UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

For the quarterly period ended December 31, 2004

OR

From the transition period from to

Commission File Number: 0-27854

BONE CARE INTERNATIONAL, INC.

1600 Aspen Commons, Suite 900
Middleton, Wisconsin 53562
(Address of Principal Executive Offices)

608-662-7800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

As of February 1, 2005, there were 19,957,168 shares of the registrant’s common stock issued and outstanding.

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BONE CARE INTERNATIONAL, INC.

FORM 10-Q

For the quarterly period ended December 31, 2004

TABLE OF CONTENTS

     Bone Care^® is a registered trademark of Bone Care International, Inc. in the U.S. Hectorol^® is a registered trademark of Bone Care International, Inc., in the U.S., the European Community, Japan and other selected countries. Hectorol^® is Bone Care’s brand name for the active drug substance, doxercalciferol. This filing may also include trademarks of other companies.

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BONE CARE INTERNATIONAL, INC.

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

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BONE CARE INTERNATIONAL, INC.

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

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BONE CARE INTERNATIONAL, INC.

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

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BONE CARE INTERNATIONAL, INC.

(1)	Basis of Presentation and Summary of Significant Accounting Policies

     Description of Business

     Bone Care International, Inc. (“Bone Care,” “we,” or the “Company”) is a specialty pharmaceutical company engaged in the discovery, development and commercialization of innovative therapeutic products to treat the unmet medical needs of patients with debilitating conditions and life-threatening diseases. Our current commercial and therapeutic focus is in nephrology utilizing Hectorol^Ò (doxercalciferol), our novel vitamin D hormone therapy, to treat secondary hyperparathyroidism in patients with moderate to severe chronic kidney disease and end-stage renal disease. Vitamin D hormone therapies are currently used to treat patients with a variety of diseases, including kidney disease, osteoporosis and psoriasis, and research has shown that they may be useful in treating certain cancers such as prostate, breast and colon. In June 1999, we received approval from the U.S. Food and Drug Administration for Hectorol^Ò 2.5 mcg Capsules, and in April 2000 we received approval for Hectorol^Ò Injection, both for the treatment of secondary hyperparathyroidism in end-stage renal disease. In April 2004, we received approval from the U.S. Food and Drug Administration for Hectorol^Ò 0.5 mcg Capsules for the treatment of secondary hyperparathyroidism in moderate to severe chronic kidney disease pre-dialysis.

     Basis of Presentation

     The accompanying unaudited condensed financial statements have been prepared from the books and records of Bone Care in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for the year. These financial statements should be read in conjunction with the financial statements and footnotes thereto for the year ended June 30, 2004 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission.

     Use of Estimates

     In preparing the financial statements in accordance with accounting principles generally accepted in the U.S., management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Reclassifications

     Certain prior period amounts in the condensed financial statements and the notes have been reclassified to conform to the fiscal 2005 presentation.

     Revenue Recognition Policy

     We record sales and the related costs of Hectorol^Ò 2.5 mcg Capsules and Hectorol^Ò Injection based on shipments to customers reduced by the estimated future returns and allowances. Revenue is recognized at the time of shipment as risk of loss has transferred to the customer, delivery has occurred, and collectibility is reasonably certain. Customers have a right to return product in accordance with our returns policy. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 48, “Revenue Recognition When Right of Return Exists”, our December 31, 2004 and June 30, 2004 balance sheets include accruals of $45,794 and $100,000, respectively, for an estimated amount of future returns, based on historical experience related to Hectorol^Ò Capsules and Hectorol^Ò Injection. In August 2004, we began selling our newly approved product, Hectorol^Ò 0.5 mcg Capsules. Due to insufficient historical data as it relates to Hectorol^Ò 0.5 mcg Capsules and since this product is promoted in a new market segment, pre-dialysis chronic kidney disease, we utilized various third-party data points for purposes of recognizing revenue and for estimating returned goods reserves. The third-party data points included prescription information and wholesaler inventory levels. For the three and six months ended December 31, 2004, we have recognized $741,355 and $992,375, respectively, of revenue

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related to Hectorol^Ò 0.5 mcg Capsules. As of December 31, 2004, we have recorded $696,024 in our balance sheet as deferred revenue representing the difference between shipments to customers and data points previously described. If current demand of Hectorol® 0.5 mcg Capsules continues to increase, the Company may be in a position to recognize revenue based on shipments to customers by the end of the 2005 fiscal year.

