for product development and commercialization, where appropriate.
We expect quarterly net sales for 2005 to be slightly higher
to those reported in 2004. Expected research and development expenses for 2005
are higher than research and development expenses for 2004 due to increased
expenses for the phase 3 hepatitis C clinical trial in Europe as well as for the
development of SCV-07. Expected net loss and net loss per share for 2005 are
higher than net loss and net loss per share for 2004 based on higher research
and development expenses and general and administrative expenses. Cash, cash
equivalents and short-term investments at December 31, 2005 are expected to be
lower than at December 31, 2004 primarily due to the expected net loss from
operations and the assumption that the $4 million convertible note due in
December 2005 will be repaid rather than converted.
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.
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
our Consolidated Financial Statements" in Part II, 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
We recognize revenue from product sales at the time
of shipment. There are no significant customer acceptance requirements or
post-shipment obligations on our part. 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, we will replace products that have expired
or are deemed to be damaged or defective when delivered. We exercise judgment in
estimating return reserves. 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 for which
there is no continuing involvement by us, are recognized on the earlier of when
the payments are received or when collection is assured. We exercise judgment in
determining the period over which our performance obligations have been
fulfilled which can have an impact on the timing and amount of revenue that is
recognized in a particular reporting period.
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. We exercise judgment in our determination of the achievement
of milestones which can have an impact on the timing and amount of revenue
recognized in a particular reporting period.
Amounts invoiced relating to arrangements where revenue
cannot be recognized are reflected on our balance sheet as deferred revenue and
recognized as the applicable revenue recognition criteria are satisfied.
Accounts Receivable
We are required to estimate the collectibility of our
trade receivables. 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. A considerable
amount of judgment is required in assessing the ultimate realization of these
receivables including, but not limited to, an analysis of the historical payment
patterns of our customers, individual customer circumstances and their
geographic region including a review of the local economic environment. 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 or the
economic environment in which they operate were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required which would increase our general and administrative expenses and
increase our reported net loss. Conversely, if actual credit losses are
significantly less than our reserve, this would decrease our general and
administrative expenses and decrease our reported net loss.
Inventories
Our inventories are stated 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. We have begun production with a new
contract manufacturer and are currently in the process of qualifying the product
to permit its importation into China. Our inventory levels decreased during the
second half of 2004. We expect to begin to build inventory levels in the second
quarter of 2005 to ensure an uninterrupted supply of product for our customers
in China. If we are unable to qualify in a timely fashion the product produced
by the new contract manufacturer, we may determine that some of this inventory
may not be saleable and could result in writedowns of inventory and in a net
loss.
Impairment of Intangible Assets
At December 31, 2004, we had net intangible assets of
$542,000 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 research and development expenses are principally
incurred for our phase 3 clinical trials in the United States. Research and
development expenses 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 vary 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 organizations or other entities managing the trials and
laboratory and other direct expenses are recognized in the period they are
estimated to be incurred and the services performed. We monitor active 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, requiring the recording of
additional expenses and an increase in net loss.
Stock Option Valuation
The preparation of the financial statement footnotes
requires us to estimate the fair value of stock options granted to employees and
directors. While fair value may be readily determinable for awards of stock,
market quotes are not available for long-term, nontransferable stock options
because these instruments are not traded. We currently use the Black-Scholes
option pricing model to estimate the fair value of employee stock options.
Option valuation models require the input of highly subjective assumptions,
including stock price volatility. Changes to the subjective input assumptions
could materially affect the estimated fair value of our stock options. We are
currently evaluating our option valuation methodologies and assumptions in light
of a new accounting standard related to employee stock options.
Results of Operations
Product sales were $22,765,000, $31,732,000, and
$17,101,000 for the years ended December 31, 2004, 2003 and 2002, respectively,
and all were derived from sales of ZADAXIN. Sales to customers in China
accounted for approximately 91%, 88% and 88% of this revenue for the years ended
December 31, 2004, 2003 and 2002, respectively. Product prices have remained
stable throughout the 2002, 2003 and 2004 periods. Of the total increase in
sales of $14,631,000 from 2002 to 2003, approximately $11,000,000 was from an
unanticipated temporary increase in demand for ZADAXIN from hospitals in China
at the time of the SARS outbreak during the second quarter of 2003.
For the years ended December 31, 2004, 2003 and 2002, sales
to between four and six importing agents in China accounted for approximately
91%, 88% and 88%, respectively of our product sales. The single largest customer
accounting for 32%, 52% and 41% of sales for the years ended December 31, 2004,
2003 and 2002, respectively was the same importing agent. As of December 31,
2004, approximately $9,609,000 or, 90% 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.
Contract revenue was $1,631,000, $806,000, and $671,000 for
the years ended December 31, 2004, 2003 and 2002, respectively. The contract
revenue includes a $1,000,000 payment we received from Sigma-Tau in June 2004
relating to the completion of enrollment of our U.S. phase 3 HCV clinical
trials. The remaining contract revenue recognized in 2002, 2003 and 2004 is in
connection with the $2,685,000 payment we received from Sigma-Tau in January
2002. This revenue is recognized as contract revenue over the course of the
ZADAXIN U.S. phase 3 HCV clinical trials and the period of sharing the clinical
data from with Sigma-Tau in accordance with the requirements under our contract.
Gross margin was 81%, 83% and 82% in 2004, 2003 and 2002,
respectively. The increase in gross margin in 2003 was largely attributable to
product-related fixed costs being spread over the significantly larger volume of
units sold. We expect cost of product sales and hence gross margin to vary from
year to year, depending upon the level of ZADAXIN sales, the absorption of
product-related fixed costs, and any charges associated with excess or expiring
finished product inventory.

Research and development (R&D) expenses were
$17,994,000, $18,949,000 and $11,647,000 for the years ended December 31, 2004,
2003, and 2002, respectively. The decrease in 2004 was primarily related to the
U.S. phase 3 hepatitis C clinical trials nearing completion by the end of 2005.
The increase in 2003 was primarily to support our ZADAXIN phase 3 HCV clinical
trials, in the United States. In 2004, 2003 and 2002, R&D expenses
represented approximately 53%, 59% and 48%, 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 essentially include clinical trials. Pharmaceutical
development costs consist of product formulation and chemical analysis. During
2004, we recorded approximately $4,100,000 on research, $11,800,000 on clinical
development, and $2,100,000 on pharmaceutical development activities. This
compares to expenses in 2003 of approximately $2,100,000 on research,
$14,500,000 on clinical development, and $2,300,000 on pharmaceutical
development activities and expenses in 2002 of approximately $2,300,000 on
research, $8,300,000 on clinical development, and $1,100,000 on pharmaceutical
development activities.

The initiation and continuation of our current clinical
development programs has had and will continue to have a significant effect on
our research and development expenses. In general, we expect research and
development expenses to increase at least over the next few 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. An expansion or significant
extension of our clinical development programs may require us to seek additional
capital resources.

Sales and marketing expenses were $9,665,000, $9,018,000 and
$8,724,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
The year-to-year increases from 2002 to 2004 were related to increased payroll
expenses and expenses for advertising and conferences associated with the
expansion of our marketing efforts for ZADAXIN. We expect sales and marketing
expenses for 2005 to be similar to those incurred in 2004.

General and administrative expenses were $6,311,000,
$4,134,000 and $3,902,000 for the years ended December 31, 2004, 2003 and 2002,
respectively. The year-to-year increases from 2002 to 2004 were attributable to
greater general and administrative activities to support an increased level of
research and development on our late-stage clinical programs. In addition, the
increase in the 2004 period was attributable to a non-recurring expense incurred
in connection with the separation of our former Chief Executive Officer from the
Company in July 2004 and to greater general and administrative activities
associated with increased securities regulation requirements. In the near term,
we expect increased general and administrative expenses as we increase our
general and administrative activities to support increased expenditures on
business development, legal and regulatory activities.

Interest and investment income was approximately $1,285,000,
$266,000 and $323,000 for the years ended December 31, 2004, 2003 and 2002,
respectively. The increase from 2003 to 2004 was primarily related to a gain
from the sale of equity securities in the amount of approximately $697,000 and
the remaining increase was due to higher cash balances earning interest in the
2004 period. Interest expense relating to $5,600,000 of convertible notes
payable was $361,000 for each of the years ended December 31, 2004, 2003 and
2002.

Net loss for the years ended December 31, 2004, 2003 and 2002
was $13,278,000, $5,275,000 and $10,037,000, respectively. Net loss was higher
in 2004 than in 2003 principally due to higher net sales and gross margin
related to the SARS epidemic in China in 2003. Net loss per share for the years
ended December 31, 2004, 2003 and 2002 was $0.30, $0.13 and $0.29, respectively.
Weighted average shares outstanding for the year ending December 31, 2004, 2003
and 2002 were 44,626,337, 39,568,199 and 35,002,003, respectively. The increases
in the shares outstanding are primarily due to financing activities in 2003 and
2002.

Income Taxes

At December 31, 2004, we had net operating loss
carryforwards for federal income tax purposes of approximately $104,000,000
which expire in the years 2006 through 2024. 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, 2004, we had federal tax credit carryforwards of
approximately $5,000,000 which expire in the years 2009 through 2024.

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.

Liquidity and Capital Resources

At December 31, 2004, 2003 and 2002, we had $51,299,000,
$62,975,000 and $21,150,000, respectively, in cash, cash equivalents and
short-term investments. In each of these years, the principal factors affecting these
balances were the net loss and cash provided by financing activities. We
currently estimate cash, cash equivalents and short-term investments at December
31, 2005 will be lower than the balance at December 31, 2004. The expected
decrease in this balance is attributable to an expected net loss and the
assumption that the $4 million convertible note due December 2005 will be repaid
rather than converted. 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, 2004, the letters of credit totaled
$700,000, one for $633,000 under our lease agreement, the other for $67,000 to
facilitate our value added tax filings in Europe.

Net cash used in operating activities totaled $12,335,000,
$8,055,000 and $5,890,000 for the years ended December 31, 2004, 2003 and 2002,
respectively. Net cash used in operating activities for the year ended December
31, 2004 was less than the net loss primarily due to a $1,599,000 decrease in
inventory levels. Net cash used in operating activities for the year ended
December 31, 2003 was more than the net loss primarily due to a $2,347,000
increase in inventory levels to provide an uninterrupted supply of ZADAXIN as we
transferred production to a new contract manufacturer. 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 for a clinical
trial collaboration which increased deferred revenue balances by $2,014,000, and
due to increases in accounts payable of $1,576,000 partially offset by increases
in prepaid expenses and other assets of $967,000 mostly associated with our
phase 3 clinical trials in the United States.

Net cash provided by investing activities is primarily the
net result of purchases and sales of short-term investments to provide working
capital for operations. We purchased $196,000 of property and equipment during
the year ended December 31, 2004.

Net cash provided by financing activities totaled $289,000,
$50,074,000 and $10,577,000 for the years ended December 31, 2004, 2003 and
2002, respectively. Net cash provided by financing activities for the year ended
December 31, 2004 consisted of approximately $12,000 related to exercises of
outstanding options under our employee stock option plans and $277,000 from the
issuance of common stock under our employee stock purchase plan. Net cash
provided by financing activities for the year ended December 31, 2003 consisted
of approximately $44,426,000 from a public offering of common stock,
approximately $2,536,000 from the exercise of outstanding warrants to purchase
common stock by institutional and accredited investors, approximately $1,800,000
from the issuance of common stock to Sigma-Tau, approximately $1,050,000 related
to exercises of outstanding options under our employee stock option plans and
$262,000 from the issuance of common stock under our employee stock purchase
plan. 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 from the
issuance of common stock under our employee stock purchase plan.

The following table summarizes our contractual obligations
and other commitments as of December 31, 2004.

`Payments Due by Period
                                     --------------------------------------------------------------------
                                                    Less than                                 More than
Contractual Obligations                 Total         1 year      1-3 years     3-5 years      5 years
-----------------------------------  ------------  ------------  ------------  ------------  ------------
Convertible notes payable (1)...... $  5,960,000  $  4,336,000  $  1,624,000  $         --  $         --
Operating leases (2)...............    3,623,000     1,396,000     2,198,000        29,000            --
Purchase obligations (3)...........    6,456,000     3,542,000     2,914,000            --            --
Royalty obligations (4)............    1,020,000       420,000       540,000        40,000        20,000
                                     ------------  ------------  ------------  ------------  ------------
Total.............................. $ 17,059,000  $  9,694,000  $  7,276,000  $     69,000  $     20,000
                                     ============  ============  ============  ============  ============`

(1) $4,000,000 of these convertible notes mature in December
2005 and $1,600,000 mature in March 2006. See note 7 of the consolidated
financial statements. Included in the amounts above is $360,000 for interest
payments.

(2) These are future minimum rental commitments for office
space and copiers leased under non-cancelable operating lease arrangements.

(3) This includes approximately $1,173,000 in minimum
purchase requirement from a contract manufacturer, approximately $1,633,000 in
research and development fees payable to the contract research organization
under our agreement for the U.S. phase 3 hepatitis C clinical trials, and
approximately $3,650,000 to our European marketing and development partner,
Sigma-Tau to conduct and complete a hepatitis C clinical trial in Europe.

