ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This report includes forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are contained or incorporated by reference in this report. We have based these forward-looking statements on our current expectations about future events. While we believe these expectations are reasonable, such forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those discussed in this report under the heading "Risk Factors" at page 28. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.

OVERVIEW

Gilead is an independent bio-pharmaceutical company dedicated to discovering, developing, manufacturing and commercializing proprietary therapeutics for antiviral, anti-infective and oncology applications. We currently derive revenue from four approved products and have five products in development. We are adding to our existing portfolio of compounds through internal discovery and an active product acquisition and in-licensing strategy. Our internal discovery activities include identification of new molecular targets, target screening and medicinal chemistry. We also have expertise in liposomal drug delivery technology that we use to develop drugs that are safer, easier for patients to tolerate and more effective. We have expanded our business and intend to continue to expand through acquisition activities.

We have four products that are currently marketed in the U.S. and various other countries worldwide.

- AmBisome-Registered Trademark- is approved for sale in 42 countries for the treatment and prevention of life-threatening fungal infections. We co-promote AmBisome in the U.S. with Fujisawa Healthcare, Inc.

- Tamiflu-TM- is sold by our corporate partner Hoffmann-La Roche in 31 countries for the treatment of influenza and recently received U.S. FDA approval for the prevention of influenza.

- VISTIDE-Registered Trademark- is approved for sale in 21 countries for the treatment of CMV retinitis in AIDS patients.

- DaunoXome-Registered Trademark- is approved for sale in 25 countries for the treatment of AIDS-related Kaposi's sarcoma.

We have a sales force of 30 in the U.S. who promote AmBisome, VISTIDE and DaunoXome, and a sales force of 85 in Europe and Australia who promote AmBisome and DaunoXome. We also have corporate partners and distributors promoting these products in over 30 countries.

We believe that our most advanced clinical candidate, tenofovir DF, a once-daily pill taken as part of combination therapy to treat HIV infection, could address a significant unmet medical need. We recently announced preliminary data from an ongoing Phase III clinical trial suggesting that 24 weeks of treatment with tenofovir DF reduced HIV levels in treatment-experienced patients by an average of approximately 75%, reduced viral levels to undetectable levels in approximately 45% of these patients,

and improved patients' immune systems. We are gathering data from ongoing trials and anticipate filing for approval of tenofovir DF in the U.S. and Europe in mid-2001. We have retained all commercial rights to tenofovir DF and, if we receive marketing approval, will promote it through our U.S. and European sales forces.

We are studying adefovir dipivoxil in two Phase III trials for the treatment of hepatitis B virus infection, or HBV. We believe that adefovir dipivoxil has the potential to address many of the limitations of current HBV therapies, most notably drug resistance associated with long-term therapy. We are conducting a Phase II program for NX 211 in relapsed ovarian cancer and small cell lung cancer and are evaluating two oncology compounds in preclinical studies.

OUR MARKETED PRODUCTS

The products that we have developed that are commercially available include:

- AMBISOME: a drug for treating and preventing life-threatening fungal infections;

- TAMIFLU: a drug for treating and preventing influenza;

- VISTIDE: a drug for treating CMV retinitis in AIDS patients; and

- DAUNOXOME: a drug for treating AIDS-related Kaposi's sarcoma.

How these products are sold, and the indications that they are approved for, vary with each product and in each country or region where they are sold.

In 2000, we earned revenues of approximately $174 million from sales of these products. Of this amount, sales of AmBisome generated aggregate product sales and royalty revenues of approximately $155 million, or 79% of our total revenues. We earned revenues from sales of, and royalties on, these products in the U.S. of $30 million in 2000, $25 million in 1999 and $25 million in 1998. Outside of the U.S., we earned revenues from sales of, and royalties on, these products of $144 million in 2000, $125 million in 1999 and $120 million in 1998. We did not begin recognizing revenues from sales of Tamiflu until 2000.

AMBISOME

AmBisome is a liposomal formulation of amphotericin B. Amphotericin B is a powerful antifungal agent that is known for its ability to attack and kill a broad variety of life-threatening fungal infections, but it also has serious side effects, including kidney toxicity. The patients most likely to suffer from these fungal infections are patients with weakened immune systems, including transplant patients, patients infected with the HIV virus, and cancer patients undergoing chemotherapy. Studies show that by delivering amphotericin B in our proprietary liposomal formulation, AmBisome reduces the rate and severity of kidney toxicity and injection-related reactions, and allows these patients to receive higher and more effective doses of amphotericin B.

AmBisome is approved for sale in 42 countries, including the U.S., all of the European Union, most of the rest of Europe, Australia, Canada and several countries in Latin America and Asia. AmBisome is primarily used for treating patients who are known to have life-threatening fungal infections. AmBisome is also approved in the U.S. and 20 other countries to treat patients who, because of certain symptoms, are presumed to have fungal infections, either as a first choice therapy (first line) or after traditional amphotericin B has failed or cannot be used. In the U.S., AmBisome also has been approved as a first line treatment of acute cryptococcal meningitis in AIDS patients. In addition, AmBisome is approved in five countries as a precautionary treatment for preventing fungal infections in liver transplant patients and is approved for treating a rare parasitic infection called visceral leishmaniasis in several countries. In 16 of the countries where AmBisome is approved, including the U.S., we are authorized to promote AmBisome as a first line treatment for patients who

are known to have a fungal infection. In the other 26 countries, AmBisome is approved for use after traditional amphotericin B therapy fails or when traditional amphotericin B cannot be used--a second line therapy.

In the U.S., we co-promote AmBisome with Fujisawa Healthcare through our domestic sales force. Our agreement with Fujisawa entitles us to a percentage of revenues generated from these sales and provides that Fujisawa purchases AmBisome from us at our manufacturing cost. See "Collaborative Relationships--Fujisawa." In the major European countries and in Australia, we sell AmBisome through our international sales force. We also sell AmBisome through independent distributors in a number of countries in Europe, Latin America and Asia. Our corporate partner, Sumitomo, is studying AmiBisome in clinical trials in Japan. Sumitomo has the exclusive right to sell AmBisome in Japan and we will receive a percentage of any revenues that they receive from those sales. See "Collaborative Relationships--Sumitomo." Most of our revenues from AmBisome are in Europe and we expect this to be the case for the foreseeable future. In most major European countries, we sell AmBisome in the currency of that country and our revenues in U.S. dollars could therefore decrease if the value of those currencies were to decrease relative to the value of the U.S. dollar.

Traditional amphotericin B is the most significant competition for AmBisome. In many countries, AmBisome cannot be prescribed until traditional amphotericin B therapy has failed or cannot be used. In addition, there are other lipid-based formulations of amphotericin B that compete with AmBisome. The most significant lipid-based amphotericin B product that currently competes with AmBisome is Abelcet, a drug sold by Elan Corporation plc, a company with significantly greater resources than we have. Traditional amphotericin B is significantly less expensive than AmBisome, and Abelcet is also less expensive than AmBisome. We expect to face significant competition from new antifungal products, including caspofungin a product developed by Merck that received marketing approval in January 2001 and voriconazole, which is being developed by Pfizer, Inc. Pfizer has filed an application for marketing approval of voriconazole. See "Competition."

TAMIFLU

Tamiflu is an oral pill for the treatment and prevention of influenza A and B. Tamiflu is in a new class of prescription drugs called neuraminidase inhibitors that act by disabling all common strains of the flu virus and preventing the virus from spreading in a patient. Tamiflu originally was approved by the FDA in October 1999 for the treatment of uncomplicated influenza in adult patients, and in November 2000 was approved by the FDA for the prevention of influenza in adults and adolescents 13 years and older. In December 2000, Tamiflu was approved in Japan for the treatment of influenza in adults and in the U.S. for the treatment of children as young as one-year old.

When used as approved for the treatment of influenza, Tamiflu has been shown to reduce the duration of the flu in adults by an average of 1.3 days, and to reduce the severity of flu symptoms and the incidence of secondary infections. When taken as approved for the prevention of influenza, studies have shown that Tamiflu is up to 92% effective in preventing the development of the flu. The most common side effects associated with Tamiflu are mild nausea and vomiting.

Hoffmann-La Roche, our corporate partner who developed Tamiflu with us and who has the exclusive right to sell Tamiflu, began selling Tamiflu in the U.S. in November 1999. In May 1999, Hoffmann-La Roche submitted a Marketing Authorisation Application to the European Commission seeking to have Tamiflu approved under the centralized procedure in the European Union. This European application was withdrawn by Hoffmann-La Roche to enable Hoffmann-La Roche to submit additional data. This application was re-filed by Hoffmann-La Roche in February 2001. We cannot be certain that this application will be approved. We receive a percentage of the net revenues that Hoffmann-La Roche generates from sales of Tamiflu. See "Collaborative Relationships--Hoffmann-La Roche."

There are several products that have been available to treat the flu for some time, but they have not been shown to be as effective or as safe as neuraminidase inhibitors. Relenza, an anti-flu drug sold by GlaxoSmithKline, is the only other neuraminidase inhibitor that has been approved by the FDA. This drug, which is delivered as an inhaled powder, is direct and significant competition for Tamiflu. Tamiflu currently is the only FDA-approved neuraminidase inhibitor that is available in a pill and we believe that this method of delivery gives Tamiflu a competitive advantage over Relenza. We are aware, however, that Johnson & Johnson is developing a neuraminidase inhibitor that has the potential to be delivered as a once-daily pill (Tamiflu is taken twice daily for treatment of flu). When and if Johnson & Johnson receives approval for this product, it will also be direct and significant competition for Tamiflu. See "Competition."

Tamiflu is not being marketed as an alternative to influenza vaccinations. Influenza vaccinations will remain the most effective method of preventing the flu.

VISTIDE

VISTIDE is an antiviral medication for the treatment of CMV retinitis in patients with AIDS. CMV retinitis is a condition caused by a viral infection that is characterized by lesions that form on a patient's retina. This condition affects persons with weakened immune systems and is most common in patients with AIDS. If left untreated, CMV retinitis can lead to blindness. VISTIDE was approved by the FDA in June 1996 and by the European regulatory authorities in May 1997 based on clinical trials demonstrating that the drug delays the progression of CMV retinitis lesions in newly diagnosed patients and in previously treated patients who had failed other therapies.

We sell VISTIDE in the U.S. through our sales force of 30 therapeutic specialists and five regional directors. These specialists promote VISTIDE through direct contact with physicians, hospitals, clinics, and other healthcare providers who are involved in the treatment of patients with CMV retinitis. We sell VISTIDE to wholesalers and specialty distributors who sell the product in the U.S. to healthcare providers. See "Marketing and Sales." Outside the U.S., Pharmacia Corporation has the exclusive right to sell VISTIDE. VISTIDE is approved for sale in all 15 countries of the European Union as well as in several other countries throughout the world. Pharmacia Corporation pays us a percentage of revenues it generates from sales of VISTIDE. See "Collaborative Relationships--Pharmacia Corporation."

There are several other products that compete with VISTIDE. Ganciclovir, which is sold by Roche Laboratories, is the most widely prescribed drug treatment for CMV retinitis. Ganciclovir is available in injectable and oral formulations, and the oral formulation is approved for both preventing and treating CMV retinitis. There is a device that is marketed by Bausch & Lomb Incorporated that is implanted in a patient's infected eye and releases ganciclovir directly to the infected area. In addition, AstraZeneca sells an injectable drug for the treatment of CMV retinitis called foscarnet, and CibaVision sells a CMV retinitis drug called fomivirsen, that is injected directly into the eye. We believe that sales of VISTIDE will be lower in future periods because the CMV retinitis market continues to decline due to the success of combination antiretroviral drug therapies in treating HIV-infected patients.

The most significant side effect associated with the use of VISTIDE is kidney toxicity. Due to this side effect, certain precautions must be taken when VISTIDE is used, and in certain circumstances VISTIDE may not be used. Each time VISTIDE is given to a patient, the patient must first be tested for warning signs of kidney toxicity. If the patient does not have warning signs of kidney toxicity, VISTIDE may be given to that patient but only in combination with certain solutions that reduce the possibility of kidney toxicity. In addition, VISTIDE may not be given to patients who are receiving other drugs that can cause kidney toxicity. Patients who are receiving other drugs that are known to cause kidney toxicity must discontinue taking those drugs and then wait seven days before using VISTIDE. In certain animal studies, cidofovir, the active ingredient in VISTIDE, has caused cancer. These side effects and dosing limitations are a competitive disadvantage of VISTIDE.

We have an exclusive, worldwide license to patent rights and related technology for cidofovir from IOCB/REGA, and are obligated to pay 5% of net revenues from sales of VISTIDE or any other products containing cidofovir to IOCB/REGA. See "Collaborative Relationships--IOCB/REGA."

