We are conducting preclinical studies with Xcytrin for use in combination with certain chemotherapy agents. Chemotherapy destroys cancer cells by interfering with their metabolism, protein synthesis or cell division. Because these agents are not tissue-selective, cancer chemotherapy agents produce serious or life-threatening side effects which compromise quality of life and increase medical costs for cancer patients. Preclinical studies conducted by us and our collaborators indicate that Xcytrin increases the responsiveness of tumors to treatment with certain chemotherapy agents. We believe this effect is related to Xcytrin's ability to disrupt cellular bioenergetics increasing the vulnerability of the cancer cells to cytotoxic chemotherapy. Xcytrin's uptake in tumors enhances the activity of cancer chemotherapy agents in tumor cells but not in normal tissues, thereby increasing the therapeutic margin, which is the difference between the therapeutic dose of a drug and the toxic dose of a drug. In preclinical studies, animals receiving Xcytrin and chemotherapy with either bleomycin or doxorubicin had enhanced tumor responses and survival rates as compared to control groups receiving equivalent doses of chemotherapy alone. Because of the encouraging preclinical data, we have begun a Phase I study evaluating Xcytrin in combination with doxorubicin that is currently enrolling patients. A Phase I study in head and neck cancer has also been initiated, which is evaluating Xcytrin in combination with radiation and chemotherapy.

In vitro studies done in collaboration with researchers at Stanford University Medical Center and published in the Proceedings of the National Academy of Sciences in February, 2002, have shown that Xcytrin selectively localizes in and destroys HIV infected human lymphocytes. Normal lymphocytes and uninfected lymphocytes from HIV patients are not affected. These studies showed that Xcytrin inhibited viral replication in vitro. The mechanism of action of this activity was found to be related to Xcytrin's ability to generate reactive oxygen species, highly cytotoxic substances, in the infected cells. Based on the in vitro studies elucidating this novel mechanism of action, we filed an IND with the FDA to evaluate the potential use of Xcytrin in patients with HIV that is resistant to standard anti-viral drugs. FDA has notified us that additional laboratory studies will be required before we can begin this clinical trial. We plan to perform additional in vitro and animal- studies to determine whether and when to proceed with clinical trials.

Preclinical studies conducted by Pharmacyclics and our collaborators have demonstrated that texaphyrins also accumulate in vascular plaque caused by atherosclerosis. Preclinical studies indicated that following intravenous injection of Antrin, light delivered into the blood vessel using an optical fiber resulted in non-mechanical reduction or elimination of the plaque without damage to the lining of the vessel. Antrin Phototherapy resulted in the elimination of inflammatory cells from the diseased vessel wall. Current treatments of atherosclerosis, such as balloon angioplasty, require anti- clotting drugs and the use of devices inserted inside the vessels to reduce the incidence of reclosure. We believe that these results suggest that Antrin Phototherapy has the potential to eliminate or reduce plaque without complications such as thrombosis and reclosure. Additional preclinical studies further indicated that Antrin Phototherapy could be used to treat longer segments of blood vessels, which is not possible with other currently available techniques. Antrin's accumulation in plaque and relatively rapid clearance from blood may provide advantages over alternative treatments for atherosclerosis. Removal of inflammatory cells also suggests that Antrin may reduce or stabilize vulnerable plaque. Vulnerable plaque is rich in inflammatory cells and prone to rupture causing a sudden blood clot and closure of the vessel. Preclinical studies have shown that Antrin and other texaphyrins accumulate in the inflammatory cells within atherosclerosis and that following phototherapy the number of these cells is reduced. These data suggest that Antrin Phototherapy may be useful for the treatment or stabilization of vulnerable plaque.

Clinical Status. In April 1999, we completed enrollment in our Phase I study with Antrin phototherapy for patients with peripheral arterial disease. Fifty-one patients received an injection of Antrin and 47 qualified to receive phototherapy of the lower extremities. The two-part study was designed to first establish an optimum dose of Antrin by treating successive groups of patients with increasing single doses of the drug. In the second part of the study, we evaluated three doses of light at several drug dose levels. We gave Antrin intravenously and delivered light to the inside of the diseased vessel using a 0.89mm optical fiber. We evaluated patients for toxicity and local arterial responses by follow-up angiograms and intravascular ultrasound performed the day of and 28 days after phototherapy. Clinical activity was evaluated using several well-established techniques. The ankle- brachial index and the Rutherford-Becker standardized classification of clinical outcomes were measured. The ankle-brachial index is a measurement of the impact of the obstruction on blood pressure in the affected limb. The Rutherford-Becker classification scores, which are based on standards for evaluating and reporting the results of surgical or percutaneous therapy for peripheral arterial disease, measure the change in clinical symptoms due to the treatment intervention.

The results of the Phase I drug- and light-dose escalation study were published in the journal Circulation in November 2000. The results indicated that Antrin phototherapy was well tolerated. There was no evidence of dose-limiting systemic or vascular toxicities in the drug and light dose ranges tested. No skin phototoxicity or treatment-related clinical laboratory abnormalities were reported. There was no evidence of thrombus, emboli or vessel wall damage. Mild and self-limited paresthesias, or tingling, in the fingertips was observed in patients receiving higher doses of drug. Four patients reported mild and transient skin rash. Baseline and day-28 paired angiograms were available for 43 patients. Overall, these indicated improvement in minimal luminal diameter on day 28 compared to baseline. Intravascular ultrasound data also indicated no evidence of vascular damage, thrombus, or hemorrhage in the treated vessel segments. There were no deleterious effects observed in adjacent untreated segments of vessel wall. The Rutherford-Becker classification and ankle-brachial index measurements were used to evaluate clinical responses to treatment in forty-seven patients. Rutherford-Becker scores improved in sixty two percent of these patients, and ankle-brachial index measurements at day 28 improved in fifty seven percent of patients. The authors concluded that the preliminary efficacy data suggested that there was a potential role for Antrin phototherapy for the treatment of atherosclerosis.

We completed enrollment of a randomized Phase II clinical trial with Antrin for patients with peripheral arterial disease of the lower extremities. The study is designed to evaluate both prevention of restenosis following balloon angioplasty and primary treatment of atherosclerosis. 150 patients have been enrolled in this study and are being evaluated with follow up angiograms.

We also completed enrollment of a Phase I clinical trial with Antrin for the treatment of coronary artery disease in patients receiving balloon angioplasty and stents. This study is primarily designed to evaluate the safety of various doses of drug and light. Patients are receiving follow-up angiograms six months after treatment to evaluate effects of the treatment on the blood vessels. In September 2001, we reported interim results of this trial at the European Society of Cardiology and the Transcatheter Cardiovascular Therapeutics meetings, which indicate that Antrin phototherapy is safe and feasible to perform in the coronary arteries.