(4) This includes $20,000 per year through 2010 in minimum
royalty payments to the U.S. Army and $900,000 of non-cancelable prepaid
royalties to be paid to Wayne State University. Upon regulatory approval of
ZADAXIN and commercialization of the product, the Company is obligated to pay
the U.S. Army and Wayne State University a royalty based on a percentage of
ZADAXIN sales. See note 8 of the Notes to Consolidated Financial
Statements.

We intend to give priority use of our financial resources to
ZADAXIN clinical programs in the United States. We believe our existing capital
resources and funds from product sales are sufficient to complete our current
U.S. phase 3 clinical trials and, if the trials are successful and we receive
FDA approval, to begin commercialization of ZADAXIN in the United States.
However, we cannot assure you that such funds will be sufficient, or that sales
of ZADAXIN, if approved in the United States, will result in profitable
operations. If we need to raise additional financing, the unavailability or the
inopportune timing of any financing could prevent or delay our long-term product
development and commercialization programs, either of which would severely hurt
our business. The need, timing and amount of any such financing would depend
upon numerous factors, including the level of ZADAXIN 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, the timing of
regulatory approvals, developments in relationships with existing or future
collaborative parties and the status of competitive products.

There are no officers or directors that were involved in
related party transactions in 2004.

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements in 2004, 2003
or 2002.

Recent Accounting Pronouncement

In December 2004, the Financial Accounting Standards
Board ("FASB") issued FASB Statement No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R") which revises SFAS 123, and supersedes APB 25, and
its related implementation guidance.  Generally the approach in SFAS 123R
is similar to the approach described in SFAS 123. However, SFAS 123R requires
share-based payments to employees and directors, including grants of stock
options, to be recognized in the statement of operations based on their fair
values. Pro forma disclosure is no longer an alternative.  The amount of
compensation cost will be measured based on the grant-date fair value of the
instruments issued.  Compensation cost will be recognized over the period
that an employee or director provides service in exchange for the award. 
We expect to adopt SFAS 123R on July 1, 2005.

As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees and directors using APB 25's intrinsic value
method and, as such, generally recognizes no compensation cost for employee and
director stock options. Accordingly, the adoption of SFAS 123R's fair value
method will have a significant impact on our result of operations, although it
will have no impact on our overall financial position. The impact of adoption of
SFAS 123R cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we adopted SFAS 123R in
prior periods, the impact of that standard would have approximated the impact of
SFAS 123 as described in the disclosure of pro forma net loss and net loss per
share in the Accounting for Stock-Based Compensation section of Note 1 to our
consolidated financial statements.

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.

If we are unable to commercialize ZADAXIN in various
markets for multiple indications, particularly in the United States for the
treatment of HCV, our business will be harmed.

Our ability to achieve and sustain operating
profitability depends in large part on our ability to commence, execute and
complete clinical programs and obtain additional regulatory approvals for
ZADAXIN and other drug candidates, particularly in the United States, Europe and
Japan. We are also dependent on our ability to increase ZADAXIN sales in
existing markets and launch ZADAXIN in new markets. In particular, our ability
to achieve and sustain profitability will depend in large part on our ability to
commercialize ZADAXIN for the treatment of HCV in the United States. We cannot
assure you that we will achieve significant levels of sales or that we will
receive approval for ZADAXIN for the treatment of HCV in the United States or
for the treatment of HCV or other indications in other countries. If we are
unable to do so, our business will be harmed.

If we do not obtain regulatory approval for ZADAXIN for
the intended indications that we are evaluating, our revenues will be limited
and we will not become profitable.

Our ability to execute on our business strategy requires
that we obtain regulatory approval for the use of ZADAXIN, particularly for the
treatment of HCV in the United States and both HCV and malignant melanoma in
Europe. If our current phase 3 trials in the United States and current and
future trials in Europe yield favorable results, we intend to submit
applications for marketing approval of ZADAXIN for the treatment of HCV in the
United States and through our partner, Sigma-Tau, for the treatment of HCV and
malignant melanoma in Europe. The regulatory approval processes in the United
States and Europe are demanding and typically require 12 months or more in the
United States and 18 months or more in Europe from the date of submission of an
NDA. We have committed significant resources, including capital and time, to
develop ZADAXIN, particularly for HCV in the United States, with the goal of
obtaining such approvals. If we do not obtain these approvals, we will be unable
to achieve any substantial increase in our revenue from ZADAXIN and our ZADAXIN
sales in other jurisdictions could decline.

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 may change from time to time and new regulations may be
adopted.

Obtaining regulatory approval in developing countries also is
time-consuming and expensive. In some countries where we are contemplating
marketing and selling ZADAXIN, the regulatory approval process often relies on
prior approvals obtained in the United States or in Europe. Without such prior
approvals, our ability to obtain regulatory approvals for ZADAXIN in these
countries may be delayed or prevented. 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 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, and we have experienced difficulties in preparing for
regulatory approval in Japan. We cannot assure you that we will ultimately
obtain regulatory approvals in our targeted countries in a timely and
cost-effective manner or at all. If we fail to obtain the required regulatory
approvals to develop, market and sell our products in countries where we
currently do not have such rights, our revenues will be limited.

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 impose costly procedures upon our activities. Even if we obtain regulatory
approval for our products, such approval may impose limitations on the indicated
uses for which our products may be marketed. Unsatisfactory data resulting from
clinical trials may also adversely affect our ability to market and sell ZADAXIN
in markets where it is approved for sale.

If the results of our clinical trials are not favorable,
we will be unable to obtain regulatory approval for the intended indications we
are evaluating.

To obtain regulatory approvals, we must, among other
requirements, complete carefully controlled and well-designed clinical trials
demonstrating that a particular drug is safe and effective for the applicable
disease. We cannot depend on data from prior trial results to predict or
demonstrate that our potential drug products are safe and efficacious under
regulatory guidelines to qualify for commercial sale. We cannot assure you, nor
can you rely on our previous clinical trial results to predict, that our ongoing
or future clinical trials will yield favorable results. Adverse or inconclusive
clinical results would prevent us from filing for regulatory approval of ZADAXIN
(thymosin alpha 1) for the indications that we are evaluating, and our current
programs in those areas would fail. In the past, Alpha 1 Biomedical, from which
we acquired certain rights to thymosin alpha 1, conducted a phase 3 clinical
trial of thymosin alpha 1 as a therapy for HBV that did not produce
statistically significant results and Alpha 1 Biomedical did not submit an NDA
to the FDA.

We are currently conducting phase 3 clinical trials based on
the use of ZADAXIN in combination with pegylated interferon alpha for the
treatment of HCV patients who did not previously respond to treatment. We cannot
assure you that these phase 3 clinical trials will yield sufficient or adequate
data to demonstrate appropriate safety and efficacy under FDA guidelines. Any
failure to obtain sufficient or adequate data could delay or prevent us from
securing FDA approval.

Our two phase 3 HCV clinical trials in the United States 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 non-responders. We cannot assure you that the results
of this combination therapy will yield the favorable results we expect, or that
the independent use of pegylated interferon alpha will not perform better than
anticipated, which could reduce the chances that an NDA will be approved or that
we will submit an NDA based on such results. If the combination therapy of
ZADAXIN and pegylated interferon alpha causes significant adverse side effects
beyond those caused by pegylated interferon alpha alone, our clinical trials
could be delayed, 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 in the United States will be significantly impaired, our
business will suffer and the price of our stock may decline.

The results and documentation of the hepatitis B clinical
trials for ZADAXIN in Japan may not be sufficient to obtain Japanese regulatory
approval.

Despite the favorable data from our phase 3 hepatitis B
clinical trial in Japan, we have identified problems in meeting the requirements
for filing a Japanese New Drug Application (JNDA) for ZADAXIN. A JNDA filing
requires complete documentation from all phases of the clinical trials. The
phase 1 and phase 2 clinical trials, and part of the phase 3 clinical trials,
were conducted and sponsored by Schering Plough KK (SPKK), a pharmaceutical
company in Japan, under a development agreement with SciClone. After several
months of soliciting from SPKK the data and documentation necessary to proceed
with the filing in Japan, and after receiving some additional documentation, we
have determined that certain information and documentation from earlier stages
of the development process has still not been delivered. Furthermore, we are
concerned that some of the necessary documentation may not be available at all,
and that certain administrative formalities may not have been observed in the
drug development process. If the necessary documentation can be obtained or
reproduced in the near future, we intend to proceed with the JNDA. We are
reviewing our legal rights and remedies with respect to third parties. We
continue to seek a resolution of this matter with SPKK.

Higher than anticipated patient drop out rates in our
clinical trials could make it more difficult to obtain
regulatory approval.

Each of our two current phase 3 HCV clinical trials in
the United States enrolled more than the planned number of 500 patients, one
trial treating patients with no liver damage and the other trial treating
patients with mild cirrhosis of the liver. The trials require patient treatment
for 48 weeks and a follow-up observation period for an additional 24 weeks.
Patient dropouts were expected, but have been higher than anticipated. A patient
who drops out at any point in the 72 weeks of the trial is considered a "failure
to respond" in results of the clinical trial. Dropouts will not prevent us from
completing our trials, however, the fewer patients who complete the trial, in
general, the higher the positive response rate for the group of remaining
ZADAXIN treated patients needs to be to demonstrate statistical significance.
Therefore, a higher than anticipated dropout rate lowers our chances of proving
statistical significance which could adversely effect our preparation of an NDA.

We cannot predict the safety profile of the use of ZADAXIN
when used in combination with other drugs.

Many of our trials involve the use of ZADAXIN in
combination with other drugs. Some of these drugs are known to cause adverse
patient reactions. Even if ZADAXIN does not produce adverse side effects when
used alone, we cannot predict how it will work with other drugs, including
causing possible adverse side effects not directly attributable to the other
drugs that could compromise the safety profile of ZADAXIN when used in certain
combination therapies.

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. Our Board of Directors is conducting a
search for a new Chief Executive Officer.

We are highly dependent upon our ability to attract and
retain qualified personnel because of the specialized, scientific and worldwide
nature of our business. Following the departure of our Chief Executive Officer
on July 14, 2004, we established an Office of the President, and believe that
the Company will function effectively while we work to identify a new Chief
Executive Officer. However, we may still be affected adversely, particularly if
we cannot retain a new Chief Executive Officer in a reasonable time frame. 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, we assign numerous key responsibilities to a limited
number of individuals, and we would experience difficulty in finding immediate
replacements for any of them. 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.

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 the low average personal
income, lack of patient cost reimbursement, poorly developed infrastructure and
existing and potential competition from other products, including generics. In
China, ZADAXIN is approved only for the treatment of HBV. We face competition
from certain large, global pharmaceutical companies who are aggressively
marketing competing products for the treatment of HBV and other indications
where ZADAXIN is used on an off-label basis. In addition, several local
companies have introduced lower priced locally manufactured generic thymosin. We expect such competition to continue and there could be a
negative impact on the price and the volume of ZADAXIN sold in China, which
would harm our business.

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 registrations, permits, pricing
approvals and reimbursement and unexpected changes in regulatory requirements.
We experience other issues with managing foreign sales operations including long
payment cycles, difficulties in accounts receivable collection and, especially
from significant customers, fluctuations in the timing and amount of orders.
Operations in foreign countries also expose us to risks relating to difficulties
in enforcing our proprietary rights, currency fluctuations and adverse or
deteriorating economic conditions.

We do not have product sales in the United States, Europe or
Japan 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 typically place large, and therefore relatively
few, orders within any six month period. 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. We rely on four to six importers, in any given
quarter, to supply substantially all of our product in China. Because we use a
small number of importing agents in China, our receivables from any one
importing agent are material, and if we were unable to collect receivables from
any importer, our business and cash-flow would be adversely affected.

Our sales of ZADAXIN may fluctuate due to seasonality of
product orders and sales in any quarter may not be indicative of future
sales.

Our sales for the quarter ended June 30, 2003 were
greatly affected by the demand in China for ZADAXIN in connection with the
treatment of SARS. To date, SARS has not re-emerged, like influenza, as a
seasonal public health problem. However, if SARS or a similar epidemic were to
emerge, it is not possible to predict what effect, if any, this would have on
future sales of ZADAXIN. Although we do not market ZADAXIN for use in treating
such epidemic diseases, if ZADAXIN is purchased in
connection with future outbreaks of seasonal viral contagions, product sales
could become more concentrated in certain quarters of the calendar year,
quarterly sales levels could fluctuate and sales in any quarter may not be
indicative of sales in future periods.

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 and to preserve our trade secrets. Our pending patent applications
may not result in the issuance of patents in the future. Our patents or patent
applications may not have priority over others' applications. Our existing
patents and additional patents that may be issued, if any, 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,
including composition of matter patents, we have rights to other patents and
patent applications relating to ZADAXIN and ZADAXIN analogues, including method
of use patents with respect to the use of ZADAXIN for certain indications. If
other parties develop generic forms of ZADAXIN for other indications, including
conducting clinical trials for such indications, our patents and other rights
might not be sufficient to prohibit them from marketing and selling such generic
forms of ZADAXIN. If other parties develop analogues or derivatives of ZADAXIN,
our patents and other rights might not be sufficient to prohibit them from
marketing these analogues or derivatives.