DAUNOXOME

DaunoXome is a liposomal formulation of the anticancer agent daunorubicin. We have received approval to sell DaunoXome in the U.S. and 24 other countries as a first line therapy for treating patients who suffer from HIV-associated Kaposi's sarcoma. Kaposi's sarcoma is a disease characterized by widely disseminated lesions in the skin, mucous membranes, lymph nodes and viscera that can be life threatening for patients suffering from AIDS.

DaunoXome uses our proprietary liposomal technology to deliver safer and more effective doses of daunorubicin to the disease site. Studies have shown that DaunoXome may actually locate and accumulate in the patient's tumor and allow a patient to receive higher concentrations of daunorubicin at the disease site than could be obtained with an equivalent dose of non-liposomal daunorubicin.

DaunoXome is marketed in the U.S. and abroad by our therapeutic specialists and, in certain foreign countries, by distributors. We believe that sales of DaunoXome will be lower in future periods because the number of HIV-infected patients who develop Kaposi's sarcoma has declined significantly in recent years due to the success of combination therapies in treating HIV patients.

OUR PRODUCTS IN LATE STAGE CLINICAL TRIALS

We have two product candidates that we are developing in large, late-stage human clinical trials: tenofovir DF for treating patients with HIV and adefovir dipivoxil for treating patients with HBV. If these Phase III clinical trials are successful, we will apply to the FDA and other foreign regulatory agencies for approval to sell these drugs. Based on results to date, we expect to apply to the FDA and the European Union for approval of tenofovir DF in mid-2001. In addition, in January 2001 we acquired exclusive rights to market Cidecin-TM- in 16 European countries. Cidecin is an antibacterial that is being developed by Cubist Pharmaceuticals, Inc. in Phase II and Phase III clinical trials. If Cubist's Phase III clinical trials are successful, we will apply for regulatory approval of Cidecin in Europe. We cannot, however, determine with any certainty if any of these clinical trials will be successful and, if they are successful, whether or not the FDA or other regulatory agencies will approve any of these drugs for marketing.

TENOFOVIR DISOPROXIL FUMARATE

Tenofovir DF is a nucleotide analogue reverse transcriptase inhibitor given once daily as part of combination therapy to treat HIV infection.

In February 2001, we announced preliminary 24-week data from study 907, a 48-week Phase III clinical trial evaluating a 300 mg dose of tenofovir DF as a component of combination therapy in 552 treatment-experienced patients at 70 sites in the U.S., Europe and Australia. We designed study 907 to provide us with conclusive data on the safety and efficacy of this dosage of tenofovir DF. In this study, patients were randomly divided into two groups: one group of patients who had tenofovir DF added to their existing combination therapy (two-thirds of enrolled patients), and one group of patients who were given placebo in addition to their existing therapy (one-third of enrolled patients). These results suggest that, following 24 weeks of treatment:

- Tenofovir DF reduced patients' HIV viral loads by an average of approximately 75% (-.61 log(10)), a primary endpoint of this trial.

- Tenofovir DF suppressed HIV viral loads to undetectable levels in approximately 45% of patients, compared to 13% of patients who received placebo.

- Tenofovir DF increased patients' CD4 cell counts while patients who received placebo had their CD4 cell counts decrease. An increase in CD4 cell count is an important indication that an HIV drug is improving a patient's immune system.

- The rate that patients discontinued the use of tenofovir DF (6%) was equivalent to the discontinuation rate for placebo.

- Tenofovir DF did not cause a significant increase of serious side effects relative to placebo.

In September 2000, we presented the results from a 48-week Phase II dose ranging clinical trial of tenofovir DF in 189 treatment-experienced patients. In this study, patients received one of three doses of tenofovir DF (300 mg, 150 mg or 75 mg) or placebo, in addition to their existing combination therapy. At week 24, patients receiving placebo were switched to the 300 mg dose. This trial showed that, in this patient population, following 24 weeks of treatment, higher doses of tenofovir DF were associated with lower levels of HIV compared to placebo and that at week 48, higher doses of tenofovir DF were associated with lower levels of HIV compared to baseline. At each measurement point, the greatest reduction was observed in the 300 mg group. The study also showed that 48 weeks of dosing with tenofovir DF did not result in an increase of serious adverse events.

These preliminary Phase III results, combined with our completed Phase II results, support our belief that tenofovir DF can be an important treatment option for these difficult to treat patients. We expect that data from these trials, together with data from other clinical trials, will form the basis of marketing applications for treating this patient population that we expect to file in the U.S. and Europe in mid-2001.

In January 2001, we completed enrollment of 601 patients in study 903, a Phase III clinical trial to evaluate tenofovir DF for treating patients who have not had prior HIV therapy. This study will compare the safety and efficacy of treatment with tenofovir DF in combination with lamivudine (3TC) and efavirenz to the safety and efficacy of treatment with stavudine (d4T), lamivudine and efavirenz. This study will help us determine the potential role of tenofovir DF for treating this patient population and, if successful, form the basis of a supplemental marketing application for this use.

We cannot be certain that the data obtained from our clinical trials will support regulatory approval of tenofovir DF as the FDA and other regulatory authorities could reject our marketing application for a number of reasons including if they require a higher level of safety or efficacy or more data than we anticipated, or if they disagree with our design or interpretation of these trials.

One of the major challenges in treating HIV-infected patients is drug resistance. Because many of the existing therapies for treating HIV and AIDS rely on similar drug processes, patients who have developed resistance to one drug often develop resistance to other drugs within its class. We believe that tenofovir DF, if eventually approved by the FDA, could be a very important drug for treatment-experienced patients because available data have shown that patients do not develop rapid resistance to tenofovir DF and that tenofovir DF is effective in treating patients who have developed resistance to other therapies. We cannot be certain, however, that the resistance data we may obtain upon completion of our Phase III clinical trials will show similar resistance characteristics to the preliminary data from study 907 or the data we obtained from the more limited Phase II clinical trials.

Another major concern in HIV treatment is convenience of dosing. The combination therapies that are having a very positive impact on the health of HIV-infected patients require these patients to take numerous different drugs. Some of these drugs require multiple doses every day and many have timing restrictions. This results not only in inconvenience for patients but also contributes to patients missing doses or not adhering to their therapy. We believe that tenofovir DF can be administered as a once-daily oral pill on a schedule that may be appealing to HIV patients and their physicians. The low discontinuation rate observed for tenofovir DF in study 907 supports this belief.

In December 1999, we discontinued developing adefovir dipivoxil for treating HIV-infected patients. This decision followed a recommendation by an FDA Advisory Panel not to approve a 60 mg dose of adefovir dipivoxil for treating HIV due primarily to concerns of kidney toxicity that developed late in the trials, as well as a desire for additional evidence of treatment benefits. Tenofovir DF has a structure and activity similar to adefovir dipivoxil. While tenofovir DF has not been associated with kidney toxicity and has shown superior treatment benefits in our clinical trials, we cannot be certain that the kidney toxicity issues that occurred in the later stages of the Phase III clinical trials for adefovir dipivoxil will not arise in the clinical trials for tenofovir DF or that we will achieve adequate treatment benefits.

We have an exclusive, worldwide license to patent rights and related technology for tenofovir DF from IOCB/REGA and would be obligated to pay 3% of any net revenues from sales of tenofovir DF to IOCB/REGA in countries where the product has patent protection. See "Collaborative Relationships--IOCB/REGA."

ADEFOVIR DIPIVOXIL FOR HEPATITIS B

Hepatitis B is a highly contagious viral infection that can cause acute liver failure. Some patients develop a chronic infection which over many years can lead to complications (such as cirrhosis and cancer) that can lead to death. The World Health Organization estimates that there are approximately 350 million people worldwide who are infected with chronic HBV, including 1.25 million people in the United States. Adefovir dipivoxil is a nucleotide analogue reverse transcriptase inhibitor. Adefovir dipivoxil disables the HBV virus by interfering with the activity of an enzyme known as HBV polymerase which is necessary for the HBV virus to replicate. In randomized, double-blind, placebo-controlled Phase II clinical trials, a 30 mg dose of adefovir dipivoxil reduced the median HBV viral load by over 99% (approximately 4 log(10)) after twelve weeks of treatment.

We have two separate Phase III clinical trials to evaluate the safety and effectiveness of adefovir dipivoxil pills for treating patients with chronic HBV infection. Both of our Phase III trials were designed as randomized, double-blind, placebo-controlled studies and are being conducted at clinical sites in the U.S., Canada, Europe, Australia and Southeast Asia. One of these trials, which is fully enrolled with 515 patients, is evaluating adefovir dipivoxil once daily at 10 mg or 30 mg for treating patients who test positive for the HBV "e" antigen, the most common type of hepatitis. The other trial, which is fully enrolled with 185 patients, is evaluating adefovir dipivoxil once daily at 10 mg for treating patients with a type of HBV known as "precore mutant hepatitis B." Precore mutant HBV is most common in countries of Southeast Asia and the Mediterranean.

A vaccine is available that can prevent the transmission of HBV, but it does not cure patients who become chronically infected with the virus. It is expected that as this vaccine becomes more widely available, the incidence of HBV will decrease. Existing therapies for treating patients who are infected with HBV include the drugs Epivir-HBV (a form of lamivudine that is sold by GlaxoSmithKline) and Intron-A (a form of interferon alpha 2b that is sold by Schering Plough). Epivir-HBV is an orally-administered drug that prevents the virus from replicating in patients. Intron-A is an injectable drug that can provide a reduction in the amount of virus in the blood of some patients, but is often associated with side effects. We believe that if the FDA approves adefovir dipivoxil, Epivir-HBV would be its most significant competition. Of course we cannot be certain that adefovir dipivoxil will be approved for the treatment of HBV and we cannot determine if adefovir dipivoxil would be competitive with Epivir-HBV. See "Competition."

As is the case with HIV, drug resistance is a serious problem with drugs that treat HBV. Available data to date has not demonstrated a resistance-mutation associated with adefovir dipivoxil in HBV suggesting that the development of resistance to adefovir dipivoxil in HBV patients may be slow and infrequent. We believe that the resistance profile of adefovir dipivoxil could make adefovir dipivoxil an

important drug for treating chronic HBV infection. We cannot be certain, however, that the resistance data we may obtain from the much broader and longer term Phase III clinical trials on adefovir dipivoxil will also show these resistance characteristics.

As described above under tenofovir DF, we discontinued development of 60 mg doses of adefovir dipivoxil for treatment of HIV due to safety and benefit concerns from the FDA. Studies have shown that adefovir dipivoxil is significantly more effective against the HBV virus than against the HIV virus, allowing us to use lower doses that have not shown significant kidney toxicity in our clinical trials to date. We have limited clinical data on the 10 mg dose of adefovir dipivoxil that we obtained from open label safety studies of adefovir dipivoxil in patients with lamivudine resistant HBV who are either pre and post liver transplant patients or who are co-infected HIV/HBV. These studies have demonstrated a decrease in HBV viral load that was similar to what has been seen with the 30 mg dose in phase II studies. We cannot be certain that the broad, long term studies of adefovir dipivoxil at 10 mg and 30 mg doses will demonstrate, to the satisfaction of the FDA and other regulatory agencies, that adefovir dipivoxil can be a safe and effective treatment for chronic HBV.

Hepatitis B is most common in China and Southeast Asian countries. In December 2000, we received approval and were granted a clinical trials permit to initiate Phase I clinical trials in China. We expect to commence these clinical trials in 2001. We have limited regulatory expertise and no manufacturing or marketing capacity in China and Southeast Asia. Therefore, we will rely on the assistance of third parties for these activities. It is also difficult to protect patents in these countries and we could be adversely affected if we were unable to obtain adequate patent protection for adefovir dipivoxil in China and Southeast Asia. As part of our approval to commence Phase I clinical trials in China, adefovir dipivoxil was granted Class I designation which would give us 12 years of market exclusivity for adefovir dipivoxil following any regulatory approval in China.

We have an exclusive, worldwide license to patent rights and related technology for adefovir dipivoxil from IOCB/REGA, and would be obligated to pay 3% of any net revenues from sales of adefovir dipivoxil to IOCB/REGA in countries where the product has patent protection. See "Collaborative Relationships--IOCB/REGA."

CIDECIN

Cidecin (daptomycin for injection) is an investigational antibacterial compound being developed by Cubist Pharmaceuticals, Inc. In January 2001, we entered into an agreement with Cubist granting us exclusive commercial rights to Cidecin in 16 European countries. Under this arrangement, Cubist is responsible for the ongoing clinical trials for the product and we are responsible for European regulatory filings. We believe that this arrangement represents a strategic opportunity for us because Cidecin falls within our therapeutic focus of anti-infectives and is a product that, if approved, could be sold through our existing European sales and marketing infrastructure.