We believe the optimum role for Antrin phototherapy will be in the treatment or stabilization of vulnerable plaque. We currently plan to establish a corporate alliance for Antrin before performing any additional clinical development.

Photodynamic therapy is a cancer treatment based on the use of light energy to activate certain types of drugs known as photosensitizers. In this procedure, the photosensitizer, ideally one which accumulates more readily in tumor cells, is injected into the patient. The tumor site is then illuminated with visible light of a strength and wavelength that is absorbed by the photosensitizer. Once so activated, the photosensitizer causes tumor cell death.

To date, photodynamic therapy has been approved only for the treatment of superficial or small lesions because existing photosensitizers have been unable to absorb light capable of penetrating deeply into tissues. Lutrin is activated by light of 720 to 760 nanometers, wavelengths that are optimal for penetrating through tissue, blood and skin pigmentation such as melanin. After absorbing light of the wavelength, Lutrin becomes activated to its tumor cell killing state. Preclinical studies indicate that Lutrin selectively accumulates in a variety of cancer cells.

We have initially studied Lutrin for photodynamic therapy of patients with invasive surface cancers that are accessible to externally applied light, such as recurrent breast cancer to the chest wall. The National Cancer Institute is sponsoring Phase I studies of Lutrin for treatment of cancer of the prostate and cervix. We plan to continue to supply drug and light devices for the National Cancer Institute studies of Lutrin but do not plan to conduct any additional clinical studies ourselves.

Pharmacyclics and our collaborators have conducted preclinical studies with Optrin for treatment of degeneration of the retina caused by abnormal growth of blood vessels. These studies have indicated that Optrin selectively eliminates abnormal retinal capillaries after activation by light of an appropriate wavelength. We entered into a development agreement with Alcon, an ophthalmic products company. Under this agreement, we provided Optrin to Alcon for further preclinical and clinical development. Alcon conducted Phase I and II studies with Optrin. In 2001, Alcon terminated its rights under the development agreement and, in accordance with the development agreement, returned to us all data associated with Alcon's development of Optrin. We do not plan to do any further development of Optrin ourselves.

Our oral magnetic resonance imaging contrast agent, Citra Vu, is not a texaphyrin, but is based on one of our patented compounds. Citra Vu was developed for use in imaging the gastrointestinal tract in patients undergoing MRI procedures of the abdomen or the pelvis. Citra Vu is an orange- flavored oral formulation designed to fill the bowel uniformly to improve diagnosis of abdominal or pelvic diseases.

We have granted E-Z-EM, Inc. exclusive rights to sell Citra Vu in North America and granted E-Z-EM's affiliate, E-Z-EM, Ltd., exclusive rights to sell Citra Vu in Europe. We do not expect significant revenue from this product should E-Z-EM, or its affiliate, market it in the future.

We rely on relationships with third parties to expand certain research, clinical development, process development, manufacturing, sales and marketing functions. In the photodynamic therapy field, we have used outside collaborations for development of light sources and delivery devices for use in our preclinical studies and clinical trials so that we could focus on development of our proprietary photosensitizing products.

National Cancer Institute Collaboration. In April 1997, the Decision Network Committee of the National Cancer Institute Division of Cancer Treatment, Diagnosis and Centers voted unanimously to sponsor and fund clinical development of both Xcytrin as a radiation enhancer and Lutrin as a photosensitizer for cancer treatment. Under this cooperative research and development agreement, Pharmacyclics and the National Cancer Institute jointly select clinical trials which will be conducted at leading medical centers for various types of cancer. For Xcytrin, the National Cancer Institute is conducting several separate clinical trials for treatment of brain tumors and cancers involving the lung and pancreas. For Lutrin, the National Cancer Institute is conducting clinical trials for cancer of the prostate and cervix. We believe that these National Cancer Institute-sponsored trials will supplement our own clinical development efforts for both Xcytrin and Lutrin. Although third parties will be conducting the trials, we will provide clinical supplies of our drugs and we intend to monitor the progression and results of these trials.

The University of Texas Agreements. We collaborate with and sponsor research and development programs at The University of Texas at Austin, through a group headed by Jonathan Sessler, Ph.D., Professor of Chemistry at The University of Texas at Austin. Such collaborations and programs extend our research capabilities in the field of expanded porphyrin chemistry. We have entered into two license agreements with The University of Texas at Austin that grant us the worldwide, exclusive right to patents or patent applications that relate to or result from research conducted at The University of Texas at Austin on the use, development and syntheses of expanded porphyrin molecules, and research conducted at The University of Texas at Dallas on the incorporation of paramagnetic metals into zeolites for use as MRI contrast agents. These agreements require us to pay royalties as a percentage of net sales to The University of Texas for products incorporating the licensed technology, including each of our current product candidates. In addition, we and The University of Texas at Austin have entered into sponsored research agreements which expand the products, inventions and discoveries developed by The University of Texas at Austin to which our license rights apply. In connection with The University of Texas license agreements, we also entered into a license agreement with an individual co-inventor of Citra Vu, pursuant to which we have been granted an exclusive royalty-bearing license to manufacture, use and sell certain products that fall within the scope of The University of Texas at Dallas license agreement.

Alcon Collaboration. In December 1997, we entered into an evaluation and license agreement with Alcon Pharmaceuticals, Ltd. under which Alcon acquired worldwide marketing rights to Optrin for ophthalmology uses. Alcon, a wholly-owned subsidiary of Nestlé S.A., is a global leader in the research, development, manufacturing and marketing of ophthalmic products. Under the terms of the agreement, we received an upfront fee for Alcon to evaluate Optrin for ophthalmology uses for a specified time period. Alcon completed the evaluation and paid us a milestone payment in fiscal 2000. In October 2001, Alcon terminated its rights under the agreement.

Nycomed Collaboration. In October 1997, we entered into an agreement with Nycomed, granting Nycomed exclusive sales and marketing rights to Lutrin for different types of cancer in all markets excluding the United States, Canada and Japan. In exchange for these rights, Nycomed agreed to pay us up to approximately $14.0 million in license fees and cost reimbursement, based upon an agreed budget, milestone payments and development cost subsidies related to the initial cancer uses for Lutrin to be developed by us and Nycomed. In each case, we were to reach certain development, clinical or commercialization milestones to receive payment. Nycomed agreed to bear a portion of the device and clinical development costs required for regulatory submission for product approval in the United States. We were required to supply bulk drug substance to Nycomed through our manufacturing collaborations. Nycomed was required to produce finished product for our use. In May 2001 we and Nycomed terminated this agreement. Pursuant to the termination agreement, we reacquired all our rights from Nycomed to develop and market Lutrin, and Nycomed agreed to make a non-recurring termination payment to Pharmacyclics of $2,750,000. The termination payment was recorded as revenue in the fourth quarter of fiscal 2001.