     Segments

     The Company operates in one segment with our current commercial focus in nephrology utilizing Hectorol^Ò, our novel vitamin D hormone therapy, to treat secondary hyperparathyroidism in patients with moderate to severe chronic kidney disease, pre-dialysis and end-stage renal disease. We currently derive our revenues from three products, Hectorol^Ò Injection, Hectorol^Ò 2.5 mcg Capsules and Hectorol^Ò 0.5 mcg Capsules. Revenue recognized by product is as follows:

     Cash and Cash Equivalents

     Highly liquid investments with original maturities of ninety days or less at the time of purchase are considered to be cash equivalents. Other highly liquid marketable securities with remaining maturities of one year or less at the balance sheet date are classified as marketable securities.

     Marketable Securities

     Securities as of December 31 2004 included the following:

     Held-to-Maturity securities included $34,130,701 of commercial paper classified as cash equivalents in the balance sheet at December 31, 2004 as these securities are highly liquid with maturity dates of ninety days or less at the balance sheet date.

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     Securities as of June 30, 2004 included the following:

     Held-to-Maturity securities included $20,231,291 of commercial paper classified as cash equivalents in the balance sheet at June 30, 2004 as these securities are highly liquid with maturity dates of ninety days or less at the balance sheet date.

     Scheduled maturities of Marketable Securities at December 31, 2004:

     In March 2004, the Financial Accounting Standards Board (“FASB”) ratified the recognition and measurement guidance and certain disclosure requirements for impaired securities as described in Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. The recognition and measurement guidance was applied to other-than-temporary impairment evaluations in reporting periods beginning with our first fiscal quarter 2005. In September 2004, the FASB Staff Position Board (“FSP”) has directed the FASB to delay the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF Issue No. 03-1. The delay of the effective date for paragraphs 10–20 will be superseded concurrent with the final issuance of proposed FSP EITF Issue 03-1-a, “Implication Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The disclosures continue to be effective in annual financial statements for fiscal years ending after December 15, 2003, for investments accounted for under SFAS Nos. 115 and 124. For all other investments within the scope of EITF Issue No. 03-1, the disclosures continue to be effective in annual financial statements for fiscal years ending after June 15, 2004. The additional disclosures for cost method investments continue to be effective for fiscal years ending after June 15, 2004. Upon final issuance, we believe the future adoption of the recognition and measurement guidance in EITF Issue No. 03-1 will not have a material impact on our financial statements.

     Investments are considered to be impaired when a decline in fair value is judged to be other than temporary. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which fair value is less than cost, and our intent and ability to hold the investment. Once a decline in fair value is determined to be other than temporary, an impairment charge is recorded and a new cost basis in the investment is established.

     At December 31, 2004, the unrealized losses on mutual funds were included in accumulated other comprehensive income within the equity section of the balance sheet. The unrecognized losses on commercial paper represent losses on fixed

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income securities, which is primarily attributable to changes in market interest rates. We do not believe the unrealized loss on these securities represents an other-than temporary impairment based on the short-term duration of the securities, the issuers’ high credit quality and our ability and intent to hold the investments for the foreseeable future. The commercial paper has been in a loss position for less than twelve months.

     Accounts Receivable

     Accounts receivable is stated net of allowance for doubtful accounts of $30,940 and $72,070 at December 31, 2004 and June 30, 2004, respectively.

Inventory

     Inventory is stated at the lower of cost or market; cost is determined in a manner which approximates the first-in, first-out (FIFO) method. Inventory consisted of the following:

     Finished goods inventory at December 31, 2004 included $19,808 of our Hectorol^Ò 0.5 mcg Capsules owned by our wholesale customers for which we have not yet recognized revenue.

Property, Plant and Equipment

     Property, plant and equipment is carried at cost and depreciation expense is calculated using the straight-line method. For the three and six months ended December 31, 2004, the Company recognized depreciation expense of $260,560 and $452,417, respectively. Included in depreciation expense is amortization related to our sales-leaseback transaction of fleet vehicles.

     On December 13, 2004, the Company relocated its principal office, which resulted in the write off of certain leasehold improvements, furniture and fixtures representing $120,794 as reflected in our statement of operations.