Laboratory tests have suggested that Cidecin may be effective in rapidly killing most Gram-positive bacteria, including those that have become resistant to current therapies. Gram-positive bacterial infections include complicated skin and soft tissue infections, bacteremia, endocarditis or infection of the valves of the heart, complicated urinary tract infections, pneumonia and osteomyelitis or infection of bone or bone marrow. As is the case with HIV and HBV, resistance to existing anti-bacterial therapy has become a significant problem in treating these infections. If these laboratory tests are confirmed in clinical trials, Cidecin could be a very useful drug for treating these serious infections. There can be no assurance, however, that these results will be confirmed in clinical trials.

Cubist is currently evaluating Cidecin in multiple Phase III trials for the treatment of complicated skin and soft tissue infection and community-acquired pneumonia. If Cubist obtains data from these Phase III clinical trials that show appropriate safety and efficacy of Cidecin for these uses, we would

file for marketing authorization in the European Union and, if the application is approved, would sell Cidecin through our European sales and marketing infrastructure.

On March 14, 2001, Cubist announced preliminary data from study 9901. Study 9901 is a pivotal phase III clinical trial evaluating Cidecin for complicated skin and soft tissue infection. According to this announcement, a primary endpoint of this trial, demonstrating equivalency to comparable agents, was achieved.

We cannot accurately predict the outcome of these clinical trials. If the trials being conducted by Cubist are not successful, we may be prevented from obtaining regulatory approval of Cidecin in Europe or may elect to conduct additional trials ourselves or together with Cubist and pay for all or a portion of the costs associated with those trials. Cubist does not have an obligation to conduct or pay for additional clinical trials.

Cubist is also evaluating Cidecin in a Phase III clinical trial for the treatment of complicated urinary tract infection and an open-label Phase II clinical trial for the treatment of bacteremia, and may evaluate Cidecin for the treatment of endocarditis and other infections. Our agreement with Cubist does not require Cubist to continue or complete these trials but, if Cubist successfully completes Phase III clinical trials for these uses, we would seek regulatory approval for these uses in our territory and would have exclusive commercial rights to these indications in our territory. We cannot predict the outcome of these clinical trials or if Cubist will evaluate Cidecin for additional uses.

Cubist is also developing an oral formulation of daptomycin. Our agreement with Cubist would give us exclusive commercial rights in our territory to any oral formulation of daptomycin that is developed by Cubist.

We are required to pay milestone payments to Cubist based upon certain development goals relating to the clinical development and regulatory approval of Cidecin and any oral formulation of daptomycin. We are also required to pay royalties to Cubist based upon our sales of Cidecin and any oral formulation of daptomycin. See "Collaborative Relationships--Cubist."

OUR ONCOLOGY PORTFOLIO

We are developing three investigational compounds in our oncology program. One of these product candidates, NX 211, is in Phase II clinical trials, and the other two product candidates, GS 7904L and GS 7836, are in preclinical development.

NX 211

NX 211 is a liposomal formulation of lurtotecan, an anti-cancer compound developed by GlaxoSmithKline. GlaxoSmithKline granted to us the exclusive right to develop and commercialize NX 211. See "Collaborative Relationships--GlaxoSmithKline--NX 211."

Prior to granting us these development and commercialization rights, GlaxoSmithKline conducted Phase II clinical trials on non-liposomal lurtotecan as a treatment for various forms of cancer. These Phase II clinical trials showed that lurtotecan has anti-cancer activity but we believe that GlaxoSmithKline did not continue pursuing development of non-liposomal lurtotecan because they were not convinced that these Phase II clinical trials showed sufficient treatment benefits at safe doses when compared to other available anti-cancer agents. We entered into the development and commercialization relationship with GlaxoSmithKline because we believe that by delivering lurtotecan in a liposome, we may be able to increase the treatment benefits of lurtotecan and give patients doses that are safe, effective and convenient.

Lurtotecan is in a class of compounds called camptothecins. These compounds work by disrupting a cell's ability to use topoisomerase I, an enzyme that is required for cells to replicate. Studies show

that the ability of these compounds to kill and stop the spread of cancer cells is directly related to the length of time that cancer cells are exposed to the compound. We believe that by formulating lurtotecan in a liposome, we may be able to increase its time of exposure and its treatment benefits.

In 2000, we completed three Phase I single agent clinical trials that evaluated different doses and treatment schedules of NX 211. These studies, which involved 108 patients, established a maximum tolerated dose for NX 211 with hematological toxicity as the dose limiting factor. We also observed anti-tumor or biological activity in seven of these difficult to treat patients. We cannot be certain that the anti-tumor activity was related to NX 211 since these trials were not designed to evaluate efficacy. One additional Phase I single agent trial is ongoing. NX211 is also being evaluated in Phase I trials in combination with another cancer therapy.

Based on these Phase I results, we commenced a Phase II clinical program evaluating NX 211 for treating patients with ovarian cancer. In November 2000, two ovarian trials were initiated: one in patients who had failed first-line chemotherapy and one in patients resistant to topotecan. In addition, we initiated a separate Phase II clinical trial in December 2000 that will evaluate NX 211 for the treatment of patients with small-cell lung cancer after failure of initial therapy. We also expect to evaluate NX 211 in other cancer types. We cannot accurately predict the outcome of these clinical trials.

We are required to pay milestone payments to GlaxoSmithKline if we achieve certain development goals related to the clinical development and regulatory approval of NX 211. We are not required to pay any royalties or other payments to GlaxoSmithKline based upon any sales of NX 211. See "Collaborative Relationships--GlaxoSmithKline--NX 211."

GS 7904L

GS 7904L is also a liposomal formulation of a compound that was developed by GlaxoSmithKline for the treatment of cancer. We acquired exclusive worldwide rights to develop and commercialize this compound from GlaxoSmithKline in December 2000.

Prior to our acquiring these rights, GlaxoSmithKline had discontinued development of this compound during Phase I clinical trials. As is the case with NX 211, we hope that by delivering the compound using our proprietary liposomal technology, we will be able to improve the safety and efficacy profile of this compound.

This investigational compound is part of a class of compounds known as thymidilate synthase inhibitors, or TS inhibitors. TS inhibitors act by preventing the production of the thymidilate synthase enzyme, an enzyme that is necessary for cell growth. This enzyme is expressed at significantly higher levels in tumor cells than in healthy cells making it an appropriate target for cancer therapy. Other TS inhibitors that have been approved by regulatory agencies are used for treating colorectal and breast cancer. Our preclinical studies to date indicate that the liposomal formulation of the compound is associated with significant tumor growth inhibition and may improve the safety profile of the compound.

If our preclinical studies are successful, we plan to begin Phase I human clinical trials of GS 7904L in 2001. We cannot be certain that our preclinical studies will be successful. Even if these preclinical studies are successful, we cannot be certain that we will be able to submit an application to begin clinical testing in 2001, or that if commenced, these clinical trials would be successful.

We are required to pay milestone payments to GlaxoSmithKline if we achieve certain development goals relating to the clinical development and regulatory approval of GS 7904L. We are also required to pay royalties to GlaxoSmithKline based upon any sales of GS 7904L. See "Collaborative Relationships--GlaxoSmithKline--GS 7904L."

GS 7836

Also in December 2000, we acquired exclusive, worldwide rights to GS 7836 (4'-thio-araC) from the Southern Research Institute, or SRI. We are evaluating GS 7836 in preclinical studies for the potential treatment of cancer.

GS 7836 is in a class of compounds called nucleoside analogs. It is believed that nucleoside analogues inhibit tumor cell growth by preventing the replication of DNA. FDA-approved drugs in this class have been used to treat acute and chronic leukemias, pancreatic and non-small cell lung cancer. GS 7836 has demonstrated anti-cancer activity against solid tumors in preclinical studies conducted by SRI and Gilead. We cannot be certain that our preclinical studies will be successful.

We are required to pay milestone payments to SRI if we achieve certain development goals relating to the clinical development and regulatory approval of GS 7836. We are also required to pay royalties to SRI based upon our sales of GS 7836. See "Collaborative Relationships--Southern Research Institute."

OUR SCIENCE

We have research scientists in Foster City and San Dimas, California, and Boulder, Colorado engaged in the discovery and development of new molecules and technologies that we hope will lead to new medicines and novel formulations of existing drugs. Our therapeutic focus is in the areas of infectious diseases and cancer.

NUCLEOTIDE ANALOGUES

Our scientists are working with our proprietary nucleotide analogues to develop treatments for viral infections. These compounds treat viral infections by interfering with the activity of certain enzymes that are necessary for the virus to grow. For example, VISTIDE, a nucleotide analogue of cytosine, inhibits the activity of an enzyme in the cytomegalovirus that is essential for that virus to spread. Tenofovir DF and adefovir dipivoxil are nucleotide analogues that work by inhibiting the activity of reverse transcriptase, an enzyme necessary for replication of the HIV virus (tenofovir DF) and the HBV virus (adefovir dipivoxil). Other viruses we are seeking to treat using nucleotide analogues include the herpes and pox viruses. We are also evaluating several nucleotide analogues in animals for activity against cancer.

We believe that small molecule nucleotide analogues can offer advantages as therapeutics. These advantages include:

- These molecules have demonstrated ability to work in both infected and uninfected cells. This could enable us to develop drugs that not only treat a patient who is infected with a virus but that can also prevent a healthy person from becoming infected in the first place; and

- Drugs developed with these molecules have been shown to have treatment activity in a patient for longer periods of time than other available drugs. This could enable us to develop drugs that require less frequent dosing and are thus more convenient for patients.

Given the complexity of drug development, we cannot be certain that any drug candidates we develop with this science will have any or all of these advantages. Even if we do develop drug candidates with some or each of these advantages, the FDA and other regulatory agencies could reject marketing approval of these drug candidates for other reasons, including safety and benefit concerns.

LIPOSOMES

We also have scientists who are focused on applying our proprietary liposomal drug delivery technology to develop safer, more effective and more convenient drugs. Liposomes are sub-microscopic

structures made of phospholipids, the basic components of human cell walls. They are hollow spheres into which drugs can be packed. We believe that we can influence the way compounds are released and distributed in the body by placing them in liposomes. This can, in turn, improve the safety and treatment benefits of such compounds. For example, we developed AmBisome by incorporating amphotericin B in a liposome. Pre-clinical studies have shown that AmBisome delivers amphotericin B in a manner that results in fewer side effects and improved treatment benefits over conventional amphotericin B, including concentrating the drug at the site of the infection, extending the time the drug remains in the blood stream to prolong the therapeutic effect and reducing kidney toxicity and injection related reactions.

Our current strategy is to use our liposomal technology with compounds we develop internally and to identify appropriate compounds developed by third parties for use with this technology. Compounds developed by third parties that are appropriate for our technology include those that, like amphotericin B, have proven therapeutic benefits but suffer from significant side effects, or that suffer from dosing and administration problems. We believe that we can use our liposomal technology to improve the safety of these drugs while maintaining or even improving their therapeutic benefits.

We have identified certain generic compounds (compounds that are not protected by patents) and proprietary compounds owned by third parties that may benefit substantially from our liposomal technology, and we have begun formulation studies for these compounds. In addition, we have discussed, and will continue to discuss, collaborative relationships with other companies to develop liposomal formulations of their compounds.

HIV PROTEASE INHIBITORS

We are evaluating a number of small molecule compounds known as "protease inhibitors" for the treatment of HIV. Protease inhibitors act by interfering with the activity of protease, an enzyme that, like reverse transcriptase, is necessary for replication of the HIV virus. We have conducted a number of preclinical experiments on these compounds and have demonstrated that they have potent antiviral activity. Our scientists are trying to increase the safety and treatment benefits of and to reduce resistance concerns with these compounds before conducting further preclinical development.

ADENOSINE RECEPTOR REGULATORS

We are working with the National Institute of Diabetes, Digestive and Kidney Diseases at the National Institutes of Health (NIH) to study compounds known as adenosine receptor agonists and antagonists for the treatment and prevention of neurodegenerative disorders (disorders of the brain and upper spine) associated with stroke. We also intend to evaluate the use of these compounds in inflammatory and allergic conditions. NIH researchers have developed a number of these compounds, some of which have shown therapeutic benefits in stroke.

DRUG DISCOVERY TECHNOLOGIES

We have a technology that we call the "SELEX process" that is used to identify potential drug candidates. This process works by identifying drug compounds, known as "aptamers", that tend to bind to the molecule that is causing the disease. Because these aptamers tend to bind to the disease molecules, we believe that they can be effective for treating disease at relatively low doses. NX 1838 is an example of an aptamer identified with the SELEX process. See "Collaborative Relationships--EyeTech."

