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

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended March 31, 2002

or

For the Transition Period from                              to                             

Commission File Number: 0-31253

Pharsight Corporation
(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code: (650) 314-3800

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  /x/    No  / /

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

        The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on May 31, 2002, as reported on the National Market of The Nasdaq Stock Market, was approximately $8,750,000. Excludes an aggregate of 11,766,707 shares of common stock held by officers and directors and by each person known by the registrant to own 5% or more of the outstanding common stock. Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. As of May 31, 2002, registrant had 18,770,422 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        The Registrant has incorporated by reference into Part III of this Form 10-K portions of its Proxy Statement for Registrant's 2002 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K.

TABLE OF CONTENTS

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PART I

FORWARD-LOOKING STATEMENTS

        This report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the "safe harbor" created by those sections. These forward-looking statements are generally identified by words such as "expect," "anticipate," "intend," "plan," "believe," "hope," "assume," "estimate" and other similar words and expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the business risks discussed under the caption "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operation—Business Risks" in this report on Form 10-K. These business risks should be considered in evaluating our prospects and future financial performance.

ITEM 1. BUSINESS

Overview

        Pharsight Corporation develops and markets integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Our solution combines proprietary computer-based simulation, statistical and data analysis tools with strategic decision making and the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics.

        We believe our solution helps pharmaceutical and biotechnology companies reduce the time, cost and risk of drug development activities, and may improve the marketing and use of pharmaceutical products. Our solution is designed to help our customers use a more rigorous scientific and statistical process to identify earlier those drug candidates that will not be successful and to enhance the likelihood that the remaining candidates will successfully complete clinical trials. This is significant because the process of taking a drug through clinical development has remained lengthy and unpredictable while the productivity of discovery research has accelerated dramatically in recent years.

        Fourteen of the world's largest 20 pharmaceutical companies have begun to apply our computer-assisted drug development solution, and our computer-based development applications are currently used on more than 2,150 researcher desktops. To date, we have been engaged in over 150 clinical development projects in more than 15 therapeutic areas.

        Our operations consist of strategic services and computer-based development applications. We have an integrated offering of products and services to address the critical steps in designing clinical trials and drug development programs. Our offerings combine proprietary simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics. Our solution is designed to help drug development experts use a more rigorous scientific and statistical process to design trials and make program decisions.

        We believe typical customer benefits of our capabilities include the following:

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More rapid and objective decision-making with quantified assessment of value versus risk;



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More effective trial designs with higher probability of success and greater information yield;



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More efficient development programs requiring fewer clinical trials and patients, less time and lower cost to reach market; and



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Strengthened competitive position due to improved product labels.

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        The following illustrates a typical customer application of our solution:

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In designing phase II clinical trials, companies often face significant uncertainty in selecting the appropriate doses to test. Our solution integrates information from phase I and pre-clinical activities, information concerning related drugs that have been developed by the customer, information in the scientific literature about other drugs in the same therapeutic area, and knowledge of the relevant physiological and disease processes. This information, along with carefully identified assumptions, is used to develop a mathematical model enabling a computer simulation of the proposed trial. Using this approach, customers are often able to identify proposed doses which have little chance of success and should be excluded or to identify additional doses which are more likely to yield important information.



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In designing phase III clinical trials, companies often face significant uncertainty concerning the most appropriate treatment strategy, patient inclusion/exclusion criteria and/or clinical measurements. Our solution uses an information gathering and modeling approach similar to that described above, but incorporates phase II data and detailed mathematical models of the relevant patient populations. We are often able to identify patient groups with low chance of demonstrating efficacy, or an unacceptable chance of demonstrating side effects, prior to conducting the actual trial. In addition, we may be able to predict which clinical measurements will be most likely to provide conclusive results in the proposed trial.



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In making drug portfolio decisions, companies need to integrate scientific and clinical results, such as those described above, with market and financial information for all of the drug candidates in the development pipeline. We believe that our solution helps companies make better decisions concerning "go/no-go" criteria, prioritization of potential label objectives to be pursued and optimal sequencing of clinical trials within a development program. Our solution can also help customers adopt a more quantitative and scientific approach to resource allocation among programs within their drug portfolios.

        We were incorporated in California in April 1995, and we reincorporated in Delaware in June 2000. In August 2000, we had our initial public offering.

Pharsight Products and Services

        We provide strategic services and computer-based development applications. We first offered our Model and Trial Workbench applications and scientific services in fiscal 1997. In fiscal 1998, we expanded our consulting offering to include decision services. At the end of fiscal 2001, we combined our scientific, decision support, methodology and training groups into an integrated group renamed strategic services. In fiscal 2002, we began selling our Pharsight® Knowledgebase Server™ (PKS), providing a means of capturing and managing both summary and detailed pharmacokinetic/pharmacodynamic (PK/PD) data across a large set of compounds and development phases.

        We believe that a key part of continued growth is to continue to deliver new products to our current and prospective customers. These new products need to address a broader set of customer needs related to clinical development of drugs and thereby expand the number of prospective users we may sell to inside pharmaceutical companies. Our most recently announced product, PKS, was the first step in providing a broader set of product functionality.

        In a typical project, our products and services are used together to design clinical trials or development programs. Some customers purchase only services from us and other customers purchase our computer-based development applications on a stand-alone basis as a tool for drug or disease modeling. In many cases our computer-based development applications continue to be utilized upon

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completion of a project as our customers seek to further redesign their drug development processes. The following chart depicts typical issues that we are asked to address in projects.

        Our solution provides an iterative method for enhancing the design of a clinical trial or development program, based on a series of steps. Each step utilizes available data to produce and validate a mathematical model that is in turn used to select a better strategy for moving to the next stage of clinical development.