     We continue to evaluate the carrying value of property and equipment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the expected future undiscounted cash flows are less than the carrying amount of the asset, a loss is recognized for the differences between the fair value and the carrying value of the asset. Property, plant and equipment consisted of the following:

     Intangibles

     Legal costs incurred to register patents are amortized on a straight-line basis over the life of the patent (weighted average amortization period of 10 years at December 31, 2004). Patent fees are stated net of accumulated amortization of

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$1,421,382 and $1,131,427 at December 31, 2004 and June 30, 2004, respectively.

     The Company evaluates goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, an assessment of fair value is used to test for impairment of goodwill and other intangible assets on at least an annual basis or when circumstances indicate a possible impairment. The Company’s annual assessment will be performed during the quarter ended June 30, 2005. The Company does not expect any indicators of impairment.

     Research and Development

     Research and development efforts are focused on developing and evaluating the clinical utility of Hectorol^Ò, LR-103, and BCI-202 in secondary hyperparathyroidism and hyperproliferative diseases, as well as developing additional products and product candidates. All research and development costs are expensed as incurred, which include, but are not limited to, personnel, lab supplies, preclinical and clinical studies, active ingredients for use in clinical trial drugs, manufacturing costs, sponsored research at other labs, consulting, and research-related overhead. For the three and six months ended December 31, 2004, we have incurred $3,229,259 and $5,768,660, respectively, of research and development expenses. The major portion of these expenses were for personnel in research, clinical development, clinical support and regulatory compliance.

     Stock Based Compensation

     Stock-based compensation related to employees and non-employee directors is recognized using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and thus there is no compensation expense for options granted with exercise prices equal to the fair value of our common stock on the date of the grant. Restricted stock awards are valued at the fair value of our common stock on the date of grant and reflected in the equity section as part of common stock. Compensation expense is recognized for restricted stock awards on a straight-line basis over the vesting period of the entire award with the balance of unearned compensation reflected in the equity section of the balance sheet.

     Pro forma net income/(loss) per share had we elected to adopt the “fair-value based method” of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123,” are as follows:

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which will be effective in our first quarter of fiscal 2006. SFAS 123R will result in our recognition of compensation expense relating to our stock option plan. Under the new rules, we are required to adopt a fair-value-based method for measuring the compensation expense related to our employee and non-employee director stock awards, which will result in non-cash compensation expense which will have an adverse effect on our reported results of operations.

Income Taxes

     As of June 30, 2004, we had federal net operating loss carryforwards of $50,872,000 and research and development tax credit carryforwards of $2,394,000, which expire in 2011 through 2024. As of June 30, 2004, we also had state net

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operating loss carryforwards of $46,036,000 and research and development tax credit carryforwards of $756,000, which expire in 2006 through 2024. Realization of deferred tax assets is dependent upon generating sufficient taxable income prior to the expiration of the related carryforward period. Because we have had cumulative losses in recent years, management has concluded that a valuation allowance is needed for net deferred tax assets. At the point in time in which we have realized a cumulative profit over a period of three consecutive fiscal years, management may have a sufficient basis to conclude that some or all of the valuation allowance may be reduced.

     Advertising Expenses

     We expense advertising costs as incurred. Advertising expenses were $290,397 and $1,184,114 for the three and six months ended December 31, 2004, respectively, compared to $154,862 and $462,783 for the three and six months ended December 31, 2003, respectively.

     Concentration of Risk

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

     We purchase our active pharmaceutical ingredient for Hectorol^Ò from a sole supplier, although we are currently in the process of obtaining regulatory approval for an additional supplier. In addition, we rely on one manufacturer for Hectorol^Ò Injection, one supplier to formulate Hectorol^Ò Capsules and another supplier to package Hectorol^Ò Capsules. Although we believe that other manufacturers, suppliers, formulators, and vendors may be available to provide these goods and services to us, any change in suppliers or our method of manufacture may cause an increase in costs, a delay in manufacturing and a possible loss of sales, any of which would affect operating results adversely.

     Our customers primarily consist of wholesale distributors of pharmaceutical products. We utilize these wholesale distributors as the principal means of distributing our products to clinics and hospitals. Five individual wholesale distributors comprised 99% of the net accounts receivable balance as of December 31, 2004. These same five wholesale distributors represented 95% of our product sales for the