MARKETING AND SALES

We established a U.S. sales force of therapeutic specialists when we began selling VISTIDE in 1996. As a result of our merger with NeXstar in July 1999, we also have marketing subsidiaries in the United Kingdom, Germany, Italy, Spain, France, Portugal and Australia and a marketing operation in Greece. Our sales professionals in the U.S., Europe and Australia promote and sell AmBisome and DaunoXome. AmBisome is also sold by Fujisawa in the U.S. (where we co-promote the product) and in Canada. Pharmacia Corporation promotes and sells VISTIDE in countries outside of the U.S. and Hoffmann-La Roche promotes and sells Tamiflu everywhere it is sold. In March 2000, we entered into a promotion agreement with The Virco Group. We amended this agreement in February, 2001. Under this arrangement, our U.S. therapeutic specialists will promote Virco's HIV resistance monitoring services to HIV-treating physicians through June 2001.

Our U.S. sales force currently consists of approximately 30 sales representatives and five regional directors who promote VISTIDE to physicians, hospitals, clinics, and other healthcare providers who treat AIDS patients, AmBisome to infectious disease specialists, hospitals, home health care providers and cancer specialists, and DaunoXome to cancer specialists and hospitals. The U.S. sales force is supported by a managed care/national accounts team and by a marketing and sales support staff of approximately 20 people based at our headquarters in Foster City, California.

Our international marketing subsidiaries are each headed by a general manager who oversees the operations in the market(s) served by that subsidiary. We currently have approximately 140 people located mainly in Europe, including medical, financial and human resources personnel, who support our international sales and marketing operations. These subsidiaries also assist in obtaining regulatory approvals in the countries where they are located.

In the U.S., we sell VISTIDE and DaunoXome to wholesalers and specialty distributors who, in turn, sell the products to physicians, hospitals, clinics, pharmacies and other healthcare providers. Outside of the U.S., we have agreements with third-party distributors, including distributors in certain of the countries where we have marketing operations, to promote, sell and distribute AmBisome and DaunoXome. These international distribution agreements generally provide that the distributor has the exclusive right to sell AmBisome and DaunoXome in a particular country or several countries for a specified period of time.

If tenofovir DF is approved for treatment of HIV, a larger sales force and additional marketing resources would be required in the U.S. and Europe to expand our coverage of healthcare professionals treating HIV patients. It is our current intention to retain the commercial rights to adefovir dipivoxil for HBV in the U.S. and Europe and sell it through marketing partners or distributors in Asia and the rest of the world. If we do retain significant commercial rights to adefovir dipivoxil for HBV and the product is approved, we would need to increase our sales force in the U.S. and Europe and use additional marketing resources to sell this product. If Cidecin is approved for marketing in Europe, we believe that given the profile of the product and its target market, our existing sales force in Europe will be sufficient to market Cidecin.

VISTIDE is returnable in its original, unopened container up to one year beyond the expiration date or, if damaged when received by the customer. Our customers may return AmBisome or DaunoXome if the shelf life has expired or if the product is damaged or defective when it is received by the customer. AmBisome has an approved shelf life of 36 months in the U.S. and 30 months in most European countries. DaunoXome has a shelf life of 52 weeks in the U.S. and most European countries. Additionally, certain governmental agency customers are entitled to discounts, and we are required to provide rebates under state Medicaid programs. To date, returns, rebates and discounts have not been material. Fujisawa establishes the return policy for AmBisome in North America, and Hoffmann-La Roche establishes the return policy for Tamiflu.

COLLABORATIVE RELATIONSHIPS

As part of our business strategy, we establish collaborations with other companies to assist in the clinical development and/or commercialization of certain of our products and product candidates and to provide support for our research programs. We also evaluate opportunities for acquiring from other companies products or rights to products and technologies that are complementary to our business. Our existing collaborative relationships are as follows:

HOFFMANN-LA ROCHE

In September 1996, we entered into a collaboration agreement with Hoffmann-La Roche to develop and commercialize therapies to treat and prevent the flu. Under this agreement, we granted Hoffmann-La Roche exclusive worldwide rights to all of our proprietary influenza neuraminidase inhibitors, including Tamiflu. In October 1999, the FDA approved Tamiflu for marketing and in November 1999, Hoffmann-La Roche began selling Tamiflu.

As of December 31, 2000, we have received license fees and milestone payments from Hoffmann-La Roche totaling $39 million relating to the execution of this agreement and to regulatory filings and approvals for Tamiflu. Hoffmann-La Roche also funded all of the research and development costs for Tamiflu, including reimbursement to us of $28 million for the period from January 1, 1997 through December 31, 2000. In addition, under this agreement:

- Hoffmann-La Roche is responsible for pricing, promoting and selling Tamiflu on a worldwide basis;

- Hoffmann-La Roche pays us a percentage of its net revenues from sales of Tamiflu. In certain circumstances, the amount that Hoffmann-La Roche pays to us may be reduced, for example, if the cost of materials they use to manufacture Tamiflu increases. We receive payments and recognize revenue from Hoffmann-La Roche in the quarter following the quarter when the sales were made; and

- Hoffmann-La Roche will make milestone payments to us if and when Tamiflu is approved in Europe.

The agreement with Hoffman-La Roche terminates on a country-by-country basis after the later of:

- the expiration of patent coverage for Tamiflu; or

- ten years from first commercial sale.

Hoffmann-La Roche has the right to terminate the agreement in its entirety or on a country-by-country basis prior to expiration at any time upon 12 months notice.

FUJISAWA

In 1991, we entered into an agreement with Fujisawa providing that:

- We have the exclusive right to promote and sell AmBisome in all countries, except the U.S. and Canada;

- Fujisawa has the exclusive right to promote and sell AmBisome in Canada;

- We have the right to co-promote AmBisome with Fujisawa in the U.S., where Fujisawa has primary responsibility for promoting and selling AmBisome;

- We receive approximately 17% of the net revenues from sales of AmBisome in the U.S. for our co-promotion efforts;

- We receive payments and recognize revenue from Fujisawa in the month following the month when Fujisawa's sales are made;

- We would be required to pay Fujisawa 4% of our revenues in connection with sales of AmBisome in significant Asian markets, including Japan, Korea, Taiwan, China and India; and

- We manufacture AmBisome for all sales and Fujisawa purchases AmBisome from us for sale in the U.S. at a price equal to our cost to manufacture the product and for sale in Canada at that cost plus a specified percentage.

Our agreement with Fujisawa terminates when the last patent covering AmBisome in the U.S. or Japan expires.

IOCB/REGA

In 1991 and 1992, we entered into agreements with IOCB/REGA relating to nucleotide compounds discovered at these institutions. In December 2000, we paid IOCB/REGA $11 million to reduce the royalties payable upon any sales of tenofovir DF and adefovir dipivoxil by 2% to a royalty rate of 3%. Under these agreements and amendments to these agreements:

- We received from IOCB/REGA the exclusive right to manufacture, use and sell the nucleotide compounds covered by these agreements;

- In countries where there is patent protection, we are required to pay to IOCB/REGA 3% of the net revenues generated from any sales of tenofovir DF and adefovir dipivoxil, and 5% of any net revenues generated from sales of VISTIDE and any other products containing these compounds, subject to minimum royalty payments; and

- In countries where there is no patent protection, we are not required to pay royalties to IOCB/ REGA for sales of tenofovir DF and adefovir dipivoxil and are required to pay 2.5% of any net revenues generated from sales of VISTIDE and any other products containing these compounds.

We are currently making quarterly payments to IOCB/REGA based upon a percentage of sales of VISTIDE and are obligated to pay additional amounts upon any commercial sales of adefovir dipivoxil or tenofovir DF. We will amortize the $11 million payment made in December 2000 over the estimated commercial lives of tenofovir DF and adefovir dipivoxil, which will reduce any reported earnings on these products.

The agreements with IOCB/REGA terminate on a country-by-country basis after the later of:

- expiration of patent coverage for any product licensed under the agreements; or

- ten years from first commercial sale.

IOCB/REGA may terminate the licenses under these agreements for a particular product in key markets if we do not make any sales of that product within 12 months after regulatory approval in those countries.

CUBIST

In January 2001, we entered into an agreement with Cubist giving us exclusive commercial rights in 16 European countries to all oral and injectable formulations of Cubist's investigational antibacterial compound daptomycin. These formulations include Cidecin, an intravenous formulation of daptomycin currently in Phase III clinical trials for treatment of bacterial infections. Under this agreement:

- Cubist is required to complete ongoing clinical trials for Cidecin;

- We are responsible for all regulatory filings for products in our territory;

- If Cidecin is approved for marketing in our territory, we are responsible for marketing Cidecin in our territory;

- We paid an upfront fee to Cubist of $13 million at the time we signed this agreement and may be required to make additional payments to Cubist of up to $31 million if certain goals related to the clinical development and regulatory approval of Cidecin and an oral formulation of daptomycin are achieved;

- We are required to pay to Cubist a percentage of our revenues from sales of products in our territory;

- If Cubist desires to grant commercial rights to an oral or injectable daptomycin-related product in certain other countries including any country that joins the EU, Cubist must offer us such commercial rights on a priority basis; and

- Cubist is obligated to continue the preclinical development of an oral formulation of daptomycin and would have an obligation to pursue clinical development of that formulation if appropriate.

This agreement expires on a country by country basis with respect to each product developed upon the later of:

- Ten years after first commercial sale of such product in such country; or

- The date that there is no patent coverage for such product.

GLAXOSMITHKLINE--NX 211

In May 1998, we entered into agreements with GlaxoSmithKline giving us rights to GlaxoSmithKline's proprietary compound lurtotecan and granting GlaxoSmithKline rights to use our SELEX process to identify aptamers for therapeutic uses. In December 2000, GlaxoSmithKline waived its right to participate in the commercialization of NX 211 and its rights to royalties based on any sales of NX 211 in exchange for our agreement to increase milestone payments upon marketing approvals of NX 211.

Under the agreement relating to lurtotecan, we are developing NX 211, a liposomal formulation of lurtotecan. This agreement provides that:

- We have the exclusive right to develop and commercialize NX 211; and

- We may be required to make one time milestone payments to GlaxoSmithKline if we achieve certain goals related to the clinical development and regulatory approval of NX 211.

PHARMACIA CORPORATION

In August 1996, we entered into an agreement with Pharmacia Corporation relating to VISTIDE. Under this agreement we received $10 million on signing and $10 million upon approval of VISTIDE for marketing in Europe. In addition, under this agreement:

- Pharmacia Corporation has the exclusive right to market and sell VISTIDE in all countries outside of the U.S. and a right of first negotiation for any competitive products we own;

- We are responsible for maintaining the patents for cidofovir;

- We are required to sell bulk cidofovir to Pharmacia Corporation;

- Pharmacia Corporation will pay to us a percentage of its net sales of VISTIDE and any other products developed under the collaboration agreement. We receive payments and recognize revenue from Pharmacia Corporation in the quarter following the quarter when the sales were made; and

- Pharmacia Corporation holds 2,267,572 shares of our common stock that it purchased in connection with this agreement. Pharmacia Corporation may not sell their shares or acquire additional shares of our stock without our approval until June 2002.

Our agreement with Pharmacia Corporation expires on a country-by-country basis as patent coverage for VISTIDE expires or ten years from first commercial sale of VISTIDE in countries where the product is not covered by a patent.

In addition, Pharmacia Corporation may terminate the agreement:

- upon six months notice; or

- upon notice on a country-by-country basis, three months before applying for marketing approval of a competitive product.

GLAXOSMITHKLINE--GS 7904L

In December 2000, we entered into an agreement with GlaxoSmithKline giving us rights to GS 7904L, a novel anti-tumor compound. Under this agreement:

- We have the exclusive worldwide right to develop and commercialize GS 7904L for all indications, other than malaria;

- We are developing GS 7904L in a liposome and are evaluating it in preclinical studies for oncology;

- We paid an upfront fee to GlaxoSmithKline at the time we signed this agreement and may be required to make payments to GlaxoSmithKline if we achieve certain goals related to the clinical development and regulatory approval of GS 7904L; and

- If we successfully commercialize the product, we would be required to pay to GlaxoSmithKline a percentage of our net sales.

This agreement expires, on a country by country basis with respect to each product developed upon the later of:

- Ten years after first commercial sale of such product in such country; or

- The date that there is no patent coverage for such product.

SOUTHERN RESEARCH INSTITUTE

In December 2000, we entered into an agreement with SRI giving us rights to GS 7836, a novel anti-tumor compound. Under this agreement:

- We have the exclusive worldwide right to develop and commercialize GS 7836 for all indications;

- We are evaluating this compound in preclinical studies for oncology;

- We paid an upfront fee to SRI at the time we signed this agreement and may be required to make payments to SRI if we achieve certain goals related to the clinical development and regulatory approval of GS 7836; and

- If we successfully commercialize the product, we would be required to pay to SRI a percentage of our net sales.

This agreement expires on a country by country basis with respect to each product developed upon the later of:

- Ten years after first commercial sale of such product in such country; or

- The date that there is no patent coverage for such product.

SUMITOMO PHARMACEUTICALS CO., LTD.