Strategic Services

        Our strategic services consist of consulting, training and process redesign conducted by our clinical and decision scientists in the application and implementation of our core decision methodology. The methodology employed by our services group uses four types of models that work in concert:

        By using these models in an integrated fashion, our consultants are able to place key decisions in development into quantitative terms of uncertainty and value. Drug development is, after all, a process by which uncertainty about a drug's efficacy and safety is progressively reduced. Our methodology enables customers to identify which uncertainties are greatest and matter most, and then to design

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development programs, trial sequences, and individual trials in such a way that they systematically reduce those uncertainties—and do so as rapidly and cost-effectively as possible.

        The methodology is most valuably applied very early in the life of a potential drug, but we have beneficially applied it at all stages of development. The integration of our models at the asset strategy (overall positioning of a new drug) and program/trial strategy (focusing on a specific indicator) phases enables us to help our customers position their drugs as competitively as possible in the market, to do so conducting all necessary and no unnecessary trials (and only as large, lengthy and costly as is required), and to redeploy resources away from unpromising compounds at the earliest possible point.

        As of May 31, 2002, our strategic services group included 33 full-time personnel. Our personnel are located throughout the United States and Europe. Most have Ph.D. degrees with post-doctoral training in clinical pharmacology, biostatistics, human genetics, decision analysis or other relevant disciplines. We bring these skill sets to bear in an integrated fashion to address our customers' challenges. Senior consultants have more than a decade of experience in drug-disease modeling, trial design or strategic consulting. We also utilize a network of part-time consultants with expertise in various specialized disciplines and therapeutic areas.

        We are continually refining our methodologies and introducing new technologies. We are also expanding our activities at the portfolio level and in newer therapeutic areas. In addition, we are beginning to address customer needs to improve their marketing and sales processes by applying the same quantitative methods that we apply to their development processes.

Computer-Based Development Applications and Services

        Our software and services provide the analytical tools and conceptual framework to help clinical researchers optimize the decision-making required to perform clinical testing needed to bring drugs to market. By applying mathematical modeling and simulation to all available information on the compound being tested, researchers can clarify and quantify which trial and treatment design factors will influence the success of clinical trials. Workbench applications are being designed to be increasingly deployed together with our strategic services.

        Our Model Workbench™ products are used to build a drug model and validate the assumptions and information on which it is based. The models constructed and validated with these tools are used by our Trial Workbench™. The Trial Workbench provides a structured framework for clinical trial simulation based on mathematical models that integrate existing knowledge and assumptions about a drug and the targeted population. The Trial Workbench supports the use of simulation scenarios allowing the clinical researcher to perform "virtual clinical trials" on the computer.

        Our most recent product, the Pharsight® Knowledgebase Server™ (PKS), provides a means of capturing and managing both summary and detailed pharmacokinetic/pharmacodynamic (PK/PD) data across a large set of compounds and development phases. PKS also provides a unified data environment for supporting clinical pharmacology modeling and analysis activities. PKS is directly integrated with WinNonlin® Enterprise, a product in Model Workbench, which also provides import/export interfaces to other modeling and analysis tools. PKS was developed to help enable compliance with the Federal Drug Administration (FDA) regulation 21 CFR 11, which requires electronic data security and auditing on submissions to the FDA. Linked to PKS, a separate product, the PKS Reporter™ 1.0, will provide regulatory-compliant authoring of Microsoft® Word documents containing analysis results, source data, tables, and plots produced by WinNonlin® or other tools and securely managed within the PKS.

        We believe that a key part of continued growth is to continue to deliver new products to our current and prospective customers. These new products need to address a broader set of customer needs related to clinical development of drugs and thereby expand the number of prospective users we

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may sell to inside pharmaceutical companies. Our most recently announced product, PKS, was the first step in providing a broader set of product functionality.

        In February 2001, we announced the signing of a Cooperative Research and Development Agreement (CRADA) with the FDA's Center for Drug Evaluation and Research (CDER) to collaborate over the next three years on future versions of our Model and Trial Workbench products.

Sales and Marketing

        Our customers range in size from the largest pharmaceutical companies to small biopharmaceutical companies, and the focus of our work differs somewhat depending on the size and maturity of the customer. In our smaller and medium-sized customers, we tend to engage in discrete projects often with challenging analytic and design problems, where modeling and simulation can be particularly valuable. This kind of work may or may not lead to subsequent engagements. By contrast, in our largest customers, we tend to have ongoing relationships progressively focused on helping improve the process by which they develop drugs, broadening and deepening the application of modeling and simulation over time, with the intent of achieving systematic, lasting performance improvement.

        PKS is our first enterprise-level software product, serving more than 100 users in our largest customers. Typically, the customer's purchase decision involves many groups, potentially including clinical pharmacology, ADME, toxicology, regulatory and early clinical as well as IT. It also involves a significant validation process. PKS therefore requires a longer selling cycle than our previous software products, and demands a team of sales, marketing and support professionals in the sales process.

Information Products

        In November 2001, Pharsight decided to suspend all marketing and acquisition of data for its information products business. This business was intended to combine anonymized patient level medical, laboratory and genetic data with software to access, analyze and present informative results to sophisticated queries. These information products permitted clinical and scientific personnel to obtain objective and quantitative answers to important questions in trial and program decision-making concerning, for example, the correlation of various disease markers with clinical outcomes, the frequency of adverse events under specific conditions, detailed patient demographics and response to placebo and standard therapies. There was very limited revenue inception to date in this area, therefore its discontinuance will not negatively impact future earnings. We have discontinued relationships that were established with Duke University, Lovelace, and Protocare Sciences, Inc. Our Clinical Workbench™ (CWB) product continues to be available but, as of March 30, 2002, had generated very limited revenues. The CWB product, which can be used in conjunction with our strategic services, enables customers to access, organize and search their large databases containing patient level information. Because the market for this product is new and emerging, it continues to be difficult to predict the level of market acceptance.

Customers

        Our customers currently consist of large pharmaceutical companies and biotechnology companies. During our fiscal year ended March 31, 2002, we provided products and services for which we recognized revenue from more than 600 customers. Pfizer Inc., our largest customer, accounted for 20% of our revenue in fiscal 2002. Consequently, we are dependent on Pfizer Inc. for a substantial portion of our revenues, and if we were to lose Pfizer Inc. as a customer, it would have a material adverse effect on our revenues and business. Information regarding long-lived assets and sales to customers by major geographic regions is set forth in Note 13 to our financial statements, which appear in "Item 8—Financial Statements and Supplementary Data."