We believe our success depends upon our ability to protect our proprietary technology. We, therefore, aggressively pursue, prosecute, protect and defend patent applications, issued patents, trade secrets, and licensed patent and trade secret rights covering certain aspects of our technology.

Our patents, patent applications, and licensed patent rights cover various compounds, pharmaceutical formulations and methods of use. We own or have license rights to:

• 73 issued U.S. patents; and

• 8 other pending U.S. patent applications.

The issued U.S. patents expire between 2009 and 2019. We also own or license 108 issued non-U.S. patents including 73 patents issued throughout Europe and 116 pending non-U.S. patent applications filed regionally under the Patent Cooperation Treaty and with the European Patent Office, and nationally in Canada, Japan, Australia and certain other countries.

We may be unsuccessful in prosecuting our patent applications or patents may not issue from our patent applications. Even if patents are issued and maintained, these patents may not be of adequate scope to benefit us, or may be held invalid and unenforceable against third parties.

We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We require all of our employees, consultants, advisors and collaborators to execute appropriate confidentiality and assignment-of- inventions agreements. These agreements typically provide that all materials and confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances, and these agreements provide that all inventions arising out of the relationship with Pharmacyclics shall be our exclusive property.

We currently use third parties to manufacture various components of our products under development.

Texaphyrin-based Products. In September 1996, we entered into an agreement with Hoechst Celanese Corporation, a manufacturer of chemicals and pharmaceutical intermediates, to optimize and scale up a manufacturing process for and supply of our texaphyrin-based products. In October 1997, Hoechst Celanese assigned the agreement to Celanese, Ltd. in connection with Hoechst Celanese's corporate restructuring. This agreement granted Celanese exclusive worldwide manufacturing rights and required Celanese to supply all of our texaphyrin-based products for late-stage clinical and commercial use. As a result of the change in its business focus, Celanese requested that we pursue alternative supply sources. On August 27, 1999, we entered into an agreement to terminate the manufacturing and supply agreement with Celanese. Pursuant to that agreement, Celanese assigned to us all right, title and interest in and to the manufacturing technology and intellectual property for our texaphyrin-based products and agreed to make a cash payment of $750,000 to us. The termination agreement also relieved us of all obligations to pay Celanese for shared development costs incurred prior to termination of the agreement.

During discussions with Celanese that resulted in the termination of the manufacturing and supply agreement, we decided to change our manufacturing strategy to divide the manufacturing process for our texaphyrin- based products into three intermediates. We have entered into commercial supply agreements with three manufacturers who each manufacture a separate intermediate. In fiscal 2001, we took delivery of commercial quantities of Xcytrin drug substance.

We have entered into a development and supply agreement with Baxter Healthcare Corporation (formerly Cook Pharmaceutical Solutions) for the formulation, filling, packaging and labeling of clinical and commercial quantities of Xcytrin. Baxter also supplies us with clinical quantities of Antrin and Lutrin.

Photodynamic Therapy Light Production and Delivery Devices. In connection with our development of Lutrin and Antrin as photosensitizers, we have developed certain light sources and delivery methods, such as lasers and light emitting diodes. We have purchased light emitting diode devices capable of producing the required wavelength of light for use in photodynamic therapy with Lutrin. We have also used light emitting diode devices in preclinical animal studies and Phase I and Phase II trials. In addition, we have acquired from CardioFocus, Inc. cylindrically diffusing light fibers for animal studies and for use in our Lutrin and Antrin trials. In October 1997, we entered into a development agreement with Diomed, Inc. under which Diomed would develop a diode laser system for use in photodynamic therapy. This effort was successful and we have used Diomed lasers in our Lutrin and Antrin clinical trials. In addition, we may seek other suppliers of light delivery devices for clinical trials and commercial purposes, although we cannot be certain that any agreements will be reached with such suppliers on terms commercially reasonable to us, if at all.

We face intense competition from pharmaceutical companies, universities, governmental entities and others in the development of therapeutic and diagnostic agents for the treatment of diseases which we target.

Although the FDA has not yet approved any agents for the enhancement of radiation therapy or chemotherapy, we expect significant competition in these fields, as we believe that one or more companies, such as Allos Therapeutics, Inc., are developing and testing products which compete directly with our products under development. Allos' product is being developed for the treatment of brain metastases in conjunction with WBRT and is being tested in a Phase III clinical trial. These companies may succeed in developing technologies and products that are more effective than ours or would render our products or technologies obsolete. Moreover, certain existing chemotherapy agents also are used as radiation enhancers. See "Risk Factors - We face rapid technological change and intense competition."

We also face intense competition in the treatment of atherosclerosis, which currently includes the use of pharmaceutical agents and devices. Various drugs also have been shown to reduce or prevent atherosclerosis. Balloon angioplasty and stents are widely used and generally accepted techniques to reduce the narrowing of vessels by atherosclerosis. Treatment of in-stent stenosis with a brachytherapy (gamma radiation) system has been recently approved by the FDA.

The FDA has approved Photofrin^®, a photosensitizer developed by QLT Phototherapeutics, Inc., for the treatment of specific types of cancer. We are aware of several other photosensitizers in various stages of development for a number of uses. In addition to QLT Phototherapeutics, Inc., other companies are developing products in this area. Some companies developing photodynamic therapy products are developing specialized light delivery devices for their products, which, when combined with their product offering, may give them a competitive advantage over our strategy of obtaining such devices from third-party sources.

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products. We believe that our products will be regulated as drugs or as a combination of drug and device, by the FDA rather than as biologics or solely devices.

The process required by the FDA before our products may be marketed in the U.S. generally involves the following:

• preclinical laboratory and animal tests;

• submission of an IND application which must become effective before clinical trials may begin;

• adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed pharmaceutical in our intended use; and

• FDA approval of a new drug application.

The testing and approval process requires substantial time, effort, and financial resources and we cannot be certain that any approval will be granted on a timely basis, if at all.

Preclinical tests include laboratory evaluation of the product, its chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of the product. We then submit the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of an IND, which must become effective before we may begin human clinical trials. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the trials as outlined in the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. Our submission of an IND may not result in FDA authorization to commence clinical trials. Further, an independent Institutional Review Board at the medical center proposing to conduct the clinical trials must review and approve any clinical study.

Human clinical trials are typically conducted in three sequential phases which may overlap:

• Phase I: The drug is initially introduced into healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion.

• Phase II: Involves studies in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.

• Phase III: When Phase II evaluations demonstrate that a dosage range of the product is effective and has an acceptable safety profile, Phase III trials are undertaken to further evaluate dosage, clinical efficacy and to further test for safety in an expanded patient population at geographically dispersed clinical study sites.