In 1996, we entered into an agreement with Sumitomo Pharmaceuticals Co., Ltd. that gave Sumitomo the exclusive right to develop and market AmBisome in Japan. Sumitomo paid to us $7 million at the time we entered into this agreement and $3 million in March 1998 when Sumitomo made a regulatory filing in Japan. Under the terms of this agreement:

- Sumitomo is required to make a payment of $4 million to us if AmBisome is approved for sale in Japan;

- Sumitimo is required to pay to us a percentage of any revenue they generate from sales of AmBisome; and

- If AmBisome is approved in Japan, we would manufacture AmBisome for sale by Sumitomo in Japan. The price that we would charge Sumitomo for the supply of AmBisome and the percentage of revenues that they would be required to pay to us would be determined by the price of AmBisome in Japan.

This agreement terminates on the later of:

- Ten years after Sumitomo begins selling AmBisome in Japan; or

- The date the last patent for AmBisome in Japan expires.

EYETECH PHARMACEUTICALS

In March 2000, we entered into an agreement with EyeTech Pharmaceuticals, Inc. relating to NX 1838. We received a $7 million up-front licensing fee from EyeTech upon execution of the agreement. Under the terms of the agreement:

- EyeTech received the exclusive right to develop and commercialize NX 1838;

- We are entitled to additional cash payments from EyeTech of up to $25 million if and when EyeTech reaches certain NX 1838 development milestones; and

- If the product is successfully commercialized, EyeTech will pay us royalties on worldwide sales of the product.

As part of this transaction, we received a five-year warrant to purchase 833,333 shares of EyeTech series B convertible preferred stock, exercisable at a price of $6.00 per share, the price at which the stock was issued to other investors. As required by our license agreement with the University Technology Corporation, we transferred 5% of this warrant to the University Technology Corporation (the right to acquire 41,666 shares) and therefore currently hold a warrant to purchase 791,667 shares. In addition, we agreed to provide clinical supplies of the product to EyeTech for an initial one-year period.

This agreement expires upon the later of:

- Ten years after first commercial sale of any product developed; or

- The date the last patent expires under the agreement.

VIRCO GROUP

In March 2000, we entered into an agreement with the Virco Group relating to Virco's HIV resistance monitoring services. Under this agreement:

- We help to promote Virco's HIV resistance monitoring services; and

- Virco pays to us a fixed fee for this promotion.

This agreement will terminate in June 2001.

PROLIGO L.L.C.

We own a 49% interest in Proligo L.L.C., a company that manufactures oligonucleotides. We also have agreements with Proligo and SKW Americas, Inc. (the owner of the remaining 51% of Proligo) relating to the ownership, operations and funding of Proligo. Under these agreements:

- We contributed a total of $4.9 million to Proligo to fund its operations in late 1999 and early 2000 and we have no further funding obligations to Proligo;

- SKW Americas will have the right to purchase our ownership interest in Proligo for a 90-day period beginning on July 29, 2001 for the amount they would have been required to pay for that interest had they purchased it in 1999;

- Over the next three years, SKW Americas is obligated to pay to us approximately $300,000; and

- Proligo agreed to manufacture oligonucleotides for us and we would pay them an amount equal to their manufacturing cost plus a pre-determined percentage.

Proligo will dissolve and any remaining assets will be distributed to its owners in August 2028, unless the owners of Proligo at that time decide to extend the term. The agreement relating to the manufacture and supply of oligonucleotides expires in August 2008.

GLAXOSMITHKLINE--SELEX

At the time we entered into the agreement with GlaxoSmithKline relating to NX 211, we also entered into an agreement giving GlaxoSmithKline the non-exclusive right to use our SELEX technology for five years to identify aptamers.

- GlaxoSmithKline would be required to pay to us a fee at the time we enter into an additional agreement;

- GlaxoSmithKline would be required to make payments to us based on achieving certain goals relating to the regulatory approval of any product they develop based on the aptamer; and

- GlaxoSmithKline would be required to pay to us a percentage of any revenues they may generate from sales of any product they develop based on the aptamer.

This agreement terminates on May 27, 2003 except:

- GlaxoSmithKline can extend this agreement for additional one year periods in which case GlaxoSmithKline would be required to pay to us an appropriate fee; and

- GlaxoSmithKline can terminate this agreement earlier at any time on 90 days notice to us.

SOMALOGIC, INC.

In November 1999, we entered into an agreement with Somalogic, Inc., a company formed by Larry Gold, the founder of NeXstar, relating to our SELEX technology. Under this agreement:

- We gave Somalogic the exclusive right to use our SELEX technology to make and sell in vitro diagnostic products (diagnostic products that are not used in a person or animal);

- We assigned and sold to Somalogic certain patents and materials relating to in vitro diagnostics, including robotic SELEX machines;

- We have the right to use the other drug discovery technology that is the subject of this agreement internally to study diseases and in our drug development and clinical trial programs; and

- Somalogic paid to us the first installment of a fee at the time we entered into the agreement and a second and final installment in November 2000.

This agreement terminates on the later of:

- On a country by country basis as patent coverage for this drug discovery technology expires; or

- November 2024.

INTERNATIONAL DISTRIBUTION AGREEMENTS

We have various agreements with distributors in Europe, Asia, South America, the Middle East and Africa that grant these distributors the exclusive right to sell AmBisome, and in some cases DaunoXome, in a particular country or countries for a specified period of time. Most of these agreements also provide for collaborative efforts between us and the distributor for obtaining regulatory approval for the product in the particular country and for marketing the product in the country. Most of these agreements establish a price that the distributor must pay for our product and require us to deliver quantities of the product ordered by the distributor.

ACADEMIC AND CONSULTING RELATIONSHIPS

To supplement our research and development efforts, as part of our regular business we enter into arrangements with universities and medical research institutions. These arrangements often provide us with rights to patents, patent applications and technology owned by these institutions in return for payments and fees relating to our use of these rights.

UNIVERSITY TECHNOLOGY CORPORATION

We have an ongoing collaborative arrangement relating to our SELEX technology with the University Technology Corporation, a technology holding company for the University of Colorado at Boulder. Under this arrangement:

- The University of Colorado at Boulder has given us all of its present and future rights to:

- inventions covered by patents and patent applications for SELEX technology;

- improvements to SELEX technology it makes or discovers;

- oligonucleotides or other molecules it makes using SELEX technology;

- results of certain research; and

- computer software related to SELEX technology.

- We are required to pay to the University of Colorado at Boulder:

- 2% of the revenues we generate from our sales of SELEX-derived products;

- 15% of any amounts we receive from a third party that are based upon sales by those third parties of SELEX-derived products; and

- 5% of other payments we receive from third parties as a result of certain arrangements we have with those third parties to develop and sell SELEX-derived products.

MANUFACTURING

AMBISOME AND DAUNOXOME

We manufacture AmBisome and DaunoXome in commercial quantities in two separate but adjacent facilities in San Dimas, California. The Medicines Control Agency of the United Kingdom has

approved both of these facilities to manufacture AmBisome and DaunoXome for commercial use. The FDA has approved both these facilities to manufacture AmBisome but only one of these facilities to manufacture DaunoXome for distribution in the U.S. To import AmBisome and DaunoXome into the European Union, we own a manufacturing facility in Dublin, Ireland where we perform quality control testing, final labeling and packaging for the European Union and elsewhere.

We use commercially available materials and equipment to manufacture these products. Currently, we obtain the amphotericin B, daunorubicin HCl and cholesterol that we use to manufacture AmBisome and DaunoXome from single approved suppliers.

AmBisome is currently freeze dried at our San Dimas manufacturing facility and is sold as a freeze-dried product. Given our demands and projections for growth in AmBisome use, we are currently using two different third parties to freeze dry some of the product and are evaluating the feasibility of installing additional freeze drying capacity in San Dimas. If we are unable to locate appropriate third parties or install and validate additional freeze drying capacity in San Dimas, our ability to increase AmBisome sales would be diminished. Manufacturing liposomal products is a particularly complex process and any new liposomal product we develop will require unique and complex variations in our manufacturing process.

ANTIVIRAL PRODUCTS

We hire third parties to manufacture our antiviral drugs for clinical and commercial purposes, including VISTIDE, adefovir dipivoxil tablets and tenofovir DF tablets. Hoffmann-La Roche manufactures Tamiflu. We have no commercial-scale manufacturing facilities for our antiviral products that are qualified under the FDA's current Good Manufacturing Practices, and we have no current plans to establish these facilities. In using third parties, we cannot be certain that they will perform their obligations effectively and on a timely basis. If these third parties do not perform effectively and timely, our clinical trials or regulatory filings could be delayed or we could be unable to deliver our products to customers on a timely basis, and this would adversely affect our operating results.

We have one supplier that has been approved by the FDA and EMEA to manufacture the cidofovir used in VISTIDE and a single FDA approved supplier for the final drug product, and we have submitted information on a second cidofovir supplier to assure our supplies. We manufacture the active ingredient in tenofovir DF in small quantities at our own facilities and in larger quantities through two contract manufacturers. The final tenofovir DF and adefovir tablets used in our clinical trials are manufactured at two contract manufacturing sites. If manufacturing at any of these sites we use were interrupted for any reason, our ability to complete our clinical trials or ship our products would be impaired, and this would adversely affect us.

For our antiviral products in particular, we will need to develop additional manufacturing capabilities and establish additional third party suppliers in order to manufacture sufficient quantities of our product candidates to complete clinical trials and to manufacture sufficient quantities of any candidates that are approved for commercial sale. If we are unable to develop manufacturing capabilities internally or contract for large scale manufacturing with third parties on acceptable terms for our antiviral products, our ability to conduct large-scale clinical trials and meet customer demand for commercial products would be adversely affected.

We believe that the technology we use to manufacture our products and compounds is proprietary. For our antiviral products, we have disclosed all necessary aspects of this technology to contract manufacturers to enable them to manufacture the products and compounds for us. We have agreements with these manufacturers that are intended to restrict them from using or revealing this technology, but we cannot be certain that these manufacturers will comply with these restrictions. In addition, these manufacturers could develop their own technology related to the work they perform for us that we may need to manufacture our products or compounds. We could be required to enter into

an agreement with that manufacturer if we wanted to use that technology ourselves or allow another manufacturer to use that technology. The manufacturer could refuse to allow us to use their technology or could demand terms to use their technology that are not acceptable.

We believe that we are in compliance with all material environmental regulations related to the manufacture of our products.

PATENTS AND PROPRIETARY RIGHTS

Patents and other proprietary rights are very important to our business. If we have a properly designed and enforceable patent it can be more difficult for our competitors to use our technology to create competitive products and more difficult for our competitors to obtain a patent that prevents us from using technology we create. As part of our business strategy, we actively seek patent protection both in the U.S. and internationally and file additional patent applications, when appropriate, to cover improvements in our compounds, products and technology. We also rely on trade secrets, internal know-how, technological innovations and agreements with third parties to develop, maintain and protect our competitive position. Our ability to be competitive will depend on the success of this strategy.

We have a number of patents, patent applications and rights to patents related to our compounds, products and technology, but we cannot be certain that issued patents will be enforceable or provide adequate protection or that pending patent applications will result in issued patents. The following table shows the actual or estimated expiration dates in the U.S. and Europe for the primary patents and for patents that may issue under pending applications that cover the compounds in our marketed products and our product candidates:

                                     U.S. PATENT EXPIRATION   EUROPEAN PATENT EXPIRATION
                                     ----------------------   --------------------------
PRODUCTS
AmBisome...........................           2016                       2008
Tamiflu............................           2016                       2016
VISTIDE............................           2010                       2012
DaunoXome..........................           2009                       2008

PRODUCT CANDIDATES
tenofovir DF.......................           2017                       2017*
adefovir dipivoxil.................           2014                       2011
NX 211.............................           2013*                      2012*
NX 1838............................           2012*                      2016*
GS 7904L...........................           2015                       2011
GS 7836............................           2019**                     2019**
Cidecin............................            N/A***                    2019**

* Applications for these patents are pending. If patents from these applications do not issue, we would not have patent protection through the dates indicated and would instead rely on other patents that expire earlier. For example, if this patent on tenofovir DF does not issue, we have patents that expire in 2006 and 2013 that provide protection.

** These are method of use patents. In general, method of use patents do not provide the same level of protection as composition of matter patents.

*** We do not have commercial rights to Cidecin in the United States.

Patents covering VISTIDE, tenofovir DF and adefovir dipivoxil, lurtotecan (the active ingredient in NX 211), Cidecin, GS 7904L and GS 7836 are held by third parties. We acquired exclusive rights to these patents in the agreements we have with these parties. See "Collaborative Relationships." Patents do not cover the active ingredients in AmBisome and DaunoXome. Instead, we hold patents to the

liposomal formulations of these compounds and also protect these formulations through trade secrets. We do not have patent filings covering adefovir dipivoxil in China or in certain other Asian countries, although we do have applications pending in various Asian countries, including China, that relate to specific forms and formulations of adefovir dipivoxil. Asia is a major market for HBV therapies.