Pharmaceutical products are either not patentable or have
only recently become patentable in some of the countries in which we market or
may market ZADAXIN. We do not have patent protection for ZADAXIN in China, our
largest market. Other companies market generic thymosin alpha 1 in China,
sometimes in violation of our trademark or other rights which we defend by
informing physicians and hospitals of the practice as well as through the
limited legal recourse. Past enforcement of intellectual property rights in many
of these countries, including China in particular, 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 are involved in intellectual property claims and
litigation, the proceedings may divert our resources and subject us to
significant liability for damages, substantial litigation expense and the loss
of our proprietary rights.

Our commercial success 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 a third-party patent that may relate to our products and may
cover a method of action used by ZADAXIN. We cannot assure you that our
mechanism of action does not infringe on their claim. In addition, we may not be
aware of all patents or patent applications that may impact our ability to make,
use or sell any of our potential products. For example, U.S. patent applications
may be kept confidential for 12 or more months while pending in the Patent and
Trademark Office, and patent applications filed in foreign countries are often
first published six months or more after filing. 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,
regardless of merit, 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. Any conflicts resulting from the patent rights of others could
significantly reduce the coverage of our patents and limit our ability to obtain
meaningful patent protection.

If other companies obtain patents with conflicting claims, we
may be required to obtain licenses to those patents or develop or obtain
alternative technology to manufacture or market the affected products and
processes. We may not be able to obtain any such licenses on acceptable terms or
at all. Any failure to obtain such licenses could delay or prevent us from
pursuing the development or commercialization of our potential products. Our
efforts to defend against any of these claims would require us to devote
resources and attention that could have been directed to our operations and
growth plans.

We may need to initiate litigation, which could be
time-consuming and expensive, to enforce our proprietary rights or to determine the
scope and validity of others' rights. If litigation results, a court may find
our patents or those of our licensors invalid or may find that we have infringed
on a competitor's rights. If any of our competitors have filed patent
applications in the United States which claim technology we also have invented,
the Patent and Trademark Office may require us to participate in expensive
interference proceedings to determine who has the right to a patent for the
technology. 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.

We rely on third parties to supply our clinical trial and
commercial products. Deficiencies in their work could delay or harm one or more
important areas of our business including our sales, clinical trials or the
regulatory approval process.

We rely on third parties, who are subject to regulatory
oversight, to supply our clinical and commercial products. If unanticipated
deficiencies in these suppliers occur, we could experience delays in our ability
to assemble a timely and acceptable NDA. If sales of ZADAXIN were to increase
dramatically, our third-party suppliers may not be able to supply ZADAXIN
quickly enough, which could limit our ability to satisfy increased demand or
could adversely affect the ability of these suppliers to provide products for
our clinical trials. Roche is our exclusive supplier of pegylated interferon
alpha for our current U.S. phase 3 HCV clinical trials and we have received all
the pegylated interferon to be used in these clinical trials. Any recall of
pegylated interferon alpha could delay the clinical trials or detract from the
integrity of the trial data, in which case, Roche's ability to complete our
clinical trials in the United States and to market and sell ZADAXIN worldwide
will be delayed or impaired, our business will suffer and the price of our stock
may decline. We have been in the process of qualifying a new manufacturer of
ZADAXIN and if we encounter problems with this process of validation, our sales
or our clinical trials could be adversely affected.

If we are not able to establish and maintain adequate
manufacturing 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 stringent regulatory requirements and
at an acceptable cost. Typically we have at any time only one supplier for each
phase of manufacturing of our product. Manufacturing interruptions or failure to
comply with regulatory requirements could significantly delay clinical
development of potential products and reduce third-party or clinical researcher
interest and support of proposed trials. These interruptions or failures 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.

We are in the process of qualifying a new supplier for
ZADAXIN with regulatory agencies. This process, quality assurance and other
steps could cause delays or interruptions of supply. If we do not obtain the
required regulatory approvals for a manufacturing change in a timely fashion,
especially in China, our sales may be interrupted until the manufacturing change
is approved. Although we are increasing inventories to prepare to manage any
such occurrences, we may still experience interruptions in supply which could
adversely affect our results.

In some countries, a manufacturing change may require
additional regulatory approvals which may delay ZADAXIN marketing approvals in
new markets.

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.

We may not be able to successfully develop or
commercialize our products. We may consider strategic alliances with other
companies in efforts to broaden our product development pipeline.

While we have limited sales of ZADAXIN in certain
markets, we do not yet have regulatory approval for ZADAXIN for our principal
target markets, and, in this respect, ZADAXIN is still being developed. Our
other potential products are in earlier stages of development than ZADAXIN. We
may consider and undertake various strategies to expand our portfolio of
potential products, including acquiring product candidate rights through
licenses or other relationships, or through other strategic relationships
including acquisitions of other companies that may have proprietary rights to
other development candidates or the capability to discover new drug candidates.
Such transactions could require a substantial amount of our financial resources,
or, if equity is involved, may result in substantial dilution to current
stockholders. Strategic transactions also require substantial management time
and effort and are subject to various risks that could adversely affect us or
our financial results.

To fully develop our products, we will need to commit
substantial resources to extensive research, development, pre-clinical testing,
clinical trials, manufacturing scale-up and regulatory approval prior to being
ready for sale. We cannot assure that our efforts will produce commercially
viable products. 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. 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.

We have not yet sold any product other than ZADAXIN and our
sales have been primarily in a single country, China. Our future revenue growth
depends on increased market acceptance and commercialization of ZADAXIN in
additional countries, particularly in the United States, Europe and Japan. If we
fail to successfully market ZADAXIN, or if we cannot commercialize this drug in
the United States and other additional markets, our revenue and operating
results will suffer. If unexpected and serious adverse events are reported, or
if expected efficacy results are not achieved, it would have a material adverse
effect on our business. Our future revenue will also depend in part on our
ability to develop other commercially viable and accepted products. Market
acceptance of our products will depend on many factors, including our ability to
convince prospective customers to use our products as an alternative to other
treatments and therapies and to convince prospective strategic partners to
market our products effectively and to manufacture our products in sufficient
quantities with acceptable quality and at an acceptable cost. In addition,
doctors must opt to use treatments involving our products. If doctors elect to
use a different course of treatment, demand for our drug products would be
reduced. Failure to do any of the above will lead to an unfavorable outcome on
the results of our operations.

We rely on third-party clinical investigators to conduct
our clinical trials and, as a result, we may encounter delays outside our
control.

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.

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

We believe our existing resources will be sufficient to
complete our current U.S. phase 3 clinical trials and, if the trials are
successful and we receive FDA approval, to begin commercialization of ZADAXIN in
the United States. However, we cannot assure that such funds will be sufficient,
or that sales of ZADAXIN, if approved in the United States, will result in
profitable operations. In addition, we may need additional funds in the future
to support future growth and achieve profitability. If we need to raise
additional funds in the future and such funds are not available on reasonable
terms, if at all, our commercialization efforts may be impeded, our revenues may
be limited and our operating results may suffer.

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, 2004, we had an accumulated deficit of
approximately $152 million. 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 United States, and these losses may increase if we cannot increase or
sustain revenue. As a result, we may never achieve profitability.

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

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. For example, Sigma-Tau
is responsible for the development and marketing of ZADAXIN in Europe. 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 with our collaborators, including disputes over ownership
rights to intellectual property, know-how or technologies developed with our
collaborators. We may not be able to negotiate similar additional arrangements
in the future to develop and commercialize ZADAXIN or other products.

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 will increase. Our success depends on our ability
to compete in this industry, but we cannot assure you that we will be able to
successfully compete with our competitors. Increased competitive pressure could
lead to intensified price-based competition resulting in lower prices and
margins, which would hurt our operating results.

We are focused on developing ZADAXIN as a treatment for HCV
and HBV and certain cancers. Several large biopharmaceutical companies have
substantial commitments to interferon alpha, an approved drug for treating HBV
and HCV, and to lamivudine and adefovir, approved drugs to treat HBV. 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 HCV, HBV, cancer and other diseases that will be superior to
ours.

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

Significant uncertainty exists as to the reimbursement
status of new therapeutic products, such as ZADAXIN. We cannot assure you that
third-party insurance coverage and reimbursement will be available for
therapeutic products we might develop. The failure to obtain third-party
reimbursement for our products, particularly in the United States, Europe and
Japan, would harm our business. Further, we cannot assure you that additional
limitations will not be imposed in the future in the United States on drug
coverage and reimbursement due to proposed health care reforms. In many emerging
markets where we have marketing rights to ZADAXIN, but where government
resources and per capita income may be so low that our products will be
prohibitively expensive, we may not be able to market our products on
economically favorable terms, if at all.

Efforts by governmental and third-party payers to contain or
reduce health care costs or the announcement of legislative proposals or reforms
to implement government controls could cause us to reduce the prices at which we
market our drugs, which will reduce our gross margins and may harm our
business.

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, if at
all, 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.

We depend on international sales, and global conditions
could negatively affect our operating results.

A large majority of our sales are in China. Heightened
tensions resulting from the current geopolitical conditions in the Middle East,
North Korea and elsewhere could worsen, causing disruptions in foreign trade,
which would harm our sales. In particular, 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 geopolitical
conditions could decrease our sales and harm our operating results.

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

We are subject to various federal, state and local laws,
regulations and recommendations relating to the use, manufacture, storage,
handling and disposal of hazardous materials and waste products (including
radioactive compounds and infectious disease agents), as well as safe working
conditions, laboratory and manufacturing practices and the experimental use of
animals. The extent of government regulation that might result from future
legislation or administrative action in these areas cannot be accurately
predicted.

We do not currently maintain hazardous materials at our
facilities. 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 environmental laws and regulations. Further, in the event of an accident,
we would be liable for any damages that result, and the liability could exceed
our resources.

Our stock price may be volatile, and an investment in our
stock could suffer a decline in value.

The market price of our common stock has experienced, and
may continue to experience, substantial volatility due to many factors, some of
which we have no control over, including:

- progress and results of clinical trials involving ZADAXIN;
- progress of ZADAXIN through the regulatory process,
especially regulatory actions and the adequacy of clinical data and
documentation for regulatory purposes in the United States, Europe and
Japan;
- timing and achievement of milestones;
- announcements of technological innovations or new products
by us or our competitors;
- government regulatory action affecting our drug products or
our competitors' drug products in both the United States and foreign
countries;
- developments or disputes concerning patent or proprietary
rights;
- changes in company assessments or financial estimates by
securities analysts;
- actual or anticipated fluctuations in our quarterly
operating results;
- general stock market conditions and fluctuations for the
emerging growth and biopharmaceutical market sectors;
- economic conditions in the United States or abroad; and
- broad financial market fluctuations in the United States,
Europe or Asia.

In the past, following periods of large price declines in the
public market price of a company's securities, securities class action
litigation has often been initiated against that company. Litigation of this
type could result in substantial costs and diversion of our attention and
resources, which would hurt our business. Any adverse determination in
litigation could also subject us to significant liabilities.

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

As of December 31, 2004, stock options to purchase
6,706,613 shares of common stock were outstanding, of which options to purchase
4,971,804 shares were exercisable. Also outstanding as of the same date were
warrants exercisable for 904,760 shares of common stock at $7.00 per share,
however, the exercise term of all of these warrants expired in January 2005. As
of December 31, 2004 two notes convertible into a total of 684,140 shares of
common stock were outstanding. The note holder has the right to purchase up to
$8.3 million of additional convertible notes due on or before March 2006, which,
if fully issued, will be convertible into 684,140 shares of our common stock.
Upon exercise of options 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
stockholders will be reduced and the price of our common stock may fall.

Sales of our common stock by officers and directors and a
former officer could affect our stock price.

Our Board of Directors has approved an amendment to our
trading policy that permits officers and directors to enter into trading plans
that comply with the requirements of Rule 10b5-1 of the Securities and Exchange
Act of 1934. Rule 10b5-1 allows corporate officers and directors to adopt
written, pre-arranged stock trading plans when they do not have material,
non-public information. Using these plans, officers and directors can gradually
diversify their investment portfolios, can spread stock trades out over an
extended period of time to reduce any market impact and can avoid concerns about
initiating stock transactions at a time when they might be in possession of
material, non-public information. As of March 9, 2005, only one director has
adopted such a plan, and other directors or officers may do so in the future. In
general our officers and directors have rarely sold stock in the Company, though
they have held options or stock for many years. However, the separation of our
former Chief Executive Officer from the Company in July 2004 may affect his
personal financial plans and result in both his exercising of stock options and
selling of stock which may have affected or may in the futureaffect the trading price of our stock. As of March 9, 2005, the former CEO
has 1,610,454 shares of stock options outstanding and exercisable that will
expire between April 2005 and July 2006. We expect future sales by officers and
directors either under 10b5-1 plans or otherwise as a result of their personal
financial planning. We do not believe the volume of such sales would affect our
trading price; however, the market could react negatively to sales by our
officers and directors, which could affect the trading price of our stock.

Anti-takeover provisions in our charter documents and
under Delaware law may make an acquisition of us, which may be beneficial to our
stockholders, more difficult.