In the case of products for severe or life-threatening diseases such as cancer, the initial human testing is often conducted in patients rather than in healthy volunteers. Since these patients already have the target disease, these studies may provide initial evidence of efficacy traditionally obtained in Phase II trials and thus these trials are frequently referred to as Phase I/II trials. We cannot be certain that we will successfully complete Phase I, Phase II or Phase III testing of our product candidates within any specific time period, if at all. Furthermore, the FDA or the Institutional Review Board or the sponsor may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The results of product development, preclinical studies and clinical studies are submitted to the FDA as part of a new drug application for approval of the marketing and commercial shipment of the product. The FDA may deny a new drug application if the applicable regulatory criteria are not satisfied or may require additional clinical data. Even if such data is submitted, the FDA may ultimately decide that the new drug application does not satisfy the criteria for approval. Once issued, the FDA may withdraw product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized, and the agency has the power to prevent or limit further marketing of a product based on the results of these post- marketing programs.

On November 21, 1997, President Clinton signed into law the Food and Drug Administration Modernization Act. That act codified the FDA's policy of granting "Fast Track" approval for cancer therapies and other therapies intended to treat severe or life-threatening diseases. Previously, the FDA approved cancer therapies primarily based on patient survival rates and/or data on improved quality of life. The FDA considered evidence of partial tumor shrinkage, while often part of the data relied on for approval, insufficient by itself to warrant approval of a cancer therapy, except in limited situations. Under the FDA's new policy, which became effective on February 19, 1998, the FDA has broadened authority to consider evidence of partial tumor shrinkage or other clinical outcomes for approval. This new policy is intended to facilitate the study of cancer therapies and shorten the total time for marketing approvals.

In addition to the drug approval requirements applicable to our Lutrin product for photosensitization of certain cancers and Antrin for photoangioplasty of atherosclerosis, we will also need to obtain FDA approval for the laser and associated light delivery devices used in such treatments. To obtain approval of such devices, Pharmacyclics and the manufacturers of such devices must submit additional clinical data obtained from the use of such devices with Lutrin and Antrin, which may further delay or hinder the approval process for these photosensitizers. Manufacturers of such light delivery devices currently are under no obligation to us to file or pursue such applications, and any delay or refusal on their part to do so could have a material adverse effect on us.

Satisfaction of the above FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially, based upon the type, complexity and novelty of the pharmaceutical product. Government regulation may delay or prevent marketing of potential products for a considerable period of time and to impose costly procedures upon our activities. We cannot be certain that the FDA or any other regulatory agency will grant approval for any of our products under development on a timely basis, if at all. Success in preclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities is not always conclusive and may be susceptible to varying interpretations which could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, the approval may be significantly limited to specific indications. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain regulatory approvals would have a material adverse effect on our business. Marketing our products abroad will require similar regulatory approvals and is subject to similar risks. In addition, we cannot predict what adverse governmental regulations may arise from future U.S. or foreign governmental action.

Any products manufactured or distributed by us pursuant to FDA clearances or approvals are subject to pervasive and continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with good manufacturing practices, which impose certain procedural and documentation requirements upon us and our third party manufacturers. We cannot be certain that we or our present or future suppliers will be able to comply with the GMP regulations and other FDA regulatory requirements.

The FDA regulates drug labeling and promotion activities. The FDA has actively enforced regulations prohibiting the marketing of products for unapproved uses. Under the Modernization Act of 1997, the FDA will permit the promotion of a drug for an unapproved use in certain circumstances, but subject to very stringent requirements. We and our products are also subject to a variety of state laws and regulations in those states or localities where our products are or will be marketed. Any applicable state or local regulations may hinder our ability to market our products in those states or localities. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.

The FDA's policies may change and additional government regulations may be enacted which could prevent or delay regulatory approval of our potential products. Moreover, increased attention to the containment of health care costs in the U.S. and in foreign markets could result in new government regulations which could have a material adverse effect on our business. We cannot predict the likelihood, nature or extent of adverse governmental regulation which might arise from future legislative or administrative action, either in the U.S. or abroad.

As of June 30, 2002, we had 133 employees, 3 of whom were part-time. 112 of our employees are engaged in research, development, preclinical and clinical testing, manufacturing, quality assurance and quality control and regulatory affairs and 21 in marketing, finance, administration and operations. 26 of our employees have an M.D. or Ph.D. degree. Our future performance depends in significant part upon the continued service of our key scientific, technical and senior management personnel, none of whom is bound by an employment agreement requiring service for any defined period of time. The loss of the services of one or more of our key employees could harm our business.

Our future success also depends on our continuing ability to attract, train and retain highly qualified scientific and technical personnel. Competition for these personnel is intense, particularly in the San Francisco Bay Area where we are headquartered. Due to the limited number of people available with the necessary scientific and technical skills, we can give no assurance that we can retain or attract key personnel in the future. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

To be profitable, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute our products under development. The time frame necessary to achieve these goals for any individual product is long and uncertain. Before we can sell any of our products under development, we must demonstrate through preclinical (animal) studies and clinical (human) trials that each product is safe and effective for human use for each targeted disease. We have conducted and plan to continue extensive and costly clinical trials to assess the safety and effectiveness of our potential products. We cannot be certain that we will be permitted to begin or continue our planned clinical trials for our potential products, or if permitted, that our potential products will prove to be safe and to produce their intended effects.

The completion rate of our clinical trials depends upon, among other factors, the rate of patient enrollment. We may fail to obtain adequate levels of patient enrollment in our clinical trials. Delays in planned patient enrollment may result in increased costs, delays or termination of clinical trials, which could have a material adverse effect on us.

Additionally, demands on our clinical staff have been increasing and we expect they will continue to increase due to our monitoring of additional clinical trials. We may fail to effectively oversee and monitor these many simultaneous clinical trials, which would result in increased costs or delays of our clinical trials. Even if these clinical trials are completed, we may fail to complete and submit a new drug application as scheduled for many reasons, including, as is the case with our Phase III trial of Xcytrin, failure to meet our primary endpoints. Even if we are able to submit a new drug application, the Food and Drug Administration may refuse to file our application or may not clear our application in a timely manner or may deny the application entirely.

Data already obtained from preclinical studies and clinical trials of our products under development do not necessarily predict the results that will be obtained from later preclinical studies and clinical trials. Moreover, data such as ours is susceptible to varying interpretations which could delay, limit or prevent regulatory approval. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and effectiveness of a product under development could delay or prevent regulatory clearance of the potential product and would materially harm our business. Our clinical trials may not demonstrate the sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approval or may not result in marketable products. For example, our Phase III trial of Xcytrin failed to meet its co-primary endpoints even though our Phase Ib/II trial showed a benefit for treated patients. This outcome may delay or prevent the regulatory clearance of Xcytrin as a treatment for brain metastases and may result in material harm to our business.