We may obtain patents for our compounds many years before we obtain marketing approval for them. This limits the time that we can prevent other companies from developing these compounds and therefore reduces the value of the product. However, we can apply for patent term extensions. For example, extensions for the patents on VISTIDE have been applied for or granted in the U.S. and a number of European countries, compensating in part for delays in obtaining marketing approval. Similar patent term extensions may be available for other products that we are developing, but we cannot be certain we will obtain them.

It is also very important that we do not infringe patents or proprietary rights of others and that we do not violate the agreements that grant proprietary rights to us. If we do infringe patents or violate these agreements, we could be prevented from developing or selling products or from using the processes covered by those patents or agreements, or we could be required to obtain a license from the third party allowing us to use their technology. We cannot be certain that, if required, we could obtain a license to any third-party technology or that we could obtain one at a reasonable cost. If we were not able to obtain a required license, we could be adversely affected.

Patents relating to pharmaceutical, biopharmaceutical and biotechnology products, compounds and processes such as those that cover our existing compounds, products and processes and those that we will likely file in the future, do not always provide complete or adequate protection. Future litigation or reexamination proceedings regarding the enforcement or validity of our existing patents or any future patents could invalidate our patents or substantially reduce their protection. In addition, our pending patent applications and patent applications filed by our collaborative partners may not result in the issuance of any patents or may result in patents that do not provide adequate protection. As a result, we may not be able to prevent third parties from developing the same compounds and products that we are developing. Also, in the U.S., patent applications are generally maintained in secrecy until patents are issued so we cannot be certain that we are the inventor of technologies covered by our pending patent applications or that we were the first to file patent applications for those inventions.

We also rely on unpatented trade secrets and improvements, unpatented internal know-how and technological innovation. In particular, a great deal of our liposomal manufacturing expertise, which is a key component of our liposomal technology, is not covered by patents but is instead protected as a trade secret. We protect these rights mainly through confidentiality agreements with our corporate partners, employees, consultants and vendors. These agreements provide that all confidential information developed or made known to an individual during the course of their relationship with us will be kept confidential and will not be used or disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions made by the individual while employed by us will be our exclusive property. We cannot be certain that these parties will comply with these confidentiality agreements, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by our competitors. Under some of our research and development agreements, inventions discovered in certain cases become jointly owned by us and our corporate partner and in other cases become the exclusive property of one of us. It can be difficult to determine who owns a particular invention, and disputes could arise regarding those inventions.

COMPETITION

Our products and development programs target a number of diseases and conditions, including fungal infections, viral infections and cancer. There are many commercially available products for these diseases, and a large number of companies and institutions are spending considerable amounts of money and resources to develop additional products to treat these diseases. Our current products compete with other available products based primarily on:

- product performance;

- safety;

- tolerability;

- acceptance by doctors;

- patient compliance;

- patent protection;

- ease of use;

- price;

- insurance and other reimbursement coverage;

- distribution;

- marketing; and

- adaptability to various modes of dosing.

Any other products we market in the future will also compete with products offered by our competitors. If our competitors introduce data that shows improved characteristics of their products, improve or increase their marketing efforts or simply lower the price of their products, sales of our products could decrease. We also cannot be certain that any products we develop in the future will compare favorably to products offered by our competitors or that our existing or future products will compare favorably to any new products that are developed by our competitors. Our ability to be competitive also depends upon our ability to attract and retain qualified personnel, to obtain patent protection or otherwise develop proprietary products or processes and to secure sufficient capital resources for the substantial period that it takes to develop a product.

In markets where AmBisome has been approved as a first line therapy, it competes against traditional amphotericin B, which is made by Bristol-Myers Squibb Company and numerous generic manufacturers. We expect to face significant competition from new antifungal products, including caspofungin, a product developed by Merck that received marketing approval in January 2001 and voriconazole, which is being developed by Pfizer, Inc. Phizer has filed an application for marketing approval for voriconazole. There is also a number of other lipid-based amphotericin B products that have been approved in the U.S. and throughout Europe, including Abelcet, which is sold by Elan Corporation, and Amphotec, which is sold by InterMune Pharmaceuticals, Inc. These products compete against AmBisome as both primary and secondary therapy and have been offered at prices that are less than AmBisome's price.

Tamiflu competes with Relenza, an anti-flu drug that is sold by GlaxoSmithKline. Relenza is a neuraminidase inhibitor that is delivered as an orally-inhaled dry powder. In addition, Johnson & Johnson and Biocryst are developing a neuraminidase inhibitor anti-flu drug that will represent significant competition when and if the FDA approves it. This drug may be administered as a once-daily pill, as opposed to Tamiflu, which must be taken twice daily. We cannot be certain that Tamiflu will compare favorably to this drug based on performance, price, length of dosing, side effects or any other criteria. Johnson & Johnson is in advanced clinical trials with this compound, but it is unclear if or when this product may be on the market.

VISTIDE competes with a number of drugs that also treat CMV retinitis. These drugs include:

- Ganciclovir, a drug that is sold in intravenous and oral formulations by Hoffman La-Roche and as an ocular implant by Bausch & Lomb Incorporated;

- Foscarnet, an intravenous drug sold by AstraZeneca; and

- Formivirsen, a drug that is injected directly into the eye that is sold by CibaVision.

If approved, tenofovir DF will face substantial competition. A number of drugs to treat HIV infection and AIDS are currently sold or are in advanced stages of clinical development, including 16 products currently sold in the U.S. Among the companies that are significant competitors in the HIV/ AIDS market are GlaxoSmithKline, Bristol-Myers Squibb, Hoffmann-La Roche, Pfizer, Merck and DuPont Pharma.

Lamivudine is a drug that was developed by GlaxoSmithKline in collaboration with Biochem Pharma. Lamivudine is sold in the U.S., China and several other countries and has been shown to be effective in treating patients with HBV. If adefovir dipivoxil is approved to treat HBV, lamivudine will be significant competition.

There are drugs that have been approved, or are awaiting approval, for the treatment of Kaposi's sarcoma in the U.S. and Europe, including one that is sold in a liposomal formulation. These drugs compete or are expected to compete with DaunoXome.

A number of companies are pursuing the development of technologies competitive with our research programs. These competing companies include specialized pharmaceutical firms and large pharmaceutical companies acting either independently or together with biopharmaceutical companies. Furthermore, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection and may establish collaborative arrangements for competitive products and programs.

We anticipate that we will face increased competition in the future as our competitors introduce new products to the market and new technologies become available. We cannot determine if existing products or new products that our competitors develop will be more effective or more effectively marketed and sold than any that we develop. Competitive products could render our technology and products obsolete or noncompetitive before we recover the money and resources we used to develop these products.

GOVERNMENT REGULATION

Our operations and activities are subject to extensive regulation by numerous government authorities in the U.S. and other countries. In the U.S., drugs are subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act and other federal and state statutes and regulations govern the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of our products. As a result of these regulations, product development and the product approval process is very expensive and time consuming.

The FDA must approve a drug before it can be sold in the U.S. The general process for this approval is as follows:

PRECLINICAL TESTING

Before we can test a drug candidate in humans, we must study the drug in laboratory experiments and in animals to generate data to support the drug's potential safety and benefits. We submit this data to the FDA in an investigational new drug application, or IND, seeking their approval to test the compound in humans.

CLINICAL TRIALS

If the FDA accepts the investigational new drug application, we study the drug in human clinical trials to determine if the drug is safe and effective. These clinical trials involve three separate phases which often overlap, can take many years and are very expensive. These three phases, which are themselves subject to considerable regulation, are as follows:

- Phase I. The drug is given to a small number of healthy human subjects or patients to test for safety, dose tolerance, pharmacokinetics, metabolism, distribution, and excretion.

- Phase II. The drug is given to a limited patient population to determine the effect of the drug in treating the disease, the best dose of the drug, and the possible side effects and safety risks of the drug.

- Phase III. If a compound appears to be effective and safe in Phase II clinical trials, Phase III clinical trials are commenced to confirm those results. Phase III clinical trials are long-term, involve a significantly larger population, are conducted at numerous sites in different geographic regions and are carefully designed to provide reliable and conclusive data regarding the safety and benefits of a drug. It is not uncommon for a drug that appears promising in Phase II clinical trials to fail in the more rigorous and reliable Phase III clinical trials.

FDA APPROVAL PROCESS

If we believe that the data from the Phase III clinical trials show an adequate level of safety and effectiveness, we will file a new drug application, or NDA, with the FDA seeking approval to sell the drug for a particular use. The FDA will review the new drug application and often will hold a public hearing where an independent advisory committee of expert advisors asks additional questions regarding the drug. This committee makes a recommendation to the FDA that is not binding on the FDA but is generally followed by the FDA. If the FDA agrees that the compound has a required level of safety and effectiveness for a particular use, it will allow us to sell the drug in the U.S. for that use. It is not unusual, however, for the FDA to reject an application because it believes that the drug is not safe enough or effective enough or because it does not believe that the data submitted is reliable or conclusive.

At any point in this process, the development of a drug could be stopped for a number of reasons including safety concerns and lack of treatment benefit. We cannot be certain that any Phase I, Phase II or Phase III clinical trials that we are conducting, including those for tenofovir DF for HIV and adefovir dipivoxil for chronic HBV, or any that we conduct in the future, will be completed successfully or within any specified time period. We may choose, or the FDA may require, us to delay or suspend our clinical trials at any time if it appears that the patients are being exposed to an unacceptable health risk or if the drug candidate does not appear to have sufficient treatment benefit.

The FDA may also require us to complete additional testing, provide additional data or information, improve our manufacturing processes, procedures or facilities or require extensive post-marketing testing and surveillance to monitor the safety or benefits of our product candidates if they determine that our new drug application does not contain adequate evidence of the safety and benefits of the drug. In addition, even if the FDA approves a drug, it could limit the uses of the drug. Approvals can also be withdrawn if the FDA does not believe that we are complying with regulatory standards or if problems are uncovered or occur after approval.

In addition to obtaining FDA approval for each drug, the manufacturing facilities for any drug we sell, including those of companies who manufacture our drugs for us as well as our own, must be approved by the FDA and are subject to periodic inspections by the FDA. Foreign establishments that manufacture products to be sold in the U.S. must also be approved by the FDA and are subject to periodic regulatory inspection. Manufacturing facilities located in California, including our San Dimas facility and Foster City facility, also must be licensed by the State of California in compliance with local regulatory requirements.

Drugs that treat serious or life-threatening diseases and conditions that are not adequately addressed by existing drugs may be designated as fast track products by the FDA and may be eligible for priority six month review and accelerated approval. Drugs receiving accelerated approval must be monitored in post-marketing clinical trials in order to confirm the safety and benefits of the drug. Tenofovir DF for HIV has qualified as a fast track product and may be eligible for accelerated approval. We have not determined if we would seek "fast track" status of any other products if they qualified or the impact of this status on the timing or likelihood of approval of any of these potential products or those of our competitors.

We are also subject to other federal, state and local regulations regarding workplace safety and protection of the environment. We use hazardous materials, chemicals, viruses and various radioactive compounds in our research and development activities and cannot eliminate the risk of accidental contamination or injury from these materials. Any misuse or accidents involving these materials could lead to significant litigation, fines and penalties.

Drugs are also subject to extensive regulation outside of the U.S. In the European Union, there is a centralized approval procedure that authorizes marketing of a product in all countries in the European Union (which includes most major countries in Europe). If this procedure is not used, under a decentralized system an approval in one country of the European Union can be used to obtain approval in another country of the European Union under a simplified application process. After approval under the centralized procedure, pricing and reimbursement approvals are also required in most countries. VISTIDE was approved by the European Union under the centralized procedure. Tamiflu and tenofovir DF will be reviewed under the centralized procedure, but neither drug has been approved in Europe.

PRICING AND REIMBURSEMENT

Insurance companies, health maintenance organizations (HMOs), other third-party payors and some governments seek to limit the amount we can charge for our drugs. For example, in certain foreign markets, pricing negotiations are often required to obtain approval of a product, and in the U.S. there have been, and we expect that there will continue to be, a number of federal and state proposals to implement drug price control. In addition, managed care organizations are becoming more common in the U.S. and will continue to seek lower drug prices. The announcement of these proposals or efforts can cause our stock price to lower, and if these proposals are adopted, our revenues would decrease.

Our ability to sell our drugs also depends on the availability of reimbursement from governments and private insurance companies. These governments and insurance companies often demand rebates or predetermined discounts from list prices. We expect that products we are developing, particularly for AIDS indications, will be subject to reimbursement issues. We cannot be certain that any of our other products that obtain regulatory approval will be reimbursed by these government and insurance companies.