Certain anti-takeover provisions of Delaware law and our
charter documents as currently in effect may make a change in control of our
company more difficult, even if a change in control would be beneficial to the
stockholders. Prior to our reincorporation in Delaware, we had a stockholder
rights plan, also commonly known as a "poison pill," which we terminated in
connection with the reincorporation. We currently do not intend to adopt a
stockholder rights plan. However, our charter documents do contain certain
anti-takeover provisions, including provisions in our certificate of incorporation
providing that stockholders may not cumulate votes, stockholders' meetings may
be called by stockholders only if they hold 25% or more of our common stock and
provisions in our bylaws providing that the stockholders may not take action by
written consent. Additionally, our board of directors has the authority to issue
10 million shares of preferred stock and to determine the terms of those shares
of stock without any further action by the stockholders. The rights of holders
of our common stock are subject to the rights of the holders of any preferred
stock that may be issued. The issuance of preferred stock could make it more
difficult for a third-party to acquire a majority of our outstanding voting
stock. Delaware law also prohibits corporations from engaging in a business
combination with any holders of 15% or more of their capital stock until the
holder has held the stock for three years unless, among other possibilities, the
board of directors approves the transaction. Our board of directors may use
these provisions to prevent changes in the management and control of our
company. Also, under applicable Delaware law, our board of directors may adopt
additional anti-takeover measures in the future.

New legislation and potential new accounting
pronouncements may impact our operations and financial position or results of
operations.

Future changes in financial accounting standards,
including proposed changes in accounting for stock options, may cause adverse,
unexpected fluctuations in the timing of the recognition of revenues or expenses
and may affect our financial position or results of operations. New
pronouncements and varying interpretations of pronouncements have occurred with
frequency and may occur in the future and we may make changes in our accounting
policies in the future. Compliance with changing regulations concerning
corporate governance and public disclosure has resulted in and may continue to
result in additional expenses. Changing laws, regulations and standards relating
to corporate governance and public disclosure, including the Sarbanes-Oxley Act
of 2002, new SEC regulations and NASDAQ National Market rules, are creating
uncertainty for companies such as ours and costs are increasing as a result of
this uncertainty and other factors. 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 has and may continue to result in increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating product development activities to compliance activities.

New legislation may impact our operations and financial
position or results of operations.

Compliance with changing regulations concerning corporate
governance and public disclosure has resulted in and may continue to result in
additional expenses. Changing laws, regulations and standards relating to
corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, new SEC regulations and NASDAQ National Market rules, are creating
uncertainty for companies such as ours and costs are increasing as a result of
this uncertainty and other factors. 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 has and may continue to result in increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities.

We may be subject to currency exchange rate fluctuations,
which could adversely affect our financial performance.

Substantially all of our product sales are denominated in
U.S. dollars. Fluctuation in the U.S. dollar exchange rate with local currency
directly affects the customer's cost for our product. In particular, a stronger
U.S. dollar vis-à-vis the local currency would tend to have an adverse
effect on sales and potentially on collection of accounts receivable. To date,
this exposure to currency exchange rate fluctuations has been minimal because
the Chinese currency has been pegged to the U.S. dollar. However, the fixed
nature of the Chinese currency in relation to the U.S. dollar may not continue
in the future and, consequently, our foreign operations may expose us to greater
risk of currency exchange rate fluctuations in the future. In addition, we are
subject to currency exchange rate fluctuations as a result of expenses incurred
by our foreign operations. In particular, one of our supply arrangements under
which we purchase finished products is denominated in euros. Consequently,
changes in exchange rates could unpredictably and adversely affect our operating
results and could result in exchange losses. To date, we have not hedged against
the risks associated with fluctuations in exchange rates and, therefore,
exchange rate fluctuations could have a material adverse impact on our operating
results and stock price.

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 and highly rated, highly liquid
short-term municipal securities. 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 $233,246 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, 2004. Actual
results may differ materially.

Our purchases from one of our contract manufacturers are
denominated in euros and this exposes us to foreign currency rate fluctuations.
However, substantially all our sales and most of our manufacturing costs to date
have been in U.S. dollars.

Item 8. Financial Statements and Supplementary Data

SCICLONE PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                         | Page
|-------------------------------------------------------- | ----
|Reports of Independent Registered Public Accounting Firm | 37  
|Consolidated Balance Sheets                              | 39  
|Consolidated Statements of Operations                    | 40  
|Consolidated Statement of Stockholders' Equity           | 41  
|Consolidated Statements of Cash Flows                    | 42  
|Notes to Consolidated Financial Statements               | 43  

---



Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of SciClone
Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance
sheets of SciClone Pharmaceuticals, Inc. as of December 31, 2004 and 2003, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2004.
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 the standards of
the Public Company Accounting Oversight Board (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, 2004 and 2003, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles. 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.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the effectiveness of
SciClone Pharmaceuticals, Inc.'s internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 10, 2005 expressed an unqualified opinion
thereon.

/s/ Ernst & Young
LLP

Palo Alto, California
                    March 10, 2005

---

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of SciClone
Pharmaceuticals, Inc.

We have audited management's assessment, included in the
accompanying Management's Report on Internal Control over Financial Reporting,
that SciClone Pharmaceuticals, Inc. maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). SciClone
Pharmaceuticals, Inc.'s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that SciClone
Pharmaceuticals, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all material respects,
based on the COSO criteria. Also, in our opinion, SciClone Pharmaceuticals, Inc.
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based onthe COSO criteria.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of SciClone Pharmaceuticals, Inc. as of December 31, 2004 and
2003, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2004 and our report dated March 10, 2005 expressed an unqualified opinion
thereon.

/s/ Ernst & Young LLP

Palo Alto, California
                   March 10, 2005

---





SCICLONE PHARMACEUTICALS, INC.
                           CONSOLIDATED BALANCE SHEETS

`December 31,
                                                                                    ----------------------------
                                                                                        2004           2003
                                                                                    -------------  -------------
                                      ASSETS                                                                    
Current assets:
  Cash and cash equivalents....................................................... $  41,204,000  $  52,899,000
  Restricted short-term investments...............................................       700,000        695,000
  Other short-term investments....................................................     9,395,000      9,381,000
  Accounts receivable, net of allowance of $452,000 in 2004 and $638,000 in 2003..    10,279,000     10,142,000
  Inventories.....................................................................     4,179,000      5,778,000
  Prepaid expenses and other current assets.......................................     1,478,000      2,456,000
                                                                                    -------------  -------------
     Total current assets.........................................................    67,235,000     81,351,000
Property and equipment, net.......................................................       398,000        325,000
Intangible assets, net............................................................       542,000        612,000
Other assets......................................................................     1,534,000      1,534,000
                                                                                    -------------  -------------
     Total assets................................................................. $  69,709,000  $  83,822,000
                                                                                    =============  =============
                                                                                                                
                       LIABILITIES AND STOCKHOLDERS' EQUITY                                                     
Current liabilities:
  Accounts payable................................................................ $   2,225,000  $   3,423,000
  Accrued compensation and employee benefits......................................     2,177,000      1,440,000
  Accrued professional fees.......................................................       452,000        481,000
  Other accrued expenses..........................................................       917,000        631,000
  Accrued clinical trials expense.................................................     1,500,000      1,889,000
  Deferred revenue................................................................       537,000        537,000
  Convertible note payable .......................................................     4,000,000             --
                                                                                    -------------  -------------
     Total current liabilities....................................................    11,808,000      8,401,000
Deferred revenue..................................................................       134,000        671,000
Other long-term liabilities.......................................................     1,044,000        900,000
Convertible note payable..........................................................     1,600,000      5,600,000
Commitments and contingencies
Stockholders' equity:
   Preferred stock; $0.001 par value; 10,000,000 shares authorized; no
      shares outstanding..........................................................
  Common stock; $0.001 par value; 75,000,000 shares authorized; 44,677,845
      and 44,484,144 shares issued and outstanding in 2004 and 2003, respectively.        45,000         44,000
  Additional paid-in capital......................................................   206,608,000    206,320,000
  Accumulated other comprehensive income..........................................        38,000        176,000
  Accumulated deficit.............................................................  (151,568,000)  (138,290,000)
                                                                                    -------------  -------------
     Total stockholders' equity...................................................    55,123,000     68,250,000
                                                                                    -------------  -------------
     Total liabilities and stockholders' equity................................... $  69,709,000  $  83,822,000
                                                                                    =============  =============`

See notes to consolidated financial statements.

---





SCICLONE PHARMACEUTICALS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

`Years Ended December 31,
                                             ----------------------------------------
                                                 2004          2003          2002
                                             ------------  ------------  ------------
Revenues:
  Product sales............................ $ 22,765,000  $ 31,732,000  $ 17,101,000
  Contract revenues........................    1,631,000       806,000       671,000
                                             ------------  ------------  ------------
    Total revenues.........................   24,396,000    32,538,000    17,772,000
Cost of product sales......................    4,577,000     5,636,000     3,487,000
                                             ------------  ------------  ------------
Gross margin...............................   19,819,000    26,902,000    14,285,000
                                             ------------  ------------  ------------
Operating expenses:
  Research and development.................   17,994,000    18,949,000    11,647,000
  Sales and marketing......................    9,665,000     9,018,000     8,724,000
  General and administrative...............    6,311,000     4,134,000     3,902,000
                                             ------------  ------------  ------------
    Total operating expenses...............   33,970,000    32,101,000    24,273,000
                                             ------------  ------------  ------------
Loss from operations.......................  (14,151,000)   (5,199,000)   (9,988,000)
Interest and investment income(1)..........    1,285,000       266,000       323,000
Interest expense...........................     (361,000)     (361,000)     (361,000)
Other income (expense), net................      (51,000)       19,000       (11,000)
                                             ------------  ------------  ------------
Net loss................................... $(13,278,000) $ (5,275,000) $(10,037,000)
                                             ============  ============  ============

Basic and diluted net loss per share....... $      (0.30) $      (0.13) $      (0.29)
                                             ============  ============  ============

Weighted average shares used in computing
  basic and diluted net loss per share.....   44,626,337    39,568,199    35,002,003
                                             ============  ============  ============`