In December 2001, we announced the top line results of our Phase III clinical trial of Xcytrin Injection to improve the efficacy of radiation therapy of tumors that have spread to the brain resulting from a variety of cancers such as lung and breast. We did not reach statistical significance for either of the trial's endpoints, survival or time to neurologic progression. Subsequently, we decided to conduct a second Phase III trial in brain metastases patients with lung cancer, the most common cause of brain metastases. This trial is expected to start in the fourth quarter of calendar 2002.

We have incurred significant operating losses since our inception in 1991 and, as of June 30, 2002, had an accumulated deficit of approximately $158.3 million. We expect to continue to incur substantial additional operating losses until the commercialization of our products generates sufficient revenues to cover our expenses. Our achieving profitability depends upon our ability, alone or with others, to successfully complete the development of our products under development, and obtain required regulatory clearances and successfully manufacture and market our proposed products. Our lead product, Xcytrin, currently being developed for the potential treatment of brain metastases originating from non-small cell lung cancer, may receive regulatory clearance on a delayed basis or may not receive such clearance at all, which would have a material impact on our ability to become profitable. To date, we have not generated revenue from the commercial sale of our products. All revenues to date are primarily from license and milestone payments and, to a lesser extent, funding from one government research grant.

The manufacture and marketing of our products and our research and development activities are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the United States and abroad. Before receiving FDA clearance to market a product, we will have to demonstrate that the product is safe and effective on the patient population and for the diseases that will be treated. Clinical trials, manufacturing and marketing of products are subject to the rigorous testing and approval process of the FDA and equivalent foreign regulatory authorities. The Federal Food, Drug and Cosmetic Act and other federal, state and foreign statutes and regulations govern and influence the testing, manufacture, labeling, advertising, distribution and promotion of drugs and medical devices. As a result, clinical trials and regulatory approval can take a number of years to accomplish and require the expenditure of substantial resources. Data obtained from clinical trials are susceptible to varying interpretations which could delay, limit or prevent regulatory clearances. Data from our completed Phase III clinical trial of Xcytrin is not sufficient to obtain regulatory clearance and an additional trial will be necessary to do so. Conducting additional trials will cause significant delays in approval and consume additional resources and may not be sufficient to obtain regulatory clearance.

In addition, we may encounter delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. We may encounter similar delays in foreign countries. We may be unable to obtain requisite approvals from the FDA and foreign regulatory authorities and even if obtained, such approvals may not be on a timely basis, or they may not cover the clinical uses that we specify.

Marketing or promoting a drug for an unapproved use is subject to very strict controls. Furthermore, clearance may entail ongoing requirements for post-marketing studies. The manufacture and marketing of drugs are subject to continuing FDA and foreign regulatory review and later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions, including withdrawal of the product from the market. Any of the following events, if they were to occur, could delay or preclude us from further developing, marketing or realizing full commercial use of our products, which in turn would have a material adverse effect on our business, financial condition and results of operations:

• failure to obtain or maintain requisite governmental approvals;
• failure to obtain approvals of clinically intended uses of our products under development; or
• identification of serious and unanticipated adverse side effects in our products under development.

Manufacturers of drugs also must comply with the applicable FDA good manufacturing practice regulations, which include quality control and quality assurance requirements as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding state agencies, including unannounced inspections, and must be licensed before they can be used in commercial manufacturing of our products. We or our present or future suppliers may be unable to comply with the applicable good manufacturing practice regulations and other FDA regulatory requirements. We have not been subject to a Good Manufacturing Practice inspection by the FDA or any state agency. We may be subject to delays in commercializing our products for photodynamic therapies due to delays in approvals of the third-party light sources required for these products.

Even if approved for marketing, our products may not achieve market acceptance. The degree of market acceptance will depend upon a number of factors, including:

• the receipt of regulatory approvals for the uses that we are studying;
• the establishment and demonstration in the medical community of the safety and clinical efficacy of our products and their potential advantages over existing therapeutic products and diagnostic and/or imaging techniques; and
• pricing and reimbursement policies of government and third-party payors such as insurance companies, health maintenance organizations and other plan administrators.

Physicians, patients, payors or the medical community in general may be unwilling to accept, utilize or recommend any of our products.

A number of third-party patent applications have been published, and some have issued, relating to biometallic and expanded porphyrin chemistries. It is likely that competitors and other third parties have and will continue to file applications for and receive patents relating to similar or even the same compositions, methods or designs as those of our products. If any third-party patent claims are asserted against the company's products and are upheld as valid and infringed, we could be prevented from practicing the subject matter claimed in such patents, require license(s) or have to redesign our products or processes to avoid infringement. Such licenses may not be available or, if available, may not be on terms acceptable to us. Alternatively, we may be unsuccessful in any attempt to redesign our products or processes to avoid infringement. Litigation or other legal proceedings may be necessary to defend against claims of infringement, to enforce our patents, or to protect our trade secrets, and could result in substantial cost to the company, and diversion of our efforts.

We are aware of several U.S. patents owned or licensed to Schering AG that relate to pharmaceutical formulations and methods for enhancing magnetic resonance imaging. We have obtained the opinion of special patent counsel that our magnetic resonance imaging detectable compounds do not infringe the claims of such patents. Nevertheless, Schering AG may still choose to assert one or more of those patents. If any of our products were legally determined to be infringing a valid and enforceable claim of any such patents, our business could be materially adversely affected. Further, any allegation by Schering AG that we infringed their patents would likely result in significant legal costs and require the diversion of substantial management resources. Schering AG sent communications to us suggesting that our oral magnetic resonance imaging contrast agent, Citra Vu, may infringe certain of their patents. We are aware that Schering AG has asserted patent rights against at least one other company in the contrast agent imaging market and that a number of companies have entered into licensing arrangements with Schering AG with respect to one or more of such patents. We cannot be certain that we would be successful in defending a lawsuit or able to obtain a license on commercially reasonable terms from Schering AG, if required.

We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We require our employees, consultants, advisors and collaborators to execute appropriate confidentiality and assignment-of-inventions agreements with us. These agreements typically provide that all materials and confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances, and that all inventions arising out of the relationship with Pharmacyclics shall be our exclusive property. These agreements may be breached, and in some instances, we may not have an appropriate remedy available for breach of the agreements. Furthermore, our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology. We may be unable to meaningfully protect our rights in unpatented proprietary technology.