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Research and Development

        We employ engineers with expertise in software development, web-based applications, database systems, and mathematical modeling, and scientists with expertise in clinical development, statistical modeling, human genetics, and clinical pharmacology and development. Our research and development personnel work closely with our service personnel in designing and testing products to meet customer requirements. We have a scientific advisory board, which helps guide our product development efforts.

        As of May 31, 2002, we had 34 employees engaged in research and development. Our research and development efforts are focused on improving and enhancing our existing products and services as well as developing new products and services. Our research and development efforts take place principally at our executive offices in Mountain View, California, and Cary, North Carolina. Our research and development expenses were $6.6 million, $8.1 million and $5.5 million, in fiscal 2002, 2001, and 2000, respectively. In November 2001, we refocused our research and development activities to concentrate only on our core modeling and simulation products and the development of our next generation platform. We believe research and development expenses will decline in fiscal 2003 as compared to fiscal 2002, as the full year effect of last year's reduction of non-core and information products resources are realized.

        Pharsight is investing to grow our business by expanding our ability to achieve potential breakthrough improvements in drug development productivity for our customers. The primary focus of this investment is in software that enables customers to adopt and implement our model-based drug development methodology. New software will complement our existing modeling tools, which are used by a relatively small number of technical experts, thereby enabling a much larger number of other participants in the drug development process to utilize those models in a systematic, integrated fashion to collaborate and make better decisions. We are also broadening the capabilities of our services organization to help our customers take maximum advantage of the new tools.

Intellectual Property Rights

Technology In-Licensing

        Although our products are based on our research and development, we license software from third parties when it is more efficient to incorporate pre-existing programs or routines, when there are novel technologies available by license that would improve our products, or when brand-recognition of established products provides a marketing advantage. We incorporate such third-party software that we have rights to use under the terms of license agreements that require us to pay royalties to the licensor based upon either a percentage of the sales of products containing the licensed software or a fixed fee for each product shipped. Although all of the software we license for use in our products is replaceable with software from other vendors or our own development efforts, the loss of a license could delay the sales of certain of our products.

Intellectual Property

        Our success is dependent upon our ability to develop and protect our proprietary technology and intellectual property rights. We rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, and patent, copyright and trademark laws to accomplish these goals.

        We license our software products pursuant to non-exclusive license agreements which impose restrictions on customers' ability to utilize the software. In addition, we seek to avoid disclosure of our trade secrets, including but not limited to, requiring employees, customers and others with access to our proprietary information to execute confidentiality agreements with us and restricting access to our source code. We also seek to protect our software, documentation and other written materials under trade secret and copyright laws.

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        We have 13 U.S. patent applications pending. It is possible that the patents that we have applied for, if issued, or our potential future patents may be successfully challenged or that no patent will be issued from our patent application. It is also possible that we may not develop proprietary products or technologies that are patentable, that any patent issued to us may not provide us with any competitive advantages, or that the patents of others will seriously harm our ability to do business.

        Despite our efforts to protect our proprietary rights, existing laws afford only limited protection. Attempts may be made to copy or reverse engineer aspects of our product or to obtain and use information that we regard as proprietary. Accordingly, there can be no assurance that we will be able to protect our proprietary rights against unauthorized third party copying or use. Use by others of our proprietary rights could materially harm our business. Furthermore, policing the unauthorized use of our product is difficult and expensive litigation may be necessary in the future to enforce our intellectual property rights.

Government Regulation

        The pharmaceutical industry is regulated by a number of federal, state, local and international governmental entities. Although our products and services are not directly regulated by the United States Food and Drug Administration or comparable international agencies, the use of certain of our analytical software products by our customers may be regulated. We currently provide assistance to our customers in achieving compliance with these regulations.

Competition

        We compete based on a number of factors, including cost, the quality and effectiveness of our services, and the functionality, reliability and ease of implementation and use of our products. Our Model Workbench and PKS products compete with products produced by InnaPhase Corporation. Although we believe we currently do not have direct competitors for our Trial Workbench product line or our scientific services, other companies may compete with us in the future. Potential competitors may have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the pharmaceutical industry than we have. In addition, competitors may merge or form strategic alliances and be able to offer, or bring to market earlier, services that are superior to our own. In addition, our customers are primarily large pharmaceutical companies that have substantial research and development budgets, and these customers may internally develop the expertise that we provide.

Employees

        As of May 31, 2002, we had a total of 114 employees. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.

ITEM 2. PROPERTIES

        Pharsight's principal administrative, sales, marketing and product development facilities are located in Mountain View, California. We lease approximately 32,000 square feet of space in Mountain View, California under a lease that expires in September 2003. Pharsight leases sales, development and training facilities in: Cary, North Carolina; Burlington, Massachusetts; and San Diego and San Francisco, California. Pharsight also leases a sales and service office in the United Kingdom. We believe that our existing facilities are adequate for our current needs and that additional space will be available as needed.

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ITEM 3. LEGAL PROCEEDINGS

        From time to time, Pharsight may become involved in claims, legal proceedings, or state or federal government agency proceedings that arise in the ordinary course of its business. We are currently subject to one such agency proceeding. We do not believe that the resolution of these Agency proceedings will have a material adverse effect on us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of Pharsight's stockholders during the fourth quarter of its fiscal year ended March 31, 2002.

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PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Our common stock is listed on the Nasdaq National Market under the symbol "PHST." Our common stock first traded on August 9, 2000, concurrent with the underwritten initial public offering of shares of our common stock. Prior to this time there was no established public trading market for our common stock.

        As of May 31, 2002, there were 18,770,422 shares of common stock outstanding that were held of record by approximately 111 stockholders.