(1)   For the year ended December 31, 2004, interest and investment income
included an approximate gain of $697,000 from the sale of
equity securities.
See notes to consolidated financial statements.
SCICLONE PHARMACEUTICALS, INC.
                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumulated
                                                                                        Other
                                                 Common Stock           Additional   Comprehensive                   Total
                                          ---------------------------    Paid-in        Income      Accumulated   Stockholders'
                                             Shares        Amount        Capital        (Loss)        Deficit        Equity
                                          ------------  -------------  ------------  ------------  -------------  ------------
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
Issuance of common stock from exercise
  of stock options, warrants and
  employee stock purchase plan...........     847,171      3,256,000            --            --             --     3,256,000
Issuance of common stock to Sigma-Tau....     504,938      1,800,000            --            --             --     1,800,000
Reincorporation in Delaware..............          --   (161,308,000)  161,308,000            --             --            --
Issuance of common stock from exercise
  of stock options, warrants and
  employee stock purchase plan...........     227,119             --       592,000            --             --       592,000
Issuance of common stock in secondary
  offering, net of financing costs.......   6,000,000          6,000    44,420,000            --             --    44,426,000
Net loss.................................          --             --            --            --     (5,275,000)   (5,275,000)
Net unrealized gain on
  available-for-sale securities..........          --             --            --        97,000             --        97,000
                                                                                                                  ------------
Total comprehensive loss.................                                                                          (5,178,000)
                                          ------------  -------------  ------------  ------------  -------------  ------------
Balance at December 31, 2003.............  44,484,144         44,000   206,320,000       176,000   (138,290,000)   68,250,000
Issuance of common stock from exercise
  of stock options, warrants and
  employee stock purchase plan...........     193,701          1,000       288,000            --             --       289,000
Net loss.................................          --             --            --            --    (13,278,000)  (13,278,000)
Net unrealized loss on
  available-for-sale securities..........          --             --            --      (138,000)            --      (138,000)
                                                                                                                  ------------
Total comprehensive loss.................                                                                         (13,416,000)
                                          ------------  -------------  ------------  ------------  -------------  ------------
Balance at December 31, 2004.............  44,677,845  $      45,000  $206,608,000  $     38,000  $(151,568,000) $ 55,123,000
                                          ============  =============  ============  ============  =============  ============
See notes to consolidated financial statements.SCICLONE PHARMACEUTICALS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
                                                                             ----------------------------------------
                                                                                 2004          2003          2002
                                                                             ------------  ------------  ------------
Operating activities:
Net loss................................................................... $(13,278,000) $ (5,275,000) $(10,037,000)
Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization............................................      190,000       160,000       531,000
  Amortization of deferred financing costs.................................       25,000        25,000        25,000
  Other non-cash (income) expense, net.....................................       (3,000)      (13,000)      (21,000)
  Gain on sale of equity investment........................................     (697,000)           --            --
  Changes in operating assets and liabilities:
     Accounts receivable...................................................     (137,000)     (866,000)     (484,000)
     Inventories...........................................................    1,599,000    (2,347,000)      628,000
     Prepaid expenses and other assets.....................................      952,000      (355,000)     (967,000)
     Accounts payable and other accrued expenses...........................     (912,000)      345,000     1,576,000
     Accrued clinical trials expense.......................................     (389,000)      923,000       670,000
     Accrued professional fees.............................................      (29,000)     (198,000)       46,000
     Accrued compensation and employee benefits............................      737,000       352,000       129,000
     Long-term liabilities.................................................      144,000            --            --
     Deferred revenue......................................................     (537,000)     (806,000)    2,014,000
                                                                             ------------  ------------  ------------
       Net cash used in operating activities...............................  (12,335,000)   (8,055,000)   (5,890,000)
                                                                             ------------  ------------  ------------
Investing activities:
  Purchases of property and equipment......................................     (196,000)     (303,000)      (66,000)
  Proceeds from sales of short-term and equity investments.................      697,000     1,000,000        94,000
  Proceeds from maturities of short-term investments.......................    6,000,000       500,000     2,600,000
  Payments on purchases of short-term investments..........................   (6,150,000)     (550,000)   (6,600,000)
                                                                             ------------  ------------  ------------
       Net cash provided by (used in) investing activities.................      351,000       647,000    (3,972,000)
                                                                             ------------  ------------  ------------
Financing activities:
  Proceeds from issuances of common stock, net.............................      289,000    50,074,000    10,577,000
                                                                             ------------  ------------  ------------
       Net cash provided by financing activities...........................      289,000    50,074,000    10,577,000
                                                                             ------------  ------------  ------------
Net increase (decrease) in cash and cash equivalents.......................  (11,695,000)   42,666,000       715,000
Cash and cash equivalents, beginning of year                                  52,899,000    10,233,000     9,518,000
                                                                             ------------  ------------  ------------
Cash and cash equivalents, end of year..................................... $ 41,204,000  $ 52,899,000  $ 10,233,000
                                                                             ============  ============  ============
Supplemental disclosures of cash flow information:
  Cash paid for interest................................................... $    336,000  $    336,000  $    336,000
Non-cash investing activities:
  Obligations incurred related to prepaid royalties........................ $         --  $  1,200,000  $         --
See notes to consolidated financial statements.SCICLONE PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL 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 currently being evaluated in
two phase 3 hepatitis C clinical trials in the United States. ZADAXIN is also
being evaluated in other late-stage clinical trials for the treatment of
hepatitis B and certain cancers. ZADAXIN currently is approved for sale in
certain international locations, primarily in Asia, the Middle East and Latin
America, and is marketed through the Company's wholly-owned subsidiary SciClone
Pharmaceuticals International Ltd. ("SPIL"). SciClone's other proprietary drug
development candidate is SCV-07, which is currently in pre-clinical studies for
the treatment of viral and other infectious diseases.
Basis of Presentation
The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, SPIL, SciClone Italy
S.R.L., SciClone Japan K.K., and SciClone do Brasil - Produtos Farmaceuticos
Ltda. SPIL 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. SciClone do Brasil is registered in Brazil
with its principal office located in Sao Paulo. 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 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.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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.
The Company is required by its lease agreement to have a
letter of credit secured by a certificate of deposit of $633,000 at December 31,
2004. Under its European value added tax filing arrangement, the Company has a
letter of credit secured by a certificate of deposit of $67,000 at December 31,
2004. These amounts are recorded as restricted short-term investments on the
accompanying balance sheets.
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 municipals. 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
and included in investment income. Management believes the credit risk
associated with these investments is limited due to the nature of the
investments.
For the years ended December 31, 2004, 2003 and 2002, net
unrealized (loss) gains of approximately $(138,000), $97,000, and $40,000,
respectively, were included in accumulated other comprehensive income. For the
year ended December 31, 2004, a net realized gain of approximately $697,000 was
recognized primarily in connection with the sale of equity securities, and for
the years ended December 31, 2003 and 2002, net realized gains were less than
$1,000 for both years.
Fair Value of Financial Instruments
The fair value of our cash equivalents and marketable
securities is based on quoted market prices. The carrying amount of cash
equivalents and marketable securities are equal to their respective fair values
at December 31, 2004 and 2003.
Other financial instruments, including accounts receivable,
accounts payable and accrued liabilities, are carried at cost, which the Company
believes approximates fair value because of the short-term maturity of these
instruments. The Company believes the reported value of its convertible debt of
$5,600,000 at December 31, 2004 and 2003 approximates the fair value.
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.

Intangible AssetsIntangible assets
with definite lives are amortized over their estimated useful lives and are
reviewed for impairment when facts or circumstances suggest that the carrying
value of these assets may not be recoverable.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 several
countries, principally as a treatment for hepatitis B. Based on the Company's
anticipated financial results for future ZADAXIN sales, it has been determined
that the expected 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 stockholders' 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 the Company's 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. SciClone's 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
essentially include clinical trials. Pharmaceutical development costs consist of
product formulation and chemical analysis.

ZADAXIN clinical trials are the largest and most significant
effect on the Company's 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 vary 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 the 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 the Company's 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 and other entities managing the
trials and laboratory and other direct expenses are recognized in the period
they are estimated to be incurred and the services performed. The Company
monitors active patient enrollment levels and related activity to the extent
possible and adjusts estimates accordingly.

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, 2004, 2003 and
2002 were $235,000, $255,000 and $108,000, respectively.

Income Taxes

Income taxes are accounted for under the 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 the effect of an additional 8,979,653,
7,906,758 and 8,436,262 shares in 2004, 2003 and 2002, respectively, related to
convertible notes payable, outstanding options and warrants. The impact of these
shares was not included in the calculation of diluted net loss per share as
their effect was antidilutive.

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 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. The following weighted-average
assumptions used for the years ended December 31 are as follows:

`2004          2003          2002
                                                                         ------------  ------------  ------------
Weighted-average fair value of stock options granted................... $       3.22  $       4.10  $       2.75
Risk-free interest rate................................................         2.59 %        2.00 %        2.00 %
Dividend yield.........................................................         0.00 %        0.00 %        0.00 %
Volatility factor of the expected market price of our common stock.....        87.36 %       93.29 %       95.62 %
Weighted-average expected life of option (years).......................         4.00          4.03          3.88

Weighted-average fair value of employee stock purchase plan purchases.. $       1.83  $       1.74  $       0.99
Risk-free interest rate................................................         3.32 %        2.00 %        2.00 %
Dividend yield.........................................................         0.00 %        0.00 %        0.00 %
Volatility factor of the expected market price of our common stock.....        85.34 %       94.31 %       95.62 %
Weighted-average expected life of option (years).......................         0.24          0.25          0.25`

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 and director 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 stock options and
stock purchases.

Had compensation expense for the Company's option and
employee stock purchase plans been determined based on the fair value at the
grant date for awards in 2004, 2003 and 2002 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 as indicated below:

`2004          2003          2002
                                                                         ------------  ------------  ------------
Net loss as reported................................................... $(13,278,000) $ (5,275,000) $(10,037,000)
Total stock-based employee compensation expense determined ............
  under the fair value based method for all awards.....................   (4,257,000)   (3,010,000)   (2,283,000)
                                                                         ------------  ------------  ------------
Net loss  -- pro forma................................................. $(17,535,000) $ (8,285,000) $(12,320,000)
                                                                         ============  ============  ============

Basic and diluted net loss per share -- as reported.................... $      (0.30) $      (0.13) $      (0.29)
                                                                         ============  ============  ============

Basic and diluted net loss per share -- pro forma...................... $      (0.39) $      (0.21) $      (0.35)
                                                                         ============  ============  ============`

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 primarily 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.

Comprehensive Income (Loss)

The Company reports changes in unrealized gains or
losses on the Company's available-for-sale securities in comprehensive income
(loss). The accumulated other comprehensive income balances represent the
unrealized gains or losses on these securities at the balance sheet dates.

Segment Information

The Company operates in one segment (see Note 14).

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, 2004,
sales to four importing agents in China accounted for 91% of the Company's
product sales and sales to five importing agents in China accounted for 88% of
the Company's product sales for the year ended December 31, 2003 and sales to
six importing agents accounted for 88% of product sales for the year ended
December 31, 2002. In 2004, the three largest customers accounted for 32%, 29%
and 23% of sales, respectively. No other customer accounted for more than 10% of
sales in 2004. In 2003, the largest customer accounted for 52% of sales and the
second largest customer accounted for 14% of sales. No other customers accounted
for more than 10% of sales in 2003. 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 each of these
three years, the same importing agent was the single largest customer. As of
December 31, 2004, approximately $9,609,000, or 90% 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.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting
Standards Board ("FASB") issued FASB Statement No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R") which revises SFAS 123, and supersedes APB 25,
and its related implementation guidance.  Generally the approach in SFAS
123R is similar to the approach described in SFAS 123. However, SFAS 123R
requires share-based payments to employees and directors, including grants of
stock options, to be recognized in the statement of operations based on their
fair values. Pro forma disclosure is no longer an alternative.  The amount
of compensation cost will be measured based on the grant-date fair value of the
instruments issued.  Compensation cost will be recognized over the period
that an employee or director provides service in exchange for the award. 
We expect to adopt SFAS 123R on July 1, 2005.

As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees and directors using APB 25's intrinsic value
method and, as such, generally recognizes no compensation cost for employee and
director stock options. Accordingly, the adoption of SFAS 123R's fair value
method will have a significant impact on our result of operations, although it
will have no impact on our overall financial position. The impact of adoption of
SFAS 123R cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we adopted SFAS 123R in
prior periods, the impact of that standard would have approximated the impact of
SFAS 123 as described in the disclosure of pro forma net loss and net loss per
share in the Accounting for Stock-Based Compensation section of Note 1 to our
consolidated financial statements.

Note 2 - Available-for-sale
Securities

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

`Available-For Sale Securities
                                                                         ----------------------------------------
                                                                                          Gross       Estimated
                                                                          Amortized     Unrealized       Fair
                                                                             Cost         Gains         Value
                                                                         ------------  ------------  ------------
December 31, 2004:                                                                                               
  Certificates of deposit.............................................. $    805,000  $         --  $    805,000
  U.S. government obligations..........................................   22,843,000            --    22,843,000
  Short-term municipal securities......................................    9,200,000            --     9,200,000
  Corporate equity securities .........................................       51,000        38,000        89,000
                                                                         ------------  ------------  ------------
                                                                        $ 32,899,000  $     38,000  $ 32,937,000
                                                                         ============  ============  ============
                                                                                                                 
December 31, 2003:                                                                                               
  Certificates of deposit.............................................. $    798,000  $         --  $    798,000
  U.S. government obligations..........................................   38,259,000            --    38,259,000
  Short-term municipal securities......................................    9,050,000            --     9,050,000
  Corporate equity securities .........................................       51,000       176,000       227,000
                                                                         ------------  ------------  ------------
                                                                        $ 48,158,000  $    176,000  $ 48,334,000
                                                                         ============  ============  ============`

As of December 31, 2004, the total available-for-sale
securities are included on the accompanying balance sheets as follows,
$22,843,000 in cash and cash equivalents, $700,000 in restricted short-term
investments and $9,395,000 in other short-term investments. As of December 31,
2003, the total available-for-sale securities are included as follows,
$38,259,000 in cash and cash equivalents, $695,000 in restricted short-term
investments and $9,381,000 in other short-term investments. As of December 31,
2004 and 2003 all available-for sale securities excluding the short-term
municipal securities had maturities of 12 months or less. The short-term
municipals are auction rate securities which have long final maturities,
however, because they are highly rated, highly liquid and their interest rate is
reset at auction every 30 days, they are included as available-for-sale
securities. The Company's interest rate risk associated with these securities is
limited due to this interest rate reset mechanism.

Note 3 - Prepaid Expenses and Other Current Assets

The following is a summary of prepaid expenses and other
current assets:

`December 31,
                                                                         --------------------------
                                                                             2004          2003
                                                                         ------------  ------------              
Prepaid insurance...................................................... $    694,000  $    717,000
Prepaid rent...........................................................      102,000       100,000
Prepaid clinical trial expense.........................................      247,000     1,085,000
VAT receivable.........................................................      142,000       208,000
Other prepaid expenses.................................................      293,000       346,000
                                                                         ------------  ------------
                                                                        $  1,478,000  $  2,456,000
                                                                         ============  ============`

Note 4 - Inventories

Inventories consisted of the following:

`December 31,
                                                                         --------------------------
                                                                             2004          2003
                                                                         ------------  ------------              
Raw materials.......................................................... $  1,517,000  $  1,577,000
Work in process........................................................      276,000     1,955,000
Finished goods.........................................................    2,386,000     2,246,000
                                                                         ------------  ------------
                                                                        $  4,179,000  $  5,778,000
                                                                         ============  ============`

Note 5 - Property and Equipment

Property and equipment consisted of the following:

`December 31,
                                                                         --------------------------
                                                                             2004          2003
                                                                         ------------  ------------              
Office furniture and fixtures                                           $    290,000  $    243,000
Office equipment                                                             788,000       667,000
Leasehold improvements                                                       139,000       121,000
                                                                         ------------  ------------
                                                                           1,217,000     1,031,000
Less accumulated depreciation and amortization                              (819,000)     (706,000)
                                                                         ------------  ------------
Net property and equipment                                              $    398,000  $    325,000
                                                                         ============  ============`

Depreciation expense for the years ended December 31, 2004,
2003 and 2002 was $115,000, $90,000 and $122,000, respectively.

Note 6 - Intangible Assets

Intangible assets include the following:

`December 31,
                                                                         --------------------------
                                                                             2004          2003
                                                                         ------------  ------------              
Intangible product rights.............................................. $  2,456,000  $  2,456,000
Accumulated amortization...............................................   (1,914,000)   (1,844,000)
                                                                         ------------  ------------
                                                                        $    542,000  $    612,000
                                                                         ============  ============`

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 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.