Regulatory approval of prices is generally required in most foreign countries. In particular, certain countries will condition their approval of a product on the agreement of the seller not to sell that product for more than a certain price in that country and in the past have required price reductions after or in connection with product approval. We cannot be certain that regulatory authorities in the future will not establish lower prices or that any regulatory action reducing the price of our products in any one country will not have the practical effect of requiring us to reduce our prices in other countries.

EMPLOYEES

As of February 28, 2001, we had more than 850 full-time employees. We believe that we have good relations with our employees.

RISK FACTORS

In evaluating our business, you should carefully consider the following risks in addition to the other information in this report. Any of the following risks could materially and adversely affect our business, operating results and financial condition.

ANY SIGNIFICANT REDUCTION IN AMBISOME SALES WOULD SIGNIFICANTLY REDUCE OUR OPERATING INCOME AND COULD REQUIRE US TO SCALE BACK OUR MANUFACTURING OPERATIONS AND REDUCE OUR SALES FORCE.

AmBisome sales for the years ended December 31, 1999 and 2000 were approximately $129 million, or 76%, and $141 million, or 72%, of our total revenues. We expect that revenues from sales of AmBisome will continue to constitute a substantial majority of our total product revenues at least through 2001.

Accordingly, for the foreseeable future, we expect that we will continue to rely on sales of AmBisome to support our existing manufacturing and sales infrastructure and to provide operating income to offset a significant portion of our administrative, research and development expenditures. Any significant reduction in sales of AmBisome, whether as a result of the introduction of competitive products or otherwise, would hurt our business, and we would have to scale back our manufacturing operations and reduce our sales force. There are several products on the market that compete with AmBisome and are generally priced lower than AmBisome. We expect to face significant competition from new antifungal products, including caspofungin, a product developed by Merck that received marketing approval in January 2001, and voriconazole, which is being developed by Pfizer, Inc. Pfizer has filed an application for marketing approval of voriconazole.

TAMIFLU IS A NEW DRUG, AND IT MAY NOT GAIN SIGNIFICANT MARKET ACCEPTANCE.

Most people who become infected with the flu use over-the-counter drugs to treat the flu symptoms and rely on their immune system to fight the infection. Tamiflu is in a new class of prescription drugs designed to prevent and treat the flu. Patients may be reluctant to visit a physician or seek a prescription drug for the flu, physicians may be reluctant to prescribe a flu drug, and government reimbursers and private insurance companies may refuse to pay for an anti-flu drug. In order for Tamiflu to be successful, our marketing partner Hoffmann-La Roche will need to increase awareness and acceptance of this new approach to preventing and treating the flu. The 1999-2000 flu season was the first flu season that Tamiflu was commercially available. To date the incidence of flu for the 2000-2001 flu season has been very low. It is too early to determine if Tamiflu will achieve significant market acceptance.

WE HAVE A HISTORY OF LOSSES, EXPECT TO OPERATE AT A LOSS FOR THE FORESEEABLE FUTURE AND MAY NEVER BE PROFITABLE.

We have never been profitable on a full-year basis. We may never become profitable. At December 31, 2000, our accumulated deficit was approximately $506 million. Our losses have resulted principally from expenses associated with our research and development programs and, to a lesser extent, from sales, general and administrative expenses. Our product sales and royalty revenues are derived from sales of AmBisome, VISTIDE and DaunoXome and royalty arrangements related to Tamiflu, AmBisome and VISTIDE.

WE DEVELOP DRUGS TO TREAT HIV AND AIDS AND RELATED CONDITIONS, AND THEREFORE CHANGES IN THE REGULATORY AND COMMERCIAL ENVIRONMENT FOR HIV AND AIDS THERAPIES COULD HARM OUR BUSINESS.

Several of our products and products in development address HIV and AIDS or related conditions. These products include VISTIDE for CMV retinitis, tenofovir DF for HIV and AIDS, and DaunoXome for HIV-associated Kaposi's sarcoma. We develop those products based upon current

policy and the current marketplace for HIV and AIDS therapies, as well as our prediction of future policy and the future marketplace for these therapies. Our business is subject to substantial risk because these policies and markets change quickly and unpredictably and in ways that could impair our ability to obtain regulatory approval and commercial acceptance of these products.

OUR OPERATIONS DEPEND ON COMPLIANCE WITH COMPLEX FDA AND COMPARABLE
INTERNATIONAL REGULATIONS. FAILURE TO OBTAIN BROAD APPROVALS ON A TIMELY BASIS OR TO ACHIEVE CONTINUED COMPLIANCE COULD DELAY COMMERCIALIZATION OF OUR PRODUCTS.

The products that we will develop and sell must be approved and will be subject to extensive regulation by the FDA and comparable agencies in other countries. We are continuing clinical trials for AmBisome for currently approved and additional uses. We are also conducting clinical trials for three other products: tenofovir DF, adefovir dipivoxil and NX 211. We anticipate that we will conduct a variety of clinical trials and file for marketing approval of additional products over the next several years. These products may fail to receive marketing approval on a timely basis, or at all. We also cannot be certain that we will file an NDA for tenofovir DF in mid-year 2001, or at all, as unexpected results of ongoing clinical trials or unexpected requests from the FDA for additional data could delay or prevent that filing. In addition, tenofovir DF may not be granted priority review by the FDA, which means that any NDA would not be reviewed within 6 months of submission. In addition, these products may receive marketing approvals that place limitations on their uses. These failures, delays or limitations, as well as other regulatory changes, actions and recalls, could delay commercialization of any products and adversely affect our results of operations.

In addition, even after our products are marketed, the products and their manufacturers are subject to continual review. Later discovery of previously unknown problems with our products, our own manufacturing or the production by third-party manufacturers may result in restrictions on our products or the manufacture of our products, including withdrawal of the products from the market. If we fail to comply with applicable regulatory requirements, we could be subject to penalties including fines, suspensions of regulatory approvals, product recalls, seizure of products and criminal prosecution.

RESULTS OF CLINICAL TRIALS AND APPROVAL OF PRODUCTS ARE UNCERTAIN, AND WE MAY BE DELAYED IN OR PROHIBITED FROM SELLING OUR PRODUCTS.

We have a number of potential products that have reached the development stage. These potential products include tenofovir DF, adefovir dipivoxil, NX 211, GS 7904L and GS 7836. We will be required to demonstrate the safety and effectiveness of these and any other products we develop in each intended use through extensive preclinical studies and clinical trials in order to obtain regulatory approval of these products. The results from preclinical and early clinical studies do not always accurately predict results in later, large-scale clinical trials for several reasons, including:

- preliminary results may not be indicative of effectiveness;

- further clinical trials may not achieve the desired result; and

- further clinical trials may reveal unduly harmful side effects or may show the drugs to be less effective than other drugs or delivery systems for the desired indications.

Even successfully completed large-scale clinical trials may not result in marketable products for several reasons, including:

- the potential products are not shown to be safe and effective;

- regulatory authorities disagree with the results or design of our studies and trials; or

- the potential products are too difficult to develop into commercially viable products.

In November 1999, an FDA Advisory Committee recommended against approval of our application to approve a 60 mg dose of adefovir dipivoxil to treat HIV. Kidney toxicity associated with this 60 mg dose, as well as a desire for additional data, were the major concerns of this committee. Following this recommendation, we were informed by the FDA that they would not approve our application unless we obtained additional data that satisfied the concerns raised by this committee. Based on these discussions, we terminated our development of adefovir dipivoxil for the treatment of AIDS. We are using 10 and 30 mg doses of adefovir dipivoxil in our Phase III clinical trials of adefovir dipivoxil for HBV. We believe that these lower doses will not result in the kidney toxicity experienced with 60 mg and that adefovir dipivoxil can be effective in treating HBV at these lower doses. We cannot be certain, however, that these lower doses will be both safe enough and have sufficient treatment benefits to receive FDA approval. Tenofovir DF is in the same class of drugs as adefovir dipivoxil. While we have not yet observed kidney toxicity in our clinical trials of tenofovir DF, the kidney toxicity in our clinical trials of adefovir dipivoxil for HIV did not arise until the later stages of our clinical trials. We cannot be certain that similar toxicity issues will not arise later in our clinical trials of tenofovir DF. A number of companies in our industry have suffered similar setbacks in advanced clinical trials despite promising results in earlier trials. In the end, we may be unable to develop additional marketable products.

DELAYS IN PATIENT ENROLLMENT FOR CLINICAL TRIALS COULD INCREASE COSTS AND DELAY REGULATORY APPROVALS.

The rate of completion of our clinical trials will depend on the rate of patient enrollment. There will be substantial competition to enroll patients in clinical trials for our drugs in development. This competition has delayed our clinical trials in the past. In addition, recent improvements in existing drug therapy, particularly for HIV, HBV and certain cancers, may make it more difficult for us to enroll patients in our clinical trials as the patient population may choose to enroll in clinical trials sponsored by other companies or choose alternative therapies. Delays in planned patient enrollment can result in increased development costs and delays in regulatory approvals.

OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE TO RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR MARKET ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.

Our success depends on our ability to successfully develop and obtain regulatory approval to market new pharmaceutical products. A significant portion of the research that we will conduct will involve new and unproven technologies. Development of a product requires substantial technical, financial and human resources even if the product is not successfully completed.

Our potential products may appear to be promising at various stages of development yet fail to reach the market for a number of reasons, including:

- lack of sufficient treatment benefit or unacceptable toxicity during preclinical studies or clinical trials;

- failure to receive necessary regulatory approvals;

- existence of proprietary rights of third parties; and

- inability to develop manufacturing methods that are efficient, cost-effective and capable of meeting stringent regulatory standards.

MOST OF OUR PRODUCT SALES OCCUR OUTSIDE THE U.S., AND CURRENCY FLUCTUATIONS MAY IMPAIR OUR FINANCIAL RESULTS.

A significant majority of our sales is denominated in foreign currencies. Increases in the value of the U.S. dollar against these foreign currencies in the past have reduced, and in the future may reduce,

our U.S. dollar return on these sales and negatively impact our financial condition. We hedge with respect to foreign accounts receivable, but we do not hedge our exposure to the impact of fluctuating foreign exchange rates on forecasted sales. Foreign currency fluctuations will continue to affect our future results.

PRODUCT DEVELOPMENT EXPENSES CAN CAUSE OUR OPERATING EXPENSES TO FLUCTUATE FROM QUARTER TO QUARTER.

The clinical trials required for regulatory approval of our products are extremely expensive. It is difficult to accurately predict or control the amount or timing of these expenses from quarter to quarter. Uneven and unexpected spending on these programs causes our operating results to fluctuate from quarter to quarter.

WE DEPEND ON RELATIONSHIPS WITH OTHER COMPANIES FOR RESEARCH FUNDING, CLINICAL DEVELOPMENT, SALES AND MARKETING PERFORMANCE AND REVENUES. FAILURE TO MAINTAIN THESE RELATIONSHIPS WOULD NEGATIVELY IMPACT OUR BUSINESS.

We rely on a number of significant collaborative relationships with major pharmaceutical companies for our research funding, clinical development and/or sales and marketing performance. These include collaborations with Fujisawa Healthcare, GlaxoSmithKline, Hoffmann-La Roche, Pharmacia Corporation, EyeTech Pharmaceuticals, Inc., and Sumitomo Pharmaceuticals Co. Inc. We also only rely on international distributors for sales of AmBisome in certain countries. In addition, we recently entered into a collaboration agreement with Cubist Pharmaceuticals, Inc. to commercialize Cubist's antibacterial drug Cidecin in several European countries following regulatory approval. Under this agreement, Cubist is responsible for the ongoing clinical development of Cidecin. Accordingly, we will have no control over but will rely on Cubist's clinical trials for our regulatory filings for Cidecin. If these ongoing clinical trials do not support regulatory approval, Cubist is not required to conduct additional clinical trials and we may choose to conduct these trials ourselves at our expense. Reliance on collaborative relationships poses a number of risks, including:

- we will not be able to control whether our corporate partners will devote sufficient resources to our programs or products;

- disputes may arise in the future with respect to the ownership of rights to technology developed with corporate partners;

- disagreements with corporate partners could lead to delays in or termination of the research, development or commercialization of product candidates, or result in litigation or arbitration;

- contracts with our corporate partners may fail to provide significant protection or may fail to be effectively enforced if one of these partners fails to perform;

- corporate partners have considerable discretion in electing whether to pursue the development of any additional products and may pursue alternative technologies or products either on their own or in collaboration with our competitors;

- corporate partners with marketing rights may choose to devote fewer resources to the marketing of our products than they do to products of their own development; and

- there are risks related to the ability of our distributors and corporate partners to pay us.

Given these risks, there is a great deal of uncertainty regarding the success of our current and future collaborative efforts. If these efforts fail, our product development or commercialization of new products could be delayed or revenue from existing products, including Tamiflu and AmBisome, could decline.