        We have never declared or paid any cash dividends on our common stock and do not anticipate paying such cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends on our common stock in the future will be at the discretion of our board of directors and will depend upon our results of operation, financial condition and other factors as our board of directors, in its discretion, deems relevant. In addition, under the terms of some of our debt agreements, we are prohibited from paying dividends without the consent of the lender.

        Set forth below are the high and low closing prices per share of our common stock for each quarterly period in our fiscal years ended March 31, 2001 and 2002, as reported on the Nasdaq National Market.

        On August 14, 2000, we closed the sale of a total of 3,000,000 shares of our common stock, par value $0.001 per share, at a price of $10.00 per share in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1, Registration No. 333-34896, declared effective on August 8, 2000. Of the $20.3 million in net proceeds raised by us in the offering, after deducting underwriting discounts and commissions, offering expenses and the repayment of $6.1 million to our holders of Series C preferred stock:

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Approximately $18.8 million was used to fund ongoing operations, including research and development of new and existing products; acquisitions; and



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The remainder of the proceeds from the offering, approximately $1.5 million, remains invested in investment grade securities.

        This application of the proceeds from the initial public offering did not represent a material change from the use of proceeds as described in the prospectus for the initial public offering.

        In June 2002, we closed the first tranche of a two-tranche financing and sold to certain existing stockholders 761,920 shares of Series A Convertible Preferred Stock and warrants to purchase 761,920 shares of our Common Stock for approximately $3,149,000. The Series A Convertible Preferred

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Stock is entitled to receive out of legally available funds quarterly dividends at the annual rate of 8% and is payable in cash or Series B Convertible Preferred Stock, of which payments will commence in September 2002. The Preferred Stock is redeemable at any time after five years from issuance upon the affirmative vote of at least 75% of the Preferred Stock stockholders. The Preferred Stock is redeemable at a price of $4.008 per share plus any unpaid dividends with respect to such share. Each share of Preferred Stock is convertible into four shares of our Common Stock at the election of the holder or upon the occurrence of certain other events. The warrants are exercisable for a period of five years from the date of issuance with an exercise price of $1.15 per share. We relied on Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"), for the exemption from registration under Section 5 of the Securities Act. All purchasers of the Series A Convertible Preferred Stock and warrants to purchase shares of our Common Stock represented that they were "accredited investors" (as defined in Regulation D of the Securities Act). Subject to the necessary stockholder approval at a meeting currently scheduled to take place in September 2002, we expect to sell to the same existing stockholders in the second tranche of the two-tranche financing, an additional 1,052,742 shares of Series A Convertible Preferred Stock and additional warrants to purchase 1,052,742 shares of Common Stock for approximately $4,350,000.

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ITEM 6. SELECTED FINANCIAL DATA

        You should read the following historical selected financial data in conjunction with the financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operation" appearing elsewhere in this Form 10-K. We have derived our balance sheet data as of March 31, 2002 and 2001, and statements of operations data for each of the years ended March 31, 2002 and 2001, from our audited financial statements included in this Form 10-K. We have derived our balance sheet data as of March 31, 2000, 1999 and 1998 and statements of operations data for the years ended March 31, 2002, 2001, and 2000, from our audited financial statements not included in this Form 10-K.

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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

        The financial and business analysis below provides information which Pharsight believes is relevant to an assessment and understanding of Pharsight's financial position and results of operations for the years ended March 31, 2002, 2001, and 2000. This financial and business analysis should be read in conjunction with Item 6 "Selected Financial Data" and our Financial Statements and related notes thereto set forth under Item 8 "Financial Statements and Supplementary Data."

        The following discussion and certain other sections of this Report on Form 10-K contain statements reflecting our views about our future performance and constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These views may involve risks and uncertainties that are difficult to predict and may cause actual results to differ materially from the results discussed in such forward-looking statements. Readers should consider that various factors, including changes in general economic conditions, nature of competition, relationships with key customers, industry consolidation, influence of e-commerce and other factors discussed in the "Business Risks" section below may effect our ability to attain the projected performance. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

        We develop and market integrated products and services that help pharmaceutical and biotechnology companies improve the drug development process. Our solution combines proprietary computer-based simulation, statistical and data analysis tools with the sciences of pharmacology, drug and disease modeling, human genetics and biostatistics.

        Substantially all of our sales activities are conducted through a dedicated direct sales organization located in the United States and Europe. In addition, our strategic services consultants and technical support personnel conduct sales and marketing activities. Pfizer Inc. accounted for 20% of our revenue in fiscal 2002. Consequently, we are dependent on Pfizer Inc. for a substantial portion of our revenues, and if we were to lose Pfizer Inc. as a customer, it would have a material adverse effect on our revenues and business. In fiscal 2001, Johnson & Johnson and Pfizer Inc. were our largest revenue customers, accounting for 17% and 11%, respectively.

        In the second half of fiscal 2001, we also signed agreements with iBiomatics LLC, Intrasphere and PriceWaterhouseCoopers (PWC) to support our current and future product and service offerings. These are lead referral and support agreements. These agreements are not based on minimums or royalties.

        In the second half of fiscal 2002, we signed agreements with Oracle, Intrasphere and PriceWaterhouseCoopers (PWC) to support our current and future product and service offerings. These are lead referral and support agreements. These agreements are not based on minimums or royalties to be paid by Pharsight. The Oracle agreement does contain contingent royalties to be paid to Pharsight, based on future sales.

Critical Accounting Policies and Estimates

        Our financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate estimates, including those related to revenue and restructuring. Estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from

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other sources. Actual results may differ materially from these estimates under different assumptions or conditions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.

Revenue Recognition

        Our revenue recognition policy is significant because our revenue is a key component of our results of operations. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue recognition policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter.

Restructuring

        During fiscal year 2002, we recorded reserves in connection with our restructuring program. These reserves include estimates pertaining to employee separation costs, the ability to sub-lease vacated facilities and the settlements of contractual obligations resulting from our actions. Although we do not anticipate significant changes, the actual costs may differ from these estimates.