Acquired ZADAXIN product rights are being amortized on a
straight-line basis over their estimated useful lives. Amortization expense for
the year ended December 31, 2002 was $409,000 based on an estimated useful life
of six years. Amortization expense for the years ended December 31, 2004 and
2003 was $70,000 per year and for the years 2005 through 2012 is expected to be
$70,000 per year. The Company has reassessed the estimated useful life of the
assets as of January 1, 2003 to be an additional eight years through 2012. Based
upon the progress in the ZADAXIN clinical trials and the Company's actual
experience of product sales, the Company assessed that the acquired product
rights will be useful to the Company through 2012 when the European patent for
the use of ZADAXIN in the treatment of hepatitis C expires. The Company
reassesses the useful life of these assets in accordance with current facts and
circumstances.

Note 7 - Other Accrued Expenses

The following is a summary of other accrued expenses:

`December 31,
                                                                         --------------------------
                                                                             2004          2003
                                                                         ------------  ------------              
Accrued royalties...................................................... $    420,000  $    323,000
Accrued annual reports/website expenses................................       81,000       120,000
Accrued pre-clinical trial expenses....................................      133,000            --
Accrued interest payable...............................................       52,000        52,000
Other..................................................................      231,000       136,000
                                                                         ------------  ------------
                                                                        $    917,000  $    631,000
                                                                         ============  ============`

Note 8 - Collaborative Agreements

In May 2004, the Company entered into an agreement with
Sigma-Tau, whereas Sigma-Tau will be conducting a multi-center phase 3 hepatitis
C triple therapy clinical trial in Europe with approximately 550 patients. The
objective of the European trial is to provide data on ZADAXIN's use as part of a
triple therapy in treating HCV patients. The Company will provide ZADAXIN, and
approximately $2,500,000 of funding support and a $1,500,000 milestone payment
to Sigma-Tau at the completion of the study.

In October 2003, the Company and Wayne State University
("WSU") amended a license agreement that WSU and A1B had entered into in 1994
that was subsequently assigned by A1B to SciClone. The 2003 amendment allows the
Company to maintain an exclusive license to certain WSU patents regarding the
use of thymosin alpha 1 in the treatment of hepatitis B and hepatitis C. In
addition to certain minimum royalty payments following sales of ZADAXIN in
certain territories, the Company is obligated to pay WSU a total of $1,400,000
in pre-paid royalties over the following three years whether or not the Company
receives regulatory approval for ZADAXIN or sales are made in the covered
territories including the United States. The Company can offset the annual
minimum royalties due on sales of ZADAXIN with these pre-paid royalties to the
extent of 50% of the annual royalties in any one year. In the year ended
December 31, 2004 and 2003, the Company paid $300,000 and $200,000, respectively
of the pre-paid royalties. These amounts plus the unpaid balance of $900,000
that is due over the next two years have been recorded as pre-paid royalties in
the long term other assets account on the accompanying balance sheets. The
remaining obligation to pay $900,000 has been included in other accrued expenses
and other long term liabilities on the accompanying balance sheets.

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 then 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 estimated time to complete the
ZADAXIN U.S. phase 3 HCV clinical trials and deliver the clinical data, the
substantive performance requirements under the contract amendment. For the year
ended December 31, 2004, 2003 and 2002, the Company recognized $537,000,
$806,000 and $671,000, respectively, as contract revenue and the remaining
$671,000 is recorded as deferred revenue as of December 31, 2004. Additionally,
in the second quarter of 2004, the Company recognized a $1,000,000 milestone
payment from Sigma-Tau for the full enrollment of the Company's current phase 3
U.S. clinical trials as there are no future performance obligations associated
with the milestone payment.

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 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.

Note 9 - Other Long-term Liabilities

The following is a summary of other long-term
liabilities:

`December 31,
                                                                         --------------------------
                                                                             2004          2003
                                                                         ------------  ------------              
Accrued compensation and employee benefits............................. $    544,000  $         --
Accrued royalties......................................................      500,000       900,000
                                                                         ------------  ------------
                                                                        $  1,044,000  $    900,000
                                                                         ============  ============`

Note 10 - Income Taxes

The domestic and foreign components of pre tax income
(loss) for the years ended December 31 are as follows:

`Years Ended December 31,
                                                                         ----------------------------------------
                                                                             2004          2003          2002
                                                                         ------------  ------------  ------------
Domestic............................................................... $(17,433,000) $(15,768,000) $ (9,510,000)
Foreign................................................................    4,155,000    10,493,000      (527,000)
                                                                         ------------  ------------  ------------
Loss                                                                    $(13,278,000) $ (5,275,000) $(10,037,000)
                                                                         ============  ============  ============`

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

`December 31,
                                                                         --------------------------
                                                                             2004          2003
                                                                         ------------  ------------
Assets                                                                                                           
  Net operating loss carryforwards..................................... $ 36,264,000  $ 30,212,000
  R&D credit carryforwards.............................................    5,474,000     5,238,000
  Other................................................................    1,156,000     1,095,000
                                                                         ------------  ------------
Gross deferred tax assets..............................................   42,894,000    36,545,000
Valuation allowance....................................................  (42,894,000)  (36,545,000)
                                                                         ------------  ------------
    Total deferred tax assets.......................................... $         --  $         --
                                                                         ============  ============`

The valuation allowance increased by approximately
$6,349,000, $5,825,000 and $3,272,000 in the years ended December 31, 2004, 2003
and 2002, respectively. Deferred tax assets relating to carryforwards as of
December 31, 2004 include approximately $7,504,000 associated with stock option
activity for which any subsequently recognized tax benefits will be credited
directly to stockholders' equity. The Company did not have any deferred tax
liabilities at December 31, 2004 or 2003.

At December 31, 2004, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $104,000,000
which expire in the years 2006 through 2024. At December 31, 2003, the Company
has federal tax credit carryforwards of approximately $5,000,000 which expire in
the years 2006 through 2024.

At December 31, 2004, the Company has state net operating
loss carryforwards of approximately $17,000,000 available to reduce future
taxable income. The carryforwards begin to expire in 2005, if not utilized. In
addition, the Company has research and development tax credit carryforwards of
approximately $700,000 for state tax purposes at December 31, 2004. The tax
credit carryforward will be carried forward indefinitely until utilized.

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 losses, the Company did not record any
state income tax expense for the years ended December 31, 2004, 2003 and
2002.

Note 11 - 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 2005. Rent expense in 2004, 2003 and 2002 was $1,393,000, $1,362,000 and
$1,376,000, respectively. Minimum future rental payments amount to a total of
$3,540,000, which consists of $1,378,000 in 2005, $1,299,000 in 2006 and
$863,000 in 2007.

Royalties

Under the October 2003 amendment to the Patent
License Agreement with Wayne State University, the Company is obligated to pay
WSU a royalty, subject to minimum amounts, on a percentage of ZADAXIN net sales
revenue for the treatment of hepatitis B and hepatitis C in certain countries
including the United States, the European Union and Japan, but not including
China. In addition, the Company is obligated to pay WSU pre-paid royalties of
$400,000 and $500,000 in 2005 and 2006, respectively, whether or not the Company
receives regulatory approval for ZADAXIN or sales are made in the covered
territories including the United States. The Company can offset the annual
minimum royalties due on sales of ZADAXIN with these pre-paid royalties to the
extent of 50% of the annual royalties in any one year. In the year ended
December 31, 2004 and 2003, the Company paid WSU $300,000 and $200,000,
respectively, of pre-paid 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 2004, 2003 and 2002 the Company paid $20,000 per year to the U.S.
Army related to the minimum annual royalty.

Convertible Notes Payable

In March 2001, the Company issued a $1,600,000
convertible note to 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 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 convertible
note to 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 convertible notes due December 2005.
If issued, the notes will bear no interest (zero coupon) and will be 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 12 - Stockholders' Equity

On July 18, 2003, the Company reincorporated from a
California corporation to a Delaware corporation by merging the Company, then a
California corporation, with and into SciClone Pharmaceuticals Inc., a Delaware
corporation and wholly-owned subsidiary of the Company. Each share of
outstanding stock of the California corporation was automatically exchanged for
a like share of stock of the Delaware corporation.

Common Stock and Warrants

In July 2004 when the former CEO left the Company,
his outstanding unvested options to purchase 253,541 shares of the Company's
common stock became fully vested and all of his outstanding options to purchase
1,615,454 shares became exercisable for a one or two year period. These changes
to the former CEO's options did not result in any stock-based compensation as
the changes were effected in accordance with the original terms of the option
grants.

In September 2003, the Company completed a public offering of
6,000,000 shares of common stock at $8.00 per share and received proceeds of
$45,120,000 from the sale, net of $694,000 of financing-related costs.

In January 2003, the Company completed a $1,800,000 direct
placement to affiliates of Sigma-Tau. 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 were not permitted to
sell any of the shares purchased in this private placement until January 24,
2004.

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 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, 2004, none of these warrants had been
exercised and the exercise period of all these warrants expired in January 2005.
In addition, the placement agent for this transaction received, as part of its
fee, five-year warrants to purchase 108,000 shares of common stock at an
exercise price of $7.00 per share. In 2003, warrants to purchase 3,240 shares of
common stock were exercised for proceeds of $22,680. As of December 31, 2004,
placement agent warrants to purchase 104,760 of common stock had not been
exercised and the exercise period of all of these warrants expired in January
2005.

In January 1999, the Company issued warrants to purchase a
total of 150,000 shares of common stock to Cato Research Ltd. as part of a
settlement agreement. Of this total, warrants to purchase 50,000 shares of
common stock were exercised at a price of $1.225 for proceeds of $61,250 in
March 2000. In January 2004, the remaining warrants to purchase 100,000 shares
of common stock were exercised at a price of $2.25 for 65,753 shares of common
stock.

Stock Award Plans

In August 1991, the Board of Directors and
stockholders 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 stockholders 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 stockholders 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 stockholders 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 stockholders 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 stockholders 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. Although the 1995 Plan expired on
January 1, 2005, the outstanding options relating to it are fully valid. In May
2004, the Board of Directors and the stockholders of the Company approved the
2004 Stock Option Plan (the "2004 Plan") and reserved 2,500,000 shares for
issuance thereunder. The 2004 Plan permits the award of incentive stock options
or nonstatutory stock options.

Under the 1991, 1992, 1995 and 2004 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 stockholders of
the Company approved the Nonemployee Director Stock Option Plan (the
"Nonemployee Director Plan") and reserved 250,000 shares for issuance
thereunder. In June 2000 and June 2002 the Board of Directors and stockholders
of the Company approved 250,000 increases in the shares reserved for issuance
under the Nonemployee Director Plan. In May 2004, the Board of Directors and
stockholders of the Company approved the 2004 Outside Directors Stock Option
Plan and reserved 465,000 shares for issuance thereunder and the Nonemployee
Director Stock Option Plan was canceled. The 2004 Outside Directors Stock Option
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 Stockholders ("Annual Grant"). The options
are granted at fair market value on the date of grant. Initial grants will
become exercisable in three equal annual installments beginning on the first
anniversary of the date of grant, and Annual grants will become exercisable in
twelve equal monthly installments from the date of grant, subject in each case
to the Outside Director's continuous service on our Board of Directors.

The following table summarizes the stock option activity
under the 1991, 1992, 1995 and 2004 Stock Option Plans, the Nonemployee Director
Plan and the 2004 Outside Director Stock Option Plan:

`Shares                     Weighted
                                                                          Available       Number       Average
                                                                             for            of         Exercise
                                                                            Grant         Shares        Price
                                                                         ------------  ------------  ------------
Balances 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)           --            --
                                                                         ------------  ------------
Balances at December 31, 2002..........................................    2,053,806     5,097,482          4.76
   Options canceled....................................................      345,168      (345,168)         7.43
   Options granted.....................................................   (1,162,034)    1,162,034          6.17
   Options exercised...................................................           --      (380,630)         2.76
   Plan shares expired.................................................      (79,697)           --            --
                                                                         ------------  ------------
Balances at December 31, 2003..........................................    1,157,243     5,533,718          5.02
   2004 Plan shares reserved...........................................    2,500,000            --            --
   2004 Outside Directors Plan shares reserved.........................      465,000            --            --
   Options canceled....................................................      225,955      (225,955)         6.35
   Options granted.....................................................   (1,402,000)    1,402,000          5.05
   Options exercised...................................................           --        (3,150)         3.79
   Plan shares expired.................................................     (269,775)           --            --
                                                                         ------------  ------------
Balances at December 31, 2004..........................................    2,676,423     6,706,613          4.99
                                                                         ============  ============`

The following table summarizes information concerning
outstanding and exercisable options as of December 31, 2004:

`Options Outstanding               Options Exercisable
                   ------------------------------------ ------------------------
                                 Weighted
                                  Average     Weighted                 Weighted
                                 Remaining    Average                  Average
Range of Exercise     Number    Contractual   Exercise     Number      Exercise
      Prices       Outstanding     Life        Price    Exercisable     Price
------------------ ------------ -----------  ---------- ------------  ----------
   $1.22 - $2.47     1,214,391        4.09  $     1.68    1,214,391  $     1.68
   $2.67 - $4.25     1,546,416        6.93  $     3.89    1,214,126  $     3.87
   $4.50 - $5.23     1,148,267        7.34  $     4.92      472,250  $     4.85
   $5.25 - $5.83     1,801,614        5.84  $     5.63    1,097,008  $     5.56
   $5.88- $10.75       990,925        4.80  $     9.62      969,029  $     9.68
   $12.50                5,000        5.16  $    12.50        5,000       12.50
                   ------------                         ------------
                     6,706,613        5.88  $     4.99    4,971,804  $     4.94
                   ============                         ============`

As of December 31, 2003 and 2002, options outstanding were
exercisable for 3,943,906 and 3,677,142 shares, respectively.