OUR RIGHTS TO MARKET AMBISOME IN THE U.S. AND CANADA ARE LIMITED BY AN AGREEMENT WITH FUJISAWA. FAILURE OF FUJISAWA TO EFFECTIVELY MARKET AMBISOME MAY REDUCE OUR REVENUES.

Our rights to market AmBisome in the U.S. and Canada are subject to an agreement with Fujisawa. Under the terms of this agreement, we have sole marketing rights to AmBisome in all countries except the U.S. and Canada but must pay royalties in connection with sales in most significant Asian markets, including Japan. We co-promote AmBisome with Fujisawa in the U.S. We manufacture AmBisome for sale in the U.S. and Canada and sell AmBisome to Fujisawa at cost in the U.S. and at cost plus a specified percentage in Canada. Fujisawa collects all revenues from AmBisome sales in the U.S. and pays us approximately 17% of net sales. The success of AmBisome in the U.S. will be dependent primarily on the efforts of Fujisawa, and in Canada the success of AmBisome will depend entirely on Fujisawa. If Fujisawa fails in its efforts, potential revenues from the sales of AmBisome may be substantially reduced.

FAILURE OF HOFFMANN-LA ROCHE TO EFFECTIVELY MARKET TAMIFLU WOULD REDUCE OUR POTENTIAL REVENUES.

Hoffmann-La Roche has sole responsibility for promoting and selling Tamiflu on a worldwide basis and we have no control over their activities. Therefore, we are relying on the efforts of Hoffmann-La Roche for any revenues we receive from the sale of Tamiflu. If Hoffmann-La Roche does not dedicate sufficient resources to the promotion of Tamiflu, or if Hoffmann-La Roche fails in its marketing efforts, the royalties we receive from the sale of Tamiflu would decrease and we would be adversely affected.

INABILITY TO ESTABLISH FUTURE SUCCESSFUL COLLABORATIVE RELATIONSHIPS MAY IMPAIR OUR FINANCIAL RESULTS.

We may seek future collaborative relationships with corporate partners to fund some of our research and development expenses and to develop and commercialize some of our, or their, potential products. Further, we anticipate that our revenues from collaborative agreements will continue to be affected by existing agreements, as well as by the timing of drug development programs of our corporate partners. We may not be able to negotiate acceptable collaborative arrangements in the future, and any arrangements we do negotiate may not be successful. If we fail to establish additional collaborative relationships, we will be required to undertake research, development, marketing and manufacturing of our proposed products at our own expense or discontinue or reduce these activities.

OUR EXISTING PRODUCTS AND PRODUCTS UNDER DEVELOPMENT MAY NOT BE ACCEPTED BY PHYSICIANS, INSURERS AND PATIENTS.

Many of our products in development, if approved for marketing, would have no established market. The ability of these products to achieve and sustain market acceptance will depend on the receipt and scope of regulatory approvals and whether or not government authorities and managed care organizations will adequately reimburse patients who use these products.

In addition, we need to convince the medical and patient advocacy community of:

- the effectiveness of these products in treating disease;

- the safety of these products when administered to patients; and

- the advantages of these products over competitive products.

Physicians, patients, patient advocates, payors and the medical community in general may not accept or use any products that we may develop. If our products are not accepted, our results of operations will suffer.

MANY OTHER COMPANIES ARE TARGETING THE SAME DISEASES AND CONDITIONS AS WE ARE.
COMPETITIVE PRODUCTS FROM OTHER COMPANIES COULD SIGNIFICANTLY REDUCE THE MARKET ACCEPTANCE OF OUR PRODUCTS.

Our products and development programs target a number of diseases and conditions, including viral infections, fungal infections, bacterial infections and cancer. There are many commercially available products for these diseases. Certain of these products are well-established therapies and have generated substantial sales. In addition, a large number of companies and institutions are conducting well-funded research and development activities directed at developing treatments for these diseases. Products currently on the market and those under development by our competitors could make our technology and products obsolete or noncompetitive. We expect that competition for the treatment of these diseases will increase in the future as new products enter the market and advanced technologies become available. We will also be competing to license or acquire technology from other companies.

Most of our competitors and potential competitors have substantially greater resources than we do. Those resources include superior product development capabilities and financial, scientific, manufacturing, marketing, managerial and human resources. These competitors may achieve superior patent protection, obtain key technology, receive regulatory approval or achieve product commercialization earlier than us.

THE SIGNIFICANTLY GREATER RESOURCES OF THE MARKETING ORGANIZATIONS OF LARGE PHARMACEUTICAL COMPANIES COULD HINDER OUR ABILITY TO COMPETE SUCCESSFULLY.

Our products compete, and the products we may develop are likely to compete, with products of other companies that currently have extensive and well-funded marketing and sales operations. Because these companies are capable of devoting significantly greater resources to their marketing efforts, our marketing or sales efforts may not compete successfully against the efforts of these other companies.

OUR EXISTING PRODUCTS ARE SUBJECT TO REIMBURSEMENT FROM GOVERNMENT AGENCIES AND OTHER THIRD PARTIES. PHARMACEUTICAL PRICING AND REIMBURSEMENT PRESSURES MAY REDUCE PROFITABILITY.

Successful commercialization of our products depends, in part, on the availability of governmental and third party payor reimbursement for the cost of such products and related treatments. Government health administration authorities, private health insurers and other organizations generally provide reimbursement. Government authorities and third-party payors increasingly are challenging the price of medical products and services, particularly for innovative new products and therapies. This has resulted in lower average sales prices. For example, a majority of our sales of AmBisome, VISTIDE and DaunoXome are subject to reimbursement by government agencies, resulting in significant discounts from list price and rebate obligations. If Tamiflu is approved for sale in Europe, its success will also depend largely on obtaining government reimbursement in Europe because in many European countries, including the United Kingdom and France, patients are reluctant to pay for prescription drugs out of their own pocket. We also expect that the success of our products in development, particularly in Europe, will depend on the ability to obtain reimbursement. Even if reimbursement is available, reimbursement policies may adversely affect our ability to sell our products on a profitable basis.

In addition, in many international markets, governments control the prices of prescription pharmaceuticals. In these markets, once marketing approval is received, pricing negotiation can take another six to twelve months or longer. Product sales, attempts to gain market share or introductory pricing programs of our competitors could require us to lower our prices in these countries, which could adversely affect our results of operations.

WE MAY NOT BE ABLE TO OBTAIN EFFECTIVE PATENTS TO PROTECT OUR TECHNOLOGIES FROM USE BY COMPETITORS, AND PATENTS OF OTHER COMPANIES COULD REQUIRE US TO STOP USING OR PAY FOR THE USE OF REQUIRED TECHNOLOGY.

Our success will depend to a significant degree on our ability to:

- obtain patents and licenses to patent rights;

- preserve trade secrets; and

- operate without infringing on the proprietary rights of others.

We have rights to U.S. and foreign issued patents and have filed and will continue to file patent applications in the U.S. and abroad relating to our technologies. There is a risk, however, that patents may not issue from any of these applications or that the patents will not be sufficient to protect our technology. Patent applications in the U.S. are generally confidential until a patent is granted. As a result, we may not know if our competitors filed patent applications for technology covered by our pending applications. We also cannot be certain that we were the first to invent the technology that is the subject of our patent applications. GS 7836 and Cidecin are protected by method of use patents that generally do not provide the same level of protection as composition of matter patents. Competitors may have filed patent applications or received patents and may obtain additional patents and proprietary rights that block or compete with our patents.

We do not have patent filings covering adefovir dipivoxil in China or in certain other Asian countries, although we do have applications pending in various Asian countries, including China, that relate to various forms and formulations of adefovir dipivoxil. Asia is a major market for HBV therapies, one of the potential indications for adefovir dipivoxil. We may obtain patents for certain products many years before marketing approval is obtained for those products. Because patents have a limited life, which may begin to run prior to commercial sale, the commercial value of the product may be limited. In addition, patents may not provide adequate protection in certain countries in Africa and Asia, including China.

Our competitors may file patent applications covering our technology. If so, we may have to participate in interference proceedings or litigation to determine the right to a patent. Litigation and interference proceedings are expensive even if successful.

Our success depends in large part on our ability to operate without infringing upon the patents or other proprietary rights of third parties. If we infringe patents of others, we may be prevented from commercializing products or may be required to obtain licenses from these third parties. We cannot be certain that we would be able to obtain alternative technologies or any required license. Even if we were to obtain such technologies or licenses, we cannot be certain that the terms would be reasonable. If we fail to obtain such licenses or alternative technologies, we may be unable to develop some or all of our products.

For example, we may decide to use an assay method in our drug screening programs. ICT Pharmaceuticals has patents that may cover parts of this program. ICT Pharmaceuticals has offered us a non-exclusive license under these patents as part of an industry-wide licensing program. If it is determined that we need these patents for this program, we would need to obtain this license or develop or acquire alternative technologies for this program. We cannot be certain that we would be able to obtain this license on reasonable terms or that alternative technologies could serve our needs for future drug development. In addition, Ohio State University holds a patent that we may need to develop and commercialize NX 211. Ohio State University has offered us a non-exclusive license under this patent, and we have entered into an option with Ohio State University to enter into this license. Should we elect to enter into an agreement with Ohio State University under this option, we will be required to pay fees and a product royalty on NX 211.

In addition, we use significant proprietary technology and rely on unpatented trade secrets and proprietary know-how to protect certain aspects of our production and other technologies. Our trade secrets may become known or independently discovered by our competitors.

MANUFACTURING PROBLEMS COULD DELAY PRODUCT SHIPMENTS AND REGULATORY APPROVALS.

For VISTIDE, adefovir dipivoxil and tenofovir DF, we rely on third parties for the manufacture of bulk drug substance and final drug product for clinical and commercial purposes. Hoffmann-La Roche is responsible for manufacturing Tamiflu, and if they encounter problems in this process, our revenues from the sales of Tamiflu could decrease. We depend on these third parties to perform their obligations effectively and on a timely basis. If these third parties fail to perform as required, our clinical trials or submission of products for regulatory approval may be delayed. These delays could impair our ability to deliver commercial products on a timely basis and could impair our competitive position.

We manufacture AmBisome and DaunoXome at our facilities in San Dimas, California. Our only formulation and manufacturing facilities are in San Dimas, California; although we own a manufacturing facility in Ireland that performs certain quality control testing, labeling and packaging, and we use third parties as alternate contract suppliers to fill and freeze dry certain batches of product. In the event of a natural disaster, including an earthquake, equipment failure, strike or other difficulty, we may be unable to replace this manufacturing capacity in a timely manner and would be unable to manufacture AmBisome and DaunoXome to meet market needs.

WE MAY NOT BE ABLE TO OBTAIN MATERIALS NECESSARY TO MANUFACTURE OUR PRODUCTS.

Many of the materials that we utilize in our operations are made at only one facility. For example, we depend on single suppliers for high quality amphotericin B, daunorubicin HCl and high quality cholesterol, each of which is used in the manufacture of one or more of our liposome products. Because the suppliers of key components and materials must be named in the new drug application filed with the FDA for a product, significant delays can occur if the qualification of a new supplier is required. If supplies from our suppliers were interrupted for any reason, we could be unable to ship AmBisome, VISTIDE or DaunoXome, or supply any of our products in development for clinical trials.

WE HAVE LIMITED EXPERIENCE IN MANUFACTURING PRODUCTS AND MAY NOT BE ABLE TO DEVELOP ADEQUATE MANUFACTURING CAPACITY.

For some of our potential products, we will need to develop further our production technologies for use on a larger scale in order to conduct clinical trials and produce such products for commercial sale at an acceptable cost. We cannot be certain that we will be able to implement any of these developments successfully.

The manufacturing process for pharmaceutical products is highly regulated, and regulators may shut down manufacturing facilities that they believe do not comply with regulations. The FDA's current Good Manufacturing Practices are extensive regulations governing manufacturing processes, stability testing, record-keeping and quality standards. In addition, our manufacturing operations are subject to routine inspections by regulatory agencies and similar regulations are in effect in other countries.

OUR BUSINESS MAY GIVE RISE TO PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE OR INDEMNITY AGREEMENTS.

The testing, manufacturing, marketing and use of AmBisome, VISTIDE and DaunoXome, as well as products in development, involve substantial risk of product liability claims. These claims may be made directly by consumers, healthcare providers, pharmaceutical companies or others. A successful product liability claim against us could require us to pay substantial amounts, which could impair our financial condition and our ability to clinically test and to market our products.

Additionally, we are required by governmental regulations to test our products even after they have been sold and used by patients. As a result of such tests, we may be required to, or may determine that, we should recall products already in the market. Subsequent testing and product recalls may increase our potential exposure to product liability claims.

OUR USE OF HAZARDOUS MATERIALS, CHEMICALS, VIRUSES AND RADIOACTIVE COMPOUNDS EXPOSES US TO POTENTIAL LIABILITIES.

Our research and development involves the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. 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 accident, we could be held liable for significant damages or fines.