Source of Revenue and Revenue Recognition

        Our revenues are derived from two primary sources: initial and renewal fees for product licenses and scientific and training consulting services. Additionally, we had a small amount of revenue from subscriptions to our information products in fiscal 2002.

        Our revenue recognition policy is in accordance with Statement of Position No. 97-2, "Software Revenue Recognition," or SOP 97-2, as amended by Statement of Position No. 98-4, "Deferral of the Effective Date of SOP 97-2, `Software Revenue Recognition,' " or SOP 98-4, and Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions," or SOP 98-9. For each arrangement, we determine whether evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. If any of these criteria are not met, we defer revenue recognition until such time as all of the criteria are met. We do not currently offer, have not offered in the past, and do not expect to offer in the future, extended payment term arrangements. If we do not consider collectibility to be probable, we recognize revenue when the fee is collected. No customer has the right of return.

        Contracts from which we receive solely license and renewal fees consist of one year software licenses (initial and renewal fees) bundled with post contract support services, or PCS. We do not have vendor specific objective evidence to allocate the fee to the separate elements, as we do not sell PCS separately. We recognize each of the initial and renewal license fees ratably over the one year period of the license during which the PCS is expected to be provided as required by paragraph 12 of SOP 97-2.

        We do not present PCS revenue separately as we do not have vendor specific objective evidence of PCS, and we do not believe other allocation methodologies, namely allocation based on relative costs, provide a meaningful and supportable allocation between license and PCS revenues.

        We have one international distributor. There is no right of return or price protection for sales to the international distributor. We recognize revenue ratably over the one-year initial license or renewal period. Revenue from this distributor in 2002, 2001, and 2000 was less than 1% of total revenues.

        For arrangements consisting solely of services, we recognize revenue as services are performed. Arrangements for services may be charged at daily rates for different levels of consultants and out-of-pocket expenses or may be for a fixed fee. For fixed fee contracts with payments based on milestones or acceptance criteria, we recognize revenue as such milestones are achieved or upon

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acceptance, which approximates the level of services provided. For fixed fee arrangements at the end of each accounting period (i) we analyze the appropriateness of the daily rates charged based upon total fees to be charged and total hours to be incurred, and (ii) we determine if losses should be recognized.

        We also enter into arrangements consisting of licenses, renewal fees and scientific consulting services. The scientific consulting services meet the criteria of paragraph 65 of SOP 97-2 for separate accounting. As the only undelivered elements are services and PCS, and the PCS term (expressed or implied) and the period over which we expect the services to be performed are the same period, we recognize revenue based on the lesser of actual services performed and licenses delivered or straight line over the period of the agreement. If the PCS term and the period over which we expect the services to be performed are not the same period, we recognize revenue based on the lesser of actual services performed and licenses delivered or straight line over the longer of the PCS term and the period over which we expect the services to be performed. Vendor specific objective evidence of fair value of scientific services for purposes of revenue recognition in these multiple element arrangements is based on daily rates for different levels of consultants and out-of-pocket expenses.

        Our strategic services included in multiple element arrangements are not essential to the functionality of the other elements of an arrangement. To date we have not used and do not expect to use contract accounting for the entire software arrangement.

        We recognize revenue from the subscription to information products over the contract period, provided we have evidence of an arrangement, the price of the subscription is fixed or determinable and payment is reasonably assured. The subscription fees have been included in license revenues.

Acquisitions

        In February 2001, we acquired the assets of Metazoa.com., a privately-held company that develops collaborative software for the life science research community. We purchased Metazoa's assets for cash of $250,000 and incurred acquisition expenses of $102,000. The acquisition was accounted for using the purchase method. We allocated the purchase price to intangible assets and goodwill based on a valuation.

Deferred Stock Compensation

        During the years ended March 31, 2001 and 2000, we recorded aggregate deferred compensation of $10.1 million and $5.4 million, respectively, representing the difference between the exercise price of stock options granted and the then deemed fair value of our common stock. The amortization of deferred compensation is charged to operations over the vesting period of the options using the graded method for employee options, and the straight-line method for non-employee options. During the year ended March 31, 2002, we recorded deferred stock compensation of $114,000 representing the intrinsic value of a certain stock award issued to an officer as a bonus. The amortization of this deferred stock compensation is charged to operations over the vesting period of the stock award using the straight-line method. We amortized $3.0 million, $7.6 million and $2.2 million of deferred compensation for the years ended March 31, 2002, 2001, and 2000. The amount of deferred compensation relating to stock options issued to employees and consultants to be amortized in future periods, ending March 31, is as follows:

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Results of Operations

Years Ended March 31, 2002 and 2001

        Revenues.    License and renewal revenues increased $1.4 million, or 38%, from $3.6 million in fiscal 2001 to $5.0 million in fiscal 2002. Of this increase, $1.1 million was due to an approximately 26% increase in the number of licenses sold from fiscal 2001 to fiscal 2002, and approximately $253,000 reflected an increase in annual renewal revenue due to the growth in the installed base.

        Service revenues increased $1.0 million, or 12%, from $8.3 million in fiscal 2001 to $9.3 million in fiscal 2002. We view this increase as our customers' increased adoption of our methodologies. As of March 31, 2002, we were engaged with 14 of the top 20 major pharmaceutical companies. Significant customer expansions and additions this past year included Aventis, Lilly and expansion to all R&D locations of Pfizer, Inc., as well as Millennium Pharmaceuticals. As a result of these expansions, revenue from existing customers increased $3.0 million or 34%, from $8.7 million in fiscal 2001 to $11.7 million in fiscal 2002. Over the same period, revenue from new customers declined 18%, as we focused on enhancing our existing relationships.

        Cost of revenues.    Cost of license and renewal revenues consists of royalty expense for third-party software included in our products, and cost of materials for both initial products and product updates provided for in our annual license agreements. Cost of license and renewal revenues increased 25% to $2.0 million for the year ended March 31, 2002, from $1.6 million for the year ended March 31, 2001. The increase was due primarily to the inclusion of costs of our information products as cost of revenues beginning with the release of these products for general distribution in December 2000. During the year ended March 31, 2002, we implemented a restructuring program to better align operating expenses with anticipated revenues. The restructuring actions reduced resources in non-core areas such as our information products. Cost of license and renewal revenues as a percentage of license and renewal revenues was 40% for the year ended March 31, 2002, compared to 45% for fiscal 2001. This percentage should decline substantially in fiscal 2003, as product royalties continue and all information product costs, as of November 2001, are now expensed. In addition, this percentage will also decrease to the extent revenues increase.