In July 1996, the Board of Directors and stockholders of the
Company approved the 1996 Employee Stock Purchase Plan (the "ESPP") and reserved
500,000 shares for issuance thereunder. In June 2003, the Board of Directors and
stockholders of the Company approved 500,000 increases in the shares reserved
for issuance under the 1996 Employee Stock Purchase Plan. 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 124,798, 127,920 and
67,160 shares to employees in 2004, 2003 and 2002, respectively.

Reserved Shares

As of December 31, 2004, the Company had reserved
shares of common stock for future issuance as follows:

`Options outstanding.....................    6,706,613
Shares available for grant..............    2,676,423
Warrants outstanding....................      904,760
Convertible notes payable...............    1,368,280
ESPP....................................      385,086
                                          ------------
                                           12,041,162
                                          ============`

Note 13 - 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 $161,000, $129,000 and $101,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.

Note 14 - 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 Office of the President, consisting of the Chief
Operating Officer and Chief Financial Officer, has been identified as the Chief
Operating Decision Makers ("CODM") because they have 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 engaged in sales and marketing
and product distribution worldwide.

Information regarding geographic areas is as follows:

`Product       Contract
                    Sales        Revenue         Long
                   for the       for the        Lived
                  Year Ended    Year Ended      Assets      Net Assets
                 December 31,  December 31,  December 31,  December 31,
                 ------------  ------------  ------------  ------------
2004:                                                                  
  U.S.......... $         --  $         --  $  1,980,000  $ 26,892,000
  China........   20,174,000            --       283,000    28,014,000
  Other........    2,051,000     1,631,000       211,000       217,000
                 ------------  ------------  ------------  ------------
    Total...... $ 22,225,000  $  1,631,000  $  2,474,000  $ 55,123,000
                 ============  ============  ============  ============
                                                                       
2003:                                                                  
  U.S.......... $         --  $         --  $  2,043,000  $ 45,093,000
  China........   28,078,000            --       213,000    22,928,000
  Other........    3,654,000       806,000       215,000       229,000
                 ------------  ------------  ------------  ------------
    Total...... $ 31,732,000  $    806,000  $  2,471,000  $ 68,250,000
                 ============  ============  ============  ============
                                                                       
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
                 ============  ============  ============  ============`

Three customers accounted for 10% or more of total revenues
(32%, 29% and 23%) for an aggregate of 84% of total revenues for the year ended
December 31, 2004. Two customers accounted for 10% or more of total revenues
(52% and 14%) for an aggregate of 66% of total revenues for the year ended
December 31, 2003. Two customers accounted for 10% or more of total revenues
(41% and 27%) for an aggregate of 68% of total revenues for the year ended
December 31, 2002. No other customer accounted for more than 10% of total
revenues during these years.

Note 15 - Selected Quarterly Financial Data
(unaudited)

`Three Months Ended
                                               ------------------------------------------------------

                                                March 31,      June 30,    September 30, December 31,
                                               ------------  ------------  ------------  ------------
2004:
Product sales................................ $  5,414,000  $  5,613,000  $  5,753,000  $  5,985,000
Contract revenue.............................      228,000     1,135,000       134,000       134,000
Cost of product sales........................    1,142,000     1,178,000     1,109,000     1,148,000
Gross margin.................................    4,500,000     5,570,000     4,778,000     4,971,000
Net loss.....................................   (3,133,000)   (2,877,000)   (4,913,000)   (2,355,000)
Basic net loss per share.....................        (0.07)        (0.06)        (0.11)        (0.05)
Diluted net loss per share...................        (0.07)        (0.06)        (0.11)        (0.05)

2003:
Product sales................................ $  5,000,000  $ 16,207,000  $  5,421,000  $  5,104,000
Contract revenue.............................      224,000       224,000       224,000       134,000
Cost of product sales........................    1,016,000     2,931,000       935,000       754,000
Gross margin.................................    4,208,000    13,500,000     4,710,000     4,484,000
Net income (loss)............................   (2,862,000)    5,124,000    (2,850,000)   (4,687,000)
Basic net income (loss) per share............        (0.08)         0.14         (0.07)        (0.11)
Diluted net income (loss) per share..........        (0.08)         0.13         (0.07)        (0.11)`

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

Not applicable

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and
Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report,
the Company carried out an evaluation, under the supervision and with the
participation of its management, including the two members of the Office of the
President, who are our Chief Financial Officer and Chief Operating Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures in ensuring that material information required to be
disclosed in the Company's reports filed or submitted under the Exchange Act has
been made known to them in a timely fashion.

Management's Report on Internal Control over Financial
Reporting

Management of the Company is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. The Company's internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the consolidated financial
statements.

Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. All control
systems have inherent limitations so that no evaluation of controls can provide
absolute assurance that all control issues are detected. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our
management, including our Office of the President, we assessed the effectiveness
of the Company's internal control over financial reporting as of December 31,
2004, based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated
Framework. Based on this assessment and those criteria, management believes that
the Company maintained effective internal control over financial reporting as of
December 31, 2004.

Ernst & Young LLP, an independent registered public
accounting firm, has audited management's assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004, as
stated in their report which is included elsewhere herein.

Changes in Internal Control over Financial Reporting

There was no change in the Company's internal control
over financial reporting identified in connection with the evaluation that
occurred during the fourth quarter of 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. There has been no change in internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

Item 9B. Other Information

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 2005 Annual Meeting of Stockholders 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," and "ELECTION OF DIRECTORS - Board Meetings and
Committees - Audit Committee." 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."

The information required by Item 406 of Regulation S-K,
including the Code of Conduct, is posted on the Company's website at

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" and "ELECTION OF DIRECTORS - Compensation of Directors."

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

Equity Compensation Plan Information

As of December 31, 2004, the Company maintained seven
compensation plans that provide for the issuance of 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, the 1996 Employee Stock Purchase Plan, the 2004
Stock Option Plan and the 2004 Outside Directors Stock Option Plan, which plans
have all been approved by the Company's stockholders. The Company does not
currently maintain any compensation plans that have not been approved by the
Company's stockholders. The following table sets forth information regarding
outstanding options and shares reserved for future issuance under the foregoing
plans as of December 31, 2004:

`Number of      Weighted      Number of shares
                                                      shares to be    average     remaining available
                                                      issued upon     exercise    for future issuance
                                                      exercise of     price of        under equity
                                                      outstanding   outstanding    compensation plans
                                                        options,      options,     (excluding shares
                                                        warrants      warrants        reflected in
                                                       and rights    and rights       column (a))
Plan Category                                             (a)           (b)               (c)
----------------------------------------------------  ------------  ------------  --------------------
Equity compensation plans approved by stockholders:
   1991 Stock Plan..................................    1,257,070        4.6982                    --
   1992 Stock Plan..................................       81,500        5.3126                    --
   1995 Equity Incentive Plan.......................    4,479,543        4.8650                22,423
   1995 Nonemployee Director Stock Option Plan......      577,500        6.6239                    --
   1996 Employee Stock Purchase Plan................           --            --               385,086 (1)
   2004 Stock Option Plan...........................       81,000        3.8586             2,419,000
   2004 Outside Directors Stock Option Plan.........      230,000        5.0822               235,000
                                                      ------------                --------------------
Total                                                   6,706,613        4.9859             3,061,509
                                                      ============                ====================`

(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."

Item 14. Principal Accountant Fees and
Services

The information required by this Item is incorporated
by reference from the Proxy Statement under the caption "RATIFICATION OF
APPOINTMENT OF INDEPENDENT AUDITORS - Principal Accountant Fees."

PART IV

Item 15. Exhibits, Financial Statement Schedules

Item 15 (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 37 - 56 of this Report on Form
10-K:

Reports of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets at December 31, 2004 and 2003.

Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2004.

Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 2004.

Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2004.

Notes to Consolidated Financial Statements.

(2)	Financial Statement Schedules

The following schedule required to be filed by Item 8 of this
form and Item 15(d) is contained on page 64 of this Report:

Schedule II - Valuation and Qualifying Accounts for each of
the three years in the period ended December 31, 2004.

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 thereto.

(3)	Exhibits.

Refer to Item 15(b) below.

Item 15 (b).	Exhibits.

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

|ExhibitNumber | Description                                                                                                                                                                                                    
|------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(i).1(1)     | Amended and Restated Certificate of
Incorporation.                                                                                                                                                             
|3(ii).1(1)    | Bylaws.                                                                                                                                                                                                        
|4.1(9)        | Rights Agreement dated as of July 25, 1997
between the Registrant and Chase Mellon Shareholder Services, LLC                                                                                                   
|4.2(1)        | First Amendment to Rights Agreement dated as of
July 17, 2003 between the Registrant and Mellon Investor Services
LLC.                                                                                         
|4.3(13)*      | 6% Convertible Note dated as of December 7, 2000
by the Registrant in favor of UBS AG, London Branch.                                                                                                          
|4.4(13)*      | Option Agreement dated as of October 26, 2000 by
and between the Registrant and UBS AG, London Branch.                                                                                                         
|4.5(13)*      | Amendment No. 1 to Option Agreement dated as of
December 19, 2000 by and between the Registrant and UBS AG, London
Branch.                                                                                     
|4.6(14)*      | 6% Convertible Note dated as of March 21, 2001
by the Company in favor of UBS AG, London Branch.                                                                                                               
|4.7(14)*      | Option Agreement dated as of February 16, 2001
by and between the Company and UBS AG, London Branch.                                                                                                           
|4.8(14)*      | Amendment No. 1 to Option Agreement dated as of
March 21, 2001 by and between the Company and UBS AG, London Branch.                                                                                           
|10.1(3)**     | Registrant's 1991 Stock Plan, together with
forms of agreements thereunder.                                                                                                                                    
|10.2(2)**     | Registrant's 1992 Stock Plan, together with
forms of agreements thereunder.                                                                                                                                    
|10.3(5)**     | Registrant's 1995 Equity Incentive Plan,
together with forms of agreement thereunder.                                                                                                                          
|10.4(5)**     | Registrant's 1995 Nonemployee Director Stock
Option Plan, together with forms of agreement thereunder.                                                                                                         
|10.5(17)**    | Registrant's 1996 Employee Stock Purchase Plan,
as amended.                                                                                                                                                    
|10.6(20)      | Registrant's 2004 Stock Option Plan                                                                                                                                                                            
|10.7(20)      | Registrant's 2004 Outside Directors Stock Option
Plan                                                                                                                                                          
|10.8(2)       | 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").        
|10.9(4)       | Amendment No. 4 to Spieker Lease, dated October
4, 1994.                                                                                                                                                       
|10.10(6)      | Amendment No. 7 to Spieker Lease, dated November
14, 1995.                                                                                                                                                     
|10.11(8)      | Amendment No. 8 to Spieker Lease, dated August
26, 1996.                                                                                                                                                       
|10.12(13)     | Amendment No. 14 to Spieker Lease dated November
21, 2000.                                                                                                                                                     
|10.13(19)     | Employment Agreement, effective as of February
1, 1996, between the Registrant and Donald R. Sellers.                                                                                                          
|10.14(19)     | Fifth Amendment of Employment Agreement,
effective as of November 30, 2003, between the Registrant and Donald R.
Sellers.                                                                                      
|10.15(13)     | Change in Control Agreement between the Company
and Alfred Rudolph dated as of November 19, 1999.                                                                                                              
|10.16(13)     | Change in Control Agreement between the Company
and Donald R. Sellers dated as of November 19, 1999.                                                                                                           
|10.17(15)     | Change in Control Agreement between the Company
and Richard A. Waldron dated as of April 30, 2001.                                                                                                             
|10.18(17)     | Change in Control Agreement between the Company
and Hans P. Schmid dated as of April 22, 2003.                                                                                                                 
|10.19(18)     | Form of Indemnity Agreement by and between the
Registrant and each director and executive officer of SciClone Pharmaceuticals,
Inc.                                                                            
|10.20(21)*    | Agreement Regarding Consulting, Resignation and
General Release of Claims between Registrant and Donald R. Sellers, dated July
14, 2004.                                                                       
|10.21(7)*     | License Agreement effective April 19, 1996
between the Registrant and the National Institute of Health Office of Technology
Transfer.                                                                          
|10.22(10)     | Alpha Rights Acquisition Agreement by and
between the Registrant and Alpha 1 Biomedicals, Inc., dated December 17,
1997.                                                                                       
|10.23(11)*    | 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.                 
|10.24(16)*    | 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.
|10.25(20)*    | Amendment No. 2 to the Expanded and Amended
Thymosin Alpha 1 License, Distributorship and Supply Agreement between the
Registrant and Sigma-Tau Industrie Farmacetiche Riunite S.p.A., dated May 20,
2004.     
|10.26(20)*    | Amendment No. 3 to the Expanded and Amended
Thymosin Alpha 1 License, Distributorship and Supply Agreement between the
Registrant and Sigma-Tau Industrie Farmacetiche Riunite S.p.A., dated May 21,
2004.     
|10.27(12)     | Acquisition Agreement between the Company and
Sclavo S.p.A. dated April 20, 1998.                                                                                                                              
|10.28(12)     | First Amendment to Acquisition Agreement between
the Company and Sclavo S.p.A., dated April 20, 1998.                                                                                                          
|10.29(14)*    | Registration Rights Agreement by and between the
Company and UBS AG, London Branch dated as of February 16, 2001.                                                                                              
|10.30(16)*    | 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.                                                                   
|10.31(19)*    | Manufacturing and Supply Agreement between
SciClone Pharmaceuticals International Ltd. and Patheon Italia S.p.A. dated as
of November 1, 2002.                                                                 
|10.32 (22)    | Agreement between the Company and Alfred R.
Rudolph, dated September 10, 2004.                                                                                                                                 
|10.33 (22)    | Agreement between the Company and Richard A.
Waldron, dated September 10, 2004.                                                                                                                                
|21.1          | Subsidiaries of Registrant.                                                                                                                                                                                    
|23.1(23)      | Consent of Independent Registered Public
Accounting Firm.                                                                                                                                                      
|24.1(23)      | Powers of Attorney. See page 63.                                                                                                                                                                               
|31.1(23)      | Rule 13a-14(a) Certification of member, Office
of the President.                                                                                                                                               
|31.2(23)      | Rule 13a-14(a) Certification of Chief Financial
Officer and member, Office of the President.                                                                                                                   
|32.1(23)      | Section 1350 Certification of member,
Office of the President.                                                                                                                                                 
|32.2(23)      | Section 1350 Certification of Chief
Financial Officer and member, Office of the President.                                                                                                                     

__________

* 	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 Current
Report on 8-K filed on July 28, 2003.