We currently depend heavily and will depend heavily in the future on third parties for support in product development, manufacturing, marketing and distribution. We depend upon the National Cancer Institute for the sponsoring and funding of certain of the clinical trials of our Xcytrin radiation enhancer and Lutrin photosensitizer products in development. We cannot be certain that the National Cancer Institute will enlist support for all such trials or that it will continue our funding. If the National Cancer Institute did not support such trials, we may have to fund the continuation of such trials ourselves or reduce the number of disease types in our clinical trials. We cannot be certain that any of these parties will fulfill their obligations in a manner that maximizes our revenues. Any reduction or discontinuance of efforts by our partners or the termination of these alliances could have a material adverse effect on our business, financial condition and results of operations.

We may be unsuccessful in entering into additional strategic alliances for the development or commercialization of other product candidates. Even if we did enter into any such alliances, they may not be on terms favorable to us or they may ultimately be unsuccessful.

We have no expertise in the development of light sources and associated light delivery devices required for our photoangioplasty and photodynamic therapy products under development. Successful development, manufacturing, approval and distribution of our photosensitization products will require third party participation for the required light sources, associated light delivery devices and other equipment. We currently obtain lasers from Diomed, Inc. and cylindrically diffusing light fibers from CardioFocus, Inc. on a purchase order basis, and such entities are under no obligation to continue to deliver light devices on an ongoing basis. Failure to maintain such relationships may require us to develop additional supply sources which may require additional clinical trials and regulatory approvals and could materially delay commercialization of our Lutrin and Antrin products under development. We may be unable to establish or maintain relationships with other supply sources on a commercially reasonable basis, if at all, or alternatively, the enabling devices may not receive regulatory approval for use in photoangioplasty or photodynamic therapy.

We must manufacture our products in commercial quantities, either directly or through third parties, in compliance with regulatory requirements and at an acceptable cost. We do not own manufacturing facilities necessary to provide clinical and commercial quantities of our products.

We have entered into an agreement with Baxter Healthcare Corporation (formerly Cook Pharmaceutical Solutions) to formulate, fill, package and label clinical and commercial quantities of Xcytrin. Baxter also supplies us with clinical quantities of Antrin and Lutrin. Any interruption of supply of our products from Baxter could have a material adverse affect on our business, financial condition and results of operations.

Any failure by these third parties to supply our requirements or the National Cancer Institute's requirements for clinical trial materials would jeopardize the completion of such trials and could therefore have a material adverse effect on us.

We currently have limited marketing, sales and distribution experience. We must develop a sales force with technical expertise. We have no experience in developing, training or managing a sales force. We will incur substantial additional expenses in developing, training and managing such an organization. We may be unable to build such a sales force, the cost of establishing such a sales force may exceed any product revenues, or our direct marketing and sales efforts may be unsuccessful. In addition, we compete with many other companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against such other companies.

We have expended and will continue to expend substantial funds to complete the research, development and clinical testing of our products. We will require additional funds for these purposes, to establish additional clinical-and commercial-scale manufacturing arrangements and to provide for the marketing and distribution of our products. Additional funds may not be available on acceptable terms, if at all. If adequate funds are unavailable from operations or additional sources of financing, we may have to delay, reduce the scope of or eliminate one or more of our research or development programs which would materially and adversely affect our business, financial condition and operations.

We believe that our cash, cash equivalents and investments, will be adequate to satisfy our capital needs through at least calendar year 2004. However, our actual capital requirements will depend on many factors, including:

• continued progress of our research and development programs;
• our ability to establish collaborative arrangements;
• progress with preclinical studies and clinical trials;
• the time and costs involved in obtaining regulatory clearance;
• the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;
• competing technological and market developments; and
• our ability to market and distribute our products and establish new collaborative and licensing arrangements.

We may seek to raise any necessary additional funds through equity or debt financings, collaborative arrangements with corporate partners or other sources which may be dilutive to existing stockholders. In addition, in the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development that we would otherwise seek to develop or commercialize ourselves.

The pharmaceutical industry is subject to rapid and substantial technological change. Developments by others may render our products under development or technologies noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Technological competition in the industry from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Many of these entities have significantly greater research and development capabilities than we do, as well as substantially more marketing, manufacturing, financial and managerial resources. These entities represent significant competition for us. Acquisitions of, or investments in, competing pharmaceutical or biotechnology companies by large corporations could increase such competitors' financial, marketing, manufacturing and other resources.

We are a relatively new enterprise and are engaged in the development of novel therapeutic technologies. As a result, our resources are limited and we may experience technical challenges inherent in such novel technologies.

Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing similar therapeutic, diagnostic and imaging effects than our products. We are aware that one of our competitors in the market for photodynamic therapy drugs has received marketing approval of a product for certain uses in the United States and other countries. Our competitors may develop products that are safer, more effective or less costly than our products and, therefore, present a serious competitive threat to our product offerings.

The widespread acceptance of therapies that are alternatives to ours may limit market acceptance of our products even if commercialized. The diseases for which we are developing our therapeutic products can also be treated, in the case of cancer, by surgery, radiation and chemotherapy, and in the case of atherosclerosis, by surgery, angioplasty, drug therapy and the use of devices to maintain and open blood vessels. These treatments are widely accepted in the medical community and have a long history of use. The established use of these competitive products may limit the potential for our products to receive widespread acceptance if commercialized.

The market prices for securities of small capitalization biotechnology companies, including ours, have historically been highly volatile. The market has from time to time experienced significant price and volume fluctuations unrelated to the operating performance of particular companies. The market price of our common stock may fluctuate significantly due to a variety of factors, including:

• the results of preclinical testing and clinical trials by us or our competitors;
• technological innovations or new therapeutic products;
• governmental regulation;
• developments in patent or other proprietary rights;
• litigation;
• public concern as to the safety of products developed by us or others;
• comments by securities analysts; and
• general market conditions in our industry.

In addition, if any of the risks described in these "Risk Factors" actually occurred, it could have a dramatic and material adverse impact on the market price of our common stock.

The continuing efforts of government and insurance companies, health maintenance organizations and other payors of healthcare costs to contain or reduce costs of health care may affect our future revenues and profitability, and the future revenues and profitability of our potential customers, suppliers and collaborative partners and the availability of capital. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could have a material adverse effect on our business, financial condition and results of operations.

Our ability to commercialize our products successfully will depend in part on the extent to which appropriate reimbursement levels for the cost of our products and related treatment are obtained from governmental authorities, private health insurers and other organizations, such as HMOs. Third-party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for or rejection of our products. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially adversely affect our ability to operate profitably.

The testing, manufacture, marketing and sale of our products involve an inherent risk that product liability claims will be asserted against us. Although we are insured against such risks up to a $10,000,000 annual aggregate limit in connection with clinical trials and commercial sales of our products, our present product liability insurance may be inadequate. A successful product liability claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition and results of operations. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms. In addition, product liability coverage may cease to be available in sufficient amounts or at an acceptable cost. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our pharmaceutical products. A product liability claim or recall would have a material adverse effect on our reputation, business, financial condition and results of operations.