        Cost of services revenues increased 26% to $6.3 million for the year ended March 31, 2002, from $5.0 million for the year ended March 31, 2001. The increase was due primarily to additional personnel in strategic services. Because of the direct relationship of personnel to projects undertaken, we anticipate that as we take on new projects, cost of revenues will reflect changes in total revenue. The cost of service revenues, as a percentage of service revenues, was 68% in fiscal 2002 and 60% in fiscal 2001. The increase in this percentage in fiscal 2002, was due to under utilized capacity in our services organization. In fiscal 2003, we are more closely aligning project teams with key customer accounts. This is being implemented to make improvements to our productivity, margins and revenues on an annual basis. Because we are still in transition to this new model, we do not expect to see significant benefits from this realignment until the second half of fiscal 2003, at the earliest.

        Research and development.    Research and development expenses decreased $1.5 million, or 19%, from $8.1 million in fiscal 2001 to $6.6 million in fiscal 2002. The decrease resulted primarily from reduced numbers of software developers and outside contractors in non-core product areas including our information products areas. As a percentage of revenues, research and development expenses decreased from 68% in fiscal 2001 to 46% in fiscal 2002. We believe research and development expenses will decline in fiscal 2003 as compared to fiscal 2002, as we see the full year impact of the headcount reductions.

        Sales and marketing.    Sales and marketing expenses increased $1.9 million, or 29%, from $6.7 million in fiscal 2001 to $8.6 million in fiscal 2002. The increase in sales and marketing expenses is related primarily to an expansion in our sales force personnel. As a percentage of total revenues, sales

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and marketing expenses increased from 56% in fiscal 2001 to 61% in fiscal 2002. The increase in marketing and sales expense as a percentage of total revenues reflects the growth in the number of professionals selling and marketing our products and services, offset in part by increased revenues. This percentage is expected to decrease in the future to the extent revenues increase.

        General and administrative.    General and administrative expenses increased from $4.0 million in fiscal 2001 to $5.9 million in fiscal 2002. The increase is related to growth in management and administrative support staff as well as professional fees as a result of the expansion of our business and the costs of being a public company. As a percentage of total revenues, general and administrative expenses increased from 34% in fiscal 2001 to 41% in fiscal 2002. This percentage is expected to decrease in the future to the extent revenues increase.

        Restructuring.    In fiscal 2002, we implemented a restructuring program to better align operating expenses with anticipated revenues. Our restructuring actions reduced resources in non-core areas. We recorded a $676,000 restructuring charge, which consists of $402,000 in facility exit costs (including $81,000 in equipment impairment), $253,000 in personnel severance costs and $21,000 in other exit costs. The restructuring program resulted in the reduction in force across all company functions of approximately 14% or 20 employees. As of March 31, 2002, all 20 employees had been terminated as a result of the program. The restructuring actions did not impact the resources assigned to develop or support our current and future PKS, WinNonlin®, WinNonMix® and Trial Simulator™ product families. At March 31, 2002, we had $249,000 of accrued restructuring costs related to monthly lease expenses for two facilities that were exited in fiscal 2002, employee severance payments and other exit costs. We estimate that the restructuring program will save the company approximately $4.5 million of expenses on an annualized basis.

        Other income (expense), net.    Other income, net, decreased to $212,000 for fiscal 2002 from other income, net, of $1.0 million for fiscal 2001. This decrease occurred as a result of lower interest income on a smaller average balance of cash and short-term investments, as well as higher interest expense as we began paying for our utilization of our term loan. We continued to reduce the outstanding balance of our obligations under capital leases. We expect our interest income to be reduced in 2003 due to lower interest rates and lower average balances. We also expect to have increased interest expense as we exercise our term loan credit facility for an entire year.

        Provision for income taxes.    As a result of our net operating losses, no provision was recorded for income taxes during fiscal years 2002 and 2001. As of March 31, 2002, we had federal and state net operating losses of $50 million and $20 million respectively, which begin to expire in the years 2003 through 2022. We have recorded a valuation allowance against the entire net operating loss carry-forwards because of the uncertainty that we will be able to realize the benefit of the net operating loss carry-forwards before they expire.

Years Ended March 31, 2001 and 2000

        Revenues.    License and renewal revenues increased $1.0 million, or 37%, from $2.6 million in fiscal 2000 to $3.6 million in fiscal 2001. Of this increase, $560,000 was due to an approximately 27% increase in the number of licenses sold from fiscal 2000 to fiscal 2001, and approximately $403,000 reflected an increase in annual renewal revenue due to the growth in the installed base.

        Service revenues increased $2.1 million, or 34%, from $6.2 million in fiscal 2000 to $8.3 million in fiscal 2001. We view this increase as an indication of our customers' acceptance of our methodologies. As of March 31, 2001, we were engaged with 14 of the top 20 major pharmaceutical companies. Significant customer additions this past year included Aventis, Lilly and Bayer, as well as an additional leading biotechnology company. Over 80% of our revenue increase from last year came from existing customers.

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        Cost of revenues.    Cost of license and renewal revenues consists of royalty expense and cost of materials for both initial products and product updates provided for in our annual license agreements. Cost of license and renewal revenues increased 54% to $1.6 million for the year ended March 31, 2001, from $1.1 million for the year ended March 31, 2000. The increase was due primarily to the inclusion of costs of our information products as cost of revenues beginning with the release of these products for general distribution in December 2000. We began including our product team's costs to convert data from contract providers into customer usable information as cost of revenue in the latter part of fiscal 2001. New versions of products shipped in fiscal 2001 contained a slightly higher royalty expense component than the older versions. These increases were partially offset by a reduction in salary-related expenses in the second half of fiscal 2001, as we increased efficiency and productivity in our customer support staff. Cost of license and renewal revenues as a percentage of license and renewal revenues was 45% for the year ended March 31, 2001, compared to 40% for fiscal 2000.