(2)	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.

(3)	Incorporated by reference from the Company's
Registration Statement on Form S-8 (No. 33-66832) filed with the Commission on
August 3, 1993.

(4)	Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.

(5)	Incorporated by reference from the Company's
Registration Statement on Form S-8 (No. 33-80911) filed with the Commission on
December 28, 1995.

(6)	Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.

(7)	Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1996.

(8)	Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996.

(9)	Incorporated by reference from the Company's Current
Report on Form 8-K filed on October 14, 1997.

(10)	Incorporated by reference from the Company's Current
Report on Form 8-K filed on January 26, 1998.

(11)	Incorporated by reference from the Company's Current
Report on Form 8-K filed on April 20, 2000.

(12)	Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1998.

(13)	Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.

(14) Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2001.

(15) Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.

(16) Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.

(17)	Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003.

(18)	Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2003.

(19)	Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.

(20)	Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004.

(21)	Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2004.

(22) Incorporated by reference from the Company's Current
Report on Form 8-K filed on September 15, 2004.

(23) Filed herewith.

Item 15 (c). None.

---

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

Date: March 15, 2005

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints Alfred R. Rudolph 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/ ALFRED R. RUDOLPH, M.D. | Chief Operating Officer and Member of the Office
of the President | March 15, 2005
|(Alfred R. Rudolph, M.D.)   | Principal Executive Officer                                       |               
|                            |                                                                   |               
|/s/ RICHARD A. WALDRON      | Chief Financial Officer and Member of the Office
of the President | March 15, 2005
|(Richard A. Waldron)        | Principal Executive and Financial
Officer                         |               
|                            |                                                                   |               
|/s/ IVAN HUI                | Director, Finance                                                 | March 15, 2005
|(Ivan B. Hui)               | Principal Accounting Officer                                      |               
|                            |                                                                   |               
|/s/ JOHN D. BAXTER, M.D.    | Director                                                          | March 15, 2005
|(John D. Baxter, M.D.)      |                                                                   |               
|                            |                                                                   |               
|/s/ EDWIN C. CADMAN, M.D.   | Director                                                          | March 15, 2005
|(Edwin C. Cadman, M.D.)     |                                                                   |               
|                            |                                                                   |               
|/s/ JERE E. GOYAN, PH.D.    | Chairman Emeritus                                                 | March 15, 2005
|(Jere E. Goyan, Ph.D.)      |                                                                   |               
|                            |                                                                   |               
|/s/ RICHARD J. HAWKINS      | Director                                                          | March 15, 2005
|(Richard J. Hawkins)        |                                                                   |               
|                            |                                                                   |               
|/s/ ROLF H. HENEL           | Director                                                          | March 15, 2005
|(Rolf H. Henel)             |                                                                   |               
|                            |                                                                   |               
|/s/ JON S. SAXE             | Director                                                          | March 15, 2005
|(Jon S. Saxe)               |                                                                   |               
|                            |                                                                   |               
|/s/ DEAN S. WOODMAN         | Chairman of Board of Directors                                    | March 15, 2005
|(Dean S. Woodman)           |                                                                   |               

---

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

SCICLONE PHARMACEUTICALS, INC.

`Balance at    Charged to                  Balance at
                                                          Beginning of    Costs and                    End of
Description                                                  Period       Expenses      Deductions     Period
--------------------------------------------------------  ------------  -------------  ------------  ----------
Year Ended December 31, 2004                                                                                   
  Reserves and allowances deducted from asset accounts:
     Allowance for uncollectable accounts............... $    638,000  $          --  $    186,000  $  452,000
                                                                                                               
Year Ended December 31, 2003                                                                                   
  Reserves and allowances deducted from asset accounts:
     Allowance for uncollectable accounts............... $    638,000  $          --  $         --  $  638,000
                                                                                                               
Year Ended December 31, 2002                                                                                   
  Reserves and allowances deducted from asset accounts:
     Allowance for uncollectable accounts............... $    638,000  $          --  $         --  $  638,000`

---

INDEX TO EXHIBITS

|ExhibitNumber | Exhibit                                                                                                                                                                                                        
|------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3(i).1(1)     | Amended and Restated Certificate of
Incorporation.                                                                                                                                                             
|3(ii).1(1)    | Bylaws.                                                                                                                                                                                                        
|4.1(9)        | Rights Agreement dated as of July 25, 1997
between the Registrant and Chase Mellon Shareholder Services, LLC                                                                                                   
|4.2(1)        | First Amendment to Rights Agreement dated as of
July 17, 2003 between the Registrant and Mellon Investor Services
LLC.                                                                                         
|4.3(13)*      | 6% Convertible Note dated as of December 7, 2000
by the Registrant in favor of UBS AG, London Branch.                                                                                                          
|4.4(13)*      | Option Agreement dated as of October 26, 2000 by
and between the Registrant and UBS AG, London Branch.                                                                                                         
|4.5(13)*      | Amendment No. 1 to Option Agreement dated as of
December 19, 2000 by and between the Registrant and UBS AG, London
Branch.                                                                                     
|4.6(14)*      | 6% Convertible Note dated as of March 21, 2001
by the Company in favor of UBS AG, London Branch.                                                                                                               
|4.7(14)*      | Option Agreement dated as of February 16, 2001
by and between the Company and UBS AG, London Branch.                                                                                                           
|4.8(14)*      | Amendment No. 1 to Option Agreement dated as of
March 21, 2001 by and between the Company and UBS AG, London Branch.                                                                                           
|10.1(3)**     | Registrant's 1991 Stock Plan, together with
forms of agreements thereunder.                                                                                                                                    
|10.2(2)**     | Registrant's 1992 Stock Plan, together with
forms of agreements thereunder.                                                                                                                                    
|10.3(5)**     | Registrant's 1995 Equity Incentive Plan,
together with forms of agreement thereunder.                                                                                                                          
|10.4(5)**     | Registrant's 1995 Nonemployee Director Stock
Option Plan, together with forms of agreement thereunder.                                                                                                         
|10.5(17)**    | Registrant's 1996 Employee Stock Purchase Plan,
as amended.                                                                                                                                                    
|10.6(20)      | Registrant's 2004 Stock Option Plan                                                                                                                                                                            
|10.7(20)      | Registrant's 2004 Outside Directors Stock Option
Plan                                                                                                                                                          
|10.8(2)       | 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").        
|10.9(4)       | Amendment No. 4 to Spieker Lease, dated October
4, 1994.                                                                                                                                                       
|10.10(6)      | Amendment No. 7 to Spieker Lease, dated November
14, 1995.                                                                                                                                                     
|10.11(8)      | Amendment No. 8 to Spieker Lease, dated August
26, 1996.                                                                                                                                                       
|10.12(13)     | Amendment No. 14 to Spieker Lease dated November
21, 2000.                                                                                                                                                     
|10.13(19)     | Employment Agreement, effective as of February
1, 1996, between the Registrant and Donald R. Sellers.                                                                                                          
|10.14(19)     | Fifth Amendment of Employment Agreement,
effective as of November 30, 2003, between the Registrant and Donald R.
Sellers.                                                                                      
|10.15(13)     | Change in Control Agreement between the Company
and Alfred Rudolph dated as of November 19, 1999.                                                                                                              
|10.16(13)     | Change in Control Agreement between the Company
and Donald R. Sellers dated as of November 19, 1999.                                                                                                           
|10.17(15)     | Change in Control Agreement between the Company
and Richard A. Waldron dated as of April 30, 2001.                                                                                                             
|10.18(17)     | Change in Control Agreement between the Company
and Hans P. Schmid dated as of April 22, 2003.                                                                                                                 
|10.19(18)     | Form of Indemnity Agreement by and between the
Registrant and each director and executive officer of SciClone Pharmaceuticals,
Inc.                                                                            
|10.20(21)*    | Agreement Regarding Consulting, Resignation and
General Release of Claims between Registrant and Donald R. Sellers, dated July
14, 2004.                                                                       
|10.21(7)*     | License Agreement effective April 19, 1996
between the Registrant and the National Institute of Health Office of Technology
Transfer.                                                                          
|10.22(10)     | Alpha Rights Acquisition Agreement by and
between the Registrant and Alpha 1 Biomedicals, Inc., dated December 17,
1997.                                                                                       
|10.23(11)*    | 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.                 
|10.24(16)*    | 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.
|10.25(20)*    | Amendment No. 2 to the Expanded and Amended
Thymosin Alpha 1 License, Distributorship and Supply Agreement between the
Registrant and Sigma-Tau Industrie Farmacetiche Riunite S.p.A., dated May 20,
2004.     
|10.26(20)*    | Amendment No. 3 to the Expanded and Amended
Thymosin Alpha 1 License, Distributorship and Supply Agreement between the
Registrant and Sigma-Tau Industrie Farmacetiche Riunite S.p.A., dated May 21,
2004.     
|10.27(12)     | Acquisition Agreement between the Company and
Sclavo S.p.A. dated April 20, 1998.                                                                                                                              
|10.28(12)     | First Amendment to Acquisition Agreement between
the Company and Sclavo S.p.A., dated April 20, 1998.                                                                                                          
|10.29(14)*    | Registration Rights Agreement by and between the
Company and UBS AG, London Branch dated as of February 16, 2001.                                                                                              
|10.30(16)*    | 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.                                                                   
|10.31(19)*    | Manufacturing and Supply Agreement between
SciClone Pharmaceuticals International Ltd. and Patheon Italia S.p.A. dated as
of November 1, 2002.                                                                 
|10.32 (22)    | Agreement between the Company and Alfred R.
Rudolph, dated September 10, 2004.                                                                                                                                 
|10.33 (22)    | Agreement between the Company and Richard A.
Waldron, dated September 10, 2004.                                                                                                                                
|21.1          | Subsidiaries of Registrant.
    PDF as a courtesy                                                                                                                                                              
|23.1(23)      | Consent of Independent Registered Public
Accounting Firm.
    PDF as a courtesy                                                                                                                                
|24.1(23)      | Powers of Attorney. See page 63.                                                                                                                                                                               
|31.1(23)      | Rule 13a-14(a) Certification of member of the
Office of the President.
    PDF as a courtesy                                                                                                                   
|31.2(23)      | Rule 13a-14(a) Certification of Chief Financial
Officer and member of the Office of the President.
    PDF as a courtesy                                                                                       
|32.1(23)      | Section 1350 Certification of member of the
Office of the President.
    PDF as a courtesy                                                                                                                     
|32.2(23)      | Section 1350 Certification of Chief
Financial Officer and member of the Office of the President.
    PDF as a courtesy                                                                                         

__________

* 	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 Current
Report on 8-K filed on July 28, 2003.

(2)	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.

(3)	Incorporated by reference from the Company's
Registration Statement on Form S-8 (No. 33-66832) filed with the Commission on
August 3, 1993.

(4)	Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.

(5)	Incorporated by reference from the Company's
Registration Statement on Form S-8 (No. 33-80911) filed with the Commission on
December 28, 1995.

(6)	Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.

(7)	Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1996.

(8)	Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996.

(9)	Incorporated by reference from the Company's Current
Report on Form 8-K filed on October 14, 1997.

(10)	Incorporated by reference from the Company's Current
Report on Form 8-K filed on January 26, 1998.

(11)	Incorporated by reference from the Company's Current
Report on Form 8-K filed on April 20, 2000.

(12)	Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1998.

(13)	Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.

(14) Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2001.

(15) Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.

(16) Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.

(17)	Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003.

(18)	Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2003.

(19)	Incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.

(20)	Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004.

(21)	Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2004.

(22) Incorporated by reference from the Company's Current
Report on Form 8-K filed on September 15, 2004.

(23) Filed herewith.

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