In connection with our research and development activities and our manufacture of materials and products, we are subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. Although we believe that we have complied with the applicable laws, regulations and policies in all material respects and have not been required to correct any material noncompliance, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future. Our research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and radioactive materials. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an occurrence, we could be held liable for any damages that result and any such liability could exceed our resources.

Executive officers and directors of the Company, and their ages as of August 31, 2002, are as follows:

__________

Dr. Miller has served as President, Chief Executive Officer and a Director since he co-founded the company in April 1991. Dr. Miller was a co-founder of IDEC Pharmaceuticals Corporation and from 1984 to February 1992 served as Vice President and a Director. Dr. Miller also is a Clinical Professor of Medicine (Oncology) at Stanford University Medical Center. Dr. Miller received his M.D. from the State University of New York Medical School and is board certified in both Internal Medicine and Medical Oncology.

Ms. Ladd has served as Senior Vice President, General Counsel and Secretary since May 2000. From 1989 to April 2000, she served in various legal and executive management positions with Genentech, Inc., most recently as Vice President, Corporate Law. Ms. Ladd received a B.S. degree in Animal Science from the Pennsylvania State University, an M.S. degree in animal nutrition/biochemistry from Cornell University and a law degree from Stanford University.

Mr. Steuer has served as Senior Vice President, Business Development since December 1998. Prior to that, Mr. Steuer served as Senior Vice President, Business Development and Chief Financial Officer from May 1998 to December 1998. Prior to that, Mr. Steuer served as Vice President, Business Development and Chief Financial Officer from November 1994 to May 1998. From April 1992 to November 1994, he was Executive Vice President, Business Development and Commercial Affairs for SciClone Pharmaceuticals, Inc. and also served as its Chief Financial Officer. From 1985 to 1992, Mr. Steuer served in a variety of roles in the Pilkington Visioncare Group ("PVG"), which developed, manufactured and distributed medical devices, pharmaceuticals and equipment for the ophthalmic field. Mr. Steuer received both B.S. and M.S. degrees in Electrical Engineering from Columbia University and an M.B.A. from New York University.

Mr. Whitten has served as Senior Vice President, Commercial Operations since September 2001. From 1985 through 2001, Mr. Whitten served in a variety of positions at Bristol-Myers Squibb, most recently as: Vice President, Global Marketing, Oncology, from February 2000 to September 2001; Vice President Global Marketing, Oncology and Immunology from February 1999 to February 2000; Vice President, Pravastatin Initiative, from November 1997 to February 1999; Vice President, Marketing, Oncology and Immunology for the U.S. Business Unit, from April 1996 to October 1997. Mr. Whitten received his B.S. in Pharmacy from West Virginia University and an M.B.A. from the University of Virginia.

Mr. Lea has served as Vice President, Finance and Administration and Chief Financial Officer since December 1998. Prior to that, Mr. Lea served as Vice President, Finance and Administration from December 1997 to December 1998. From September 1996 through November 1997, he served as a financial consultant for high technology companies and was Acting Chief Financial Officer for Global Village Communications, Inc. From 1987 through June 1996 he served as Vice President and Chief Financial Officer of Margaux, Inc., a public company that manufactured refrigeration equipment. Mr. Lea received a B.S. degree in Agricultural Economics from the University of California, Davis and an M.B.A. from the University of California, Los Angeles.

Dr. Adelman has served as Vice President, Clinical Operations since June 2002. Prior to that, Dr. Adelman served as Senior Director of Clinical Development from April 1998 to June 2002. From December 1994 to April 1998, Dr. Adelman was a Clinical Scientist at Genentech, Inc., and from 1989 to 1994 he was Director of Clinical Immunology and Allergy and an Assistant Professor of Clinical Medicine at the University of California, San Francisco. Dr. Adelman is an Associate Adjunct Professor of Medicine at UCSF and board certified in Medicine and Allergy and Immunology. Dr. Adelman received his M.D. from the University of California, Davis and a B.A. degree in Biological Sciences from the University of California, Berkeley.

Dr. Madden has served as Vice President, Chemical Operations since June 1998. From 1995 to June 1998, he served as Plant Manager and as Director of Process Development at Catalytica Pharmaceuticals, Inc., a contract pharmaceutical manufacturer. From 1977 to 1995, Dr. Madden served in a variety of positions with Syntex Corporation, a pharmaceutical company. His positions at Syntex included Technical Director at the Bahamas Chemical Division and Manager of Process Development and Engineering at the Technology Center in Boulder, Colorado. Dr. Madden received a B.A. degree in Chemistry from the University of Oxford and a Ph.D. from the University of London.

Dr. Renschler has served as Vice President, Oncology Clinical Development since May 2001. Prior to that, Dr. Renschler served as Senior Director of Clinical Development from May 1998 to May 2001. Prior to that, Dr. Renschler served as Director of Clinical Development from January 1996 to May 1998. Dr. Renschler is also a Clinical Assistant Professor of Medicine/Oncology at Stanford University School of Medicine. He is board certified both in Medical Oncology and Internal Medicine. Dr. Renschler received his M.D. from Stanford University and a B.A. degree in Public and International Affairs from Princeton University.

Mr. Gilburne was elected as a Director of the Company in March 2000. Mr. Gilburne has been a managing member of ZG Ventures, a venture capital and investment company since 2000. From February 1995 through December 1999, he was Senior Vice President, Corporate Development for America Online, Inc., an internet services company. He is currently a member of the board of directors of AOL Time Warner Inc. Prior to joining America Online, Mr. Gilburne was a founding partner of the Silicon Valley office of the law firm of Weil, Gotshal and Manges and a founding partner of the Cole Gilburne Fund, an early stage venture capital fund focused on information technology. Mr. Gilburne received an A.B. degree from Princeton University and a law degree from the Harvard Law School.

Dr. Itri was elected as a Director of the Company in July 2001. Dr. Itri is currently the Executive Vice President, Pharmaceutical Research and Development, and Chief Medical Officer of Genta Incorporated, a biopharmaceutical company which she joined in March 2001. From November 1990 to January 2000 she was Senior Vice President, Worldwide Clinical Affairs, and Chief Medical Officer at Ortho Biotech Inc., a Johnson & Johnson company. Dr. Itri earned her M.D. from New York Medical College, and is Board certified in Internal Medicine. She completed a fellowship in Medical Oncology at Memorial Sloan-Kettering Cancer Center.