        Cost of services revenues increased 48% to $5.0 million for the year ended March 31, 2001, from $3.4 million for the year ended March 31, 2000. The increase was due primarily to increased personnel in strategic services. The cost of service revenues, as a percentage of service revenues, was 60% in fiscal 2001 and 54% in fiscal 2000.

        Research and development.    Research and development expenses increased $2.6 million, or 49%, from $5.5 million in fiscal 2000 to $8.1 million in fiscal 2001. The increase resulted primarily from an increase in the number of software developers and the use of outside contractors. In particular, we dedicated considerable resources to the development of the Clinical Workbench and information products. As a percentage of revenues, research and development expenses increased from 62% in fiscal 2000 to 68% in fiscal 2001.

        Sales and marketing.    Sales and marketing expenses increased $2.6 million, or 65%, from $4.1 million in fiscal 2000 to $6.7 million in fiscal 2001. The increase in sales and marketing expenses is related primarily to an expansion in our sales force personnel. As a percentage of total revenues, sales and marketing expenses increased from 46% in fiscal 2000 to 56% in fiscal 2001. The increase in marketing and sales expense as a percentage of total revenues reflects the rapid growth in the number of professionals selling and marketing our products and services, offset by increased revenues.

        General and administrative.    General and administrative expenses increased from $2.0 million in fiscal 2000 to $4.0 million in fiscal 2001. The increase is related to growth in management and administrative support staff as well as professional fees as a result of the expansion of our business and the costs of being a public company. As a percentage of total revenues, general and administrative expenses increased from 22% in fiscal 2000 to 34% in fiscal 2001.

        Other income (expense), net.    Other income, net, increased to $1.0 million for fiscal 2001 from other income, net, of $185,000 for fiscal 2000. This increase occurred as a result of higher interest income on a larger average balance of cash and short-term investments as a result of the net proceeds received in August 2000 from our initial public offering, as well as lower interest expense as we reduced the outstanding balance of our notes payable.

        Provision for income taxes.    As a result of our net operating losses, no provision was recorded for income taxes during fiscal years 2001 and 2000. As of March 31, 2001, we had federal and state net operating loss carry forwards of $42.3 million available to offset future taxable income, which may be used, subject to limitations, to offset future state and federal taxable income through 2020. We have recorded a valuation allowance against the entire net operating loss carryforwards because of the uncertainty that we will be able to realize the benefit of the net operating loss carryforwards before they expire.

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Liquidity and Capital Resources

        Since our inception we have funded operations through the private sale of preferred stock, with net proceeds of approximately $38 million, limited borrowings and equipment leases. In August 2000, we completed our initial public offering of 3,000,000 shares of common stock, at a price of $10.00 per share, all of which shares were issued and sold by us for net proceeds of $26.4 million, net of underwriting discounts and commissions of $2.1 million and expenses of $1.5 million. We paid $6.1 million to holders of our Series C preferred stock at the closing of the offering as required by the terms of the Series C preferred stock. After this payment, our net proceeds were $20.3 million.

        As of March 31, 2002, we had $13.5 million in cash and short-term investments, which include $4.5 million of cash borrowed under our credit facilities with Silicon Valley Bank. Cash and short-term investments decreased by $7.7 million from those held as of March 31, 2001. Our working capital, defined as current assets less current liabilities, at March 31, 2002, was $6.8 million, a decrease of $12.7 million in working capital from March 31, 2001. The decrease in the working capital is primarily attributable to our net loss, and the borrowing of $4.5 million on our credit facilities, offset by continued payment of our previous notes payable. In June 2001 we extended and enhanced our previously unused credit facilities with Silicon Valley Bank, providing $7.5 million available under three different facilities. All have rates which are based on the prime interest rate plus one point or prime interest plus 1.25 points, and were fundable over the next year and are payable over a four year period. The term loan facility of $3.5 million was fully exercised in fiscal 2002 and is payable, beginning in July 2002, over the next four years, ending June 2006. In addition, $1.0 million of the accounts receivable facility was also utilized in fiscal 2002 and is payable in June 2003.

        As of March 31, 2002, we were in violation of a debt/tangible net worth covenant under our credit facilities with Silicon Valley Bank. On May 10, 2002, a loan modification agreement was signed with Silicon Valley Bank which removed the debt/tangible net worth covenant thereby curing the breach.

        The following covenants apply to our Silicon Valley Bank loan facilities: Quick Ratio (excluding deferred revenue) greater than 1.0, Remaining months liquidity of 6 months, Liquidity of two times the term loan advance, and annual Net Losses within 20% of our plan, measured at specific quarterly amounts. We are in compliance with each of these covenants.

        Net cash used in operating activities was $10.4 million in fiscal 2002, $11.6 million in fiscal 2001 and $6.6 million in fiscal 2000. The cash used in these periods was primarily attributable to net losses in each period of $19.0 million, $20.6 million and $10.0 million, respectively, partially offset by non-cash charges of $3.0 million, $7.6 million and $2.2 million in deferred stock compensation in fiscal 2002, 2001, and 2000, respectively.

        Net cash provided by investing activities was $1.5 million in fiscal 2002 and $2.1 million in fiscal 2001, which resulted from maturities of short-term investments, partially offset by purchases of short-term investments and property and equipment. Net cash used for investing activities was $10.0 million in fiscal 2000 including the purchase of short-term investments and capital expenditures.

        Financing activities provided net cash of $4.1 million in fiscal 2002, $19.5 million in fiscal 2001 and $17.7 million in fiscal 2000. In fiscal 2002, these amounts were primarily proceeds from our credit facility borrowings, partially offset by $689,000 in payments on our notes payable and capital lease obligations.