Dr. Levy was elected as a Director of the Company in June 2000. He has served as President and Chief Executive Officer and a director of Varian Medical Systems, Inc., a medical equipment company, since April 1999, and as Executive Vice President of Varian Associates, Inc., the predecessor company from which Varian Medical Systems, Inc. was spun out, since 1992. Dr. Levy holds a B.A. degree from Dartmouth College and a Ph.D. in nuclear chemistry from the University of California at Berkeley.

Mr. Rohn was elected as a Director of the Company in March 2000. He has served as the President and Chief Operating Officer of IDEC Pharmaceuticals Corporation, a biopharmaceutical company, since May 1998. He joined IDEC in August 1993 as Senior Vice President, Commercial and Corporate Development and was appointed Senior Vice President, Commercial Operations in April 1996 and Chief Operating Officer in May 1998. From 1984 to 1993, he was employed by Adria Laboratories, most recently as Senior Vice President of Sales and Marketing. Mr. Rohn is currently a Director of Cerus Corporation. Mr. Rohn received a B.A. in Marketing from Michigan State University.

Mr. Taylor was elected as a Director of the Company in June 1991. Mr. Taylor is a General Partner of AMC Partners 89, L.P., and the General Partner of Asset Management Associates 1989, L.P., a private venture capital partnership. Mr. Taylor has been a General Partner of Alloy Ventures, Inc., a venture management firm which succeeded Asset Management Company, the prior management firm for the Asset Management funds, since 1998. Mr. Taylor had been with Asset Management Company from 1977 to 1998, as General Partner since 1982. Mr. Taylor is a Director of Lynx Therapeutics, Inc. and several private companies. Mr. Taylor holds B.S. and M.S. degrees in Physics from Brown University and an M.B.A. from Stanford University.

Our corporate offices are located in Sunnyvale, California, where we lease approximately 105,000 square feet under two leases that expire in December 2003 and January 2004. We have subleased 18,000 square feet of this space through January 2003. These facilities include administrative and research and development space. Both leases are non-cancelable operating leases. We believe that our existing facilities are adequate to meet our current and foreseeable needs or that suitable additional space will be available as needed.

None.

None.

Our common stock began trading publicly on the Nasdaq National Market on October 24, 1995 and is traded under the symbol "PCYC." Prior to that date, there was no public market for our common stock. The following table sets forth for the periods indicated the high and low sales prices of the common stock.

As of June 30, 2002, there were 163 holders of record of our common stock. We currently anticipate that we will retain all future earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future.

The data set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and related notes included elsewhere herein.

                                                                                                   Period
                                                                                                    from
                                                                                                  Inception
                                                                                                  (April 1991)
                                                          Years Ended June 30,                     through
                                           -----------------------------------------------------  June 30,
                                             2002       2001       2000       1999       1998       2002
                                           ---------  ---------  ---------  ---------  ---------  ---------
                                                      (in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues:
  License, milestone and grant
    revenues ............................ $      --  $      --  $   1,000  $     750  $   2,700  $   7,855
  Contract revenues .....................        --      3,121        604      1,291        831      5,847
                                           ---------  ---------  ---------  ---------  ---------  ---------
      Total revenues ....................        --      3,121      1,604      2,041      3,531     13,702
                                           ---------  ---------  ---------  ---------  ---------  ---------
Operating expenses:
  Research and development ..............    33,981     37,974     28,590     21,889     13,973    173,567
  Marketing, general and administrative .     7,791      6,548      4,409      2,762      1,987     29,572
                                           ---------  ---------  ---------  ---------  ---------  ---------
      Total operating expenses ..........    41,772     44,522     32,999     24,651     15,960    203,139
                                           ---------  ---------  ---------  ---------  ---------  ---------
Loss from operations ....................   (41,772)   (41,401)   (31,395)   (22,610)   (12,429)  (189,437)
Interest income .........................     5,152     10,604      7,778      3,398      2,826     32,699
Interest expense and other
   income (expense), net ................        45       (128)       (13)       (34)       (72)    (1,529)
                                           ---------  ---------  ---------  ---------  ---------  ---------
Net loss................................. $ (36,575) $ (30,925) $ (23,630) $ (19,246) $  (9,675) $(158,267)
                                           =========  =========  =========  =========  =========  =========
Basic and diluted net
   loss per share(1)..................... $   (2.27) $   (1.92) $   (1.60) $   (1.55) $   (0.87)
                                           =========  =========  =========  =========  =========
Shares used to compute basic and
  diluted net loss per share(1) .........    16,143     16,075     14,723     12,378     11,061
                                           =========  =========  =========  =========  =========



                                                                 June 30,
                                           -----------------------------------------------------
                                             2002       2001       2000       1999       1998
                                           ---------  ---------  ---------  ---------  ---------
                                                                (in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
  securities ............................ $ 114,918  $ 152,782  $ 178,247  $  50,005  $  70,381
Total assets ............................   121,012    160,973    185,123     55,557     73,019
Capital lease obligations ...............        --         --         59        275        530
Deficit accumulated during
  development stage .....................  (158,267)  (121,692)   (90,767)   (67,137)   (47,891)
Total stockholders' equity ..............   117,608    154,355    181,414     49,957     68,641

__________

Pharmacyclics is a pharmaceutical company focused on the development of products that improve existing therapeutic approaches to cancer and atherosclerosis. To date we have devoted substantially all of our resources to the research and development of our products and have not derived any commercial revenues from the sale of our products. We have two primary drug products, or research and development programs, for which we are currently focusing our efforts: Xcytrin® and Antrin®.

In December 2001, we announced the top line results of our Phase III clinical trial of Xcytrin Injection to improve the efficacy of radiation therapy of tumors that have spread to the brain resulting from a variety of cancers such as lung and breast or brain metastases. We did not reach statistical significance for either of the trial's endpoints, survival or time to neurologic progression. However, additional analysis of the data indicated that brain metastases patients with lung cancer who received Xcytrin demonstrated significant improvement in time to neurologic progression. Based on our discussions with the FDA, we believe the best course of action is to conduct a confirmatory trial in brain metastases patients with lung cancer, the most common cause of brain metastases. This confirmatory trial is expected to start in the fourth quarter of calendar 2002.

We have completed patient enrollment in a multicenter Phase II trial with Xcytrin for the treatment of glioblastoma multiforme, a malignant primary brain tumor. We also have begun enrollment in a Phase I clinical trials for head and neck cancer and the use of Xcytrin with chemotherapy. Through our Cooperative Research and Development Agreement, the National Cancer Institute is conducting Phase I trials of Xcytrin for treatment of both primary adult and pediatric brain tumors, pancreatic cancer and lung cancer.

We completed enrollment of a randomized Phase II clinical trial with Antrin for patients with peripheral arterial disease of the lower extremities. The study is designed to evaluate both prevention of restenosis following balloon angioplasty and primary treatment of atherosclerosis. 150 patients have been enrolled in t