        We have incurred quarterly and annual losses in each of the seven years since we were formed. We incurred a net loss of $19.0 million for the fiscal year ended March 31, 2002, as well as net losses of $20.6 million and $10.0 million for the fiscal years ended March 31, 2001 and 2000, respectively.

        In June 2002, we extended our secured revolving credit facility agreement with Silicon Valley Bank for an additional year. We continue to have up to $4.0 million available under two accounts receivable

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facilities. These include $2.5 million of secured revolving credit against 80% of eligible domestic accounts receivable and $1.5 million of secured revolving credit against 90% of eligible foreign accounts receivable. We continue to have $1.0 million of the accounts receivable facilities utilized.

        In June 2002, we closed the first tranche of a two-tranche financing and sold to certain existing stockholders 761,920 shares of Series A Convertible Preferred Stock and warrants to purchase 761,920 shares of our Common Stock for approximately $3,149,000. The Series A Convertible Preferred Stock is entitled to receive out of legally available funds quarterly dividends at the annual rate of 8% and is payable in cash or Series B Convertible Preferred Stock, of which payments will commence in September 2002. The Preferred Stock is redeemable at any time after five years from issuance upon the affirmative vote of at least 75% of the Preferred Stock stockholders. The Preferred Stock is redeemable at a price of $4.008 per share plus any unpaid dividends with respect to such share. Each share of Preferred Stock is convertible into four shares of our Common Stock at the election of the holder or upon the occurrence of certain other events. The warrants are exercisable for a period of five years from the date of issuance with an exercise price of $1.15 per share, subject to the necessary stockholder approval at a meeting currently scheduled to take place in September 2002, we expect to sell to the same existing stockholders in the second tranche of the two-tranche financing, an additional 1,052,742 shares of Series A Convertible Preferred Stock and additional warrants to purchase 1,052,742 shares of Common Stock for approximately $4,350,000.

        Management believes the Company has adequate cash to sustain operations through fiscal year 2003 and is managing its business to achieve positive cash flow utilizing existing assets. During 2002, the Company's commitments and liabilities were significantly reduced via restructuring events. In addition, the Company reduced ongoing operating expenses by reducing purchases of other services and making workforce reductions. We are committed to the successful execution of our operating plan and will take further restructuring actions as necessary to align our revenues and reduce expenses.

        The following table depicts our contractual obligations as of March 31, 2002:

*

Net of subleases and payments included in the current year restructuring charge

Recent Accounting Pronouncements

        In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The new rules require business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting and goodwill acquired after this date will not be amortized. Goodwill existing at June 30, 2001, continued to be amortized through the end of our fiscal year ended March 31, 2002, and will be tested for impairment using the current method, which uses an undiscounted cash flow test. Beginning in our first fiscal quarter ended June 30, 2002, Pharsight will adopt SFAS 141 and SFAS 142. Based on acquisitions completed as of June 30, 2001, it is not expected to have a significant impact on our results of operations.

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        In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. Pharsight adopted FAS 144 as of April 1, 2002, and Pharsight does not expect that the adoption of the Statement will have a significant impact on our financial position and results of operations.

        In November 2001, the FASB issued a Staff Announcement (the "Announcement"), Topic D-103, which concluded that the reimbursement of "out-of-pocket" expenses should be classified as revenue in the statement of operations. This Announcement should be applied in financial reporting periods beginning after December 15, 2001. Upon application of this Announcement, comparative financial statements for prior periods should be reclassified to comply with the guidance in this Announcement. Pharsight previously recorded reimbursement of "out-of-pocket" expenses in cost of services. Effective January 1, 2002, Pharsight adopted the Announcement. The adoption of the Announcement had no significant impact on our results of operation and on our comparative financial statements for prior periods.

Business Risks

Items That Affect Our Future Operations

We have a history of losses that we expect will continue, and we may not be able to generate sufficient revenues to achieve profitability.

        We commenced our operations in April 1995 and have incurred net losses since that time. As of March 31, 2002, we had an accumulated deficit of $66.2 million. We expect to incur further losses as we continue to develop our business. Since the amounts we may determine to invest to grow our business are uncertain, we are unable to be certain when, if ever, we may become profitable. We have announced that we intend to achieve cash breakeven (ebitda—earnings before interest, taxes, depreciation and amortization) by June 2003; however, this expectation is based on a number of assumptions, including some outside of our control, including the state of the overall economy and the demand for our products, and if these assumptions do not prove to be accurate then we may never generate sufficient revenues to achieve profitability. Furthermore, even if we do achieve ebitda breakeven profitability and positive operating cash flow, we may not be able to sustain or increase profitability or positive operating cash flow on a quarterly or annual basis. If our losses exceed the expectations of investors, the price of our common stock may decline.

We have experienced restructuring actions, which may not sufficiently reduce operating expenses, and there is a continued risk of restructuring until the company reaches profitability.

        Our restructurings were designed to lower our cash used for operating expenses by reducing expenses for facilities, sales and marketing, hosting, professional services and marketing arrangements and significantly reducing our current employee and contractor staffing levels. While the restructurings have reduced cash operating expenses, our ability to adequately reduce cash used in operations, and ultimately generate profitable results from operations, is dependent upon successful execution of our business plan, including obtaining new customers. As of March 31, 2002, we had working capital of $6.8 million and had equity of $6.7 million. During the year ended March 31, 2002, we used cash in operating activities of $10.4 million. There can be no assurance that we will be successful in implementing our new business plan or sufficiently reducing our operating expenses in the future. Our inability to generate adequate revenue growth, reduce costs or to integrate acquisitions and continue to

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develop successful product and services offerings could have a material adverse effect upon our ability to successfully achieve breakeven operations and result in additional restructuring actions.

Our quarterly operating results may fluctuate significantly and may fail to meet the expectations of securities analysts and investors, which could cause our stock price to decline.

        We expect our quarterly operating results may fluctuate in the future, and may vary from securities analysts' and investors' expectations, depending on a number of factors described below and elsewhere in this "Business Risks" section of Form 10-K, including:

•

Variances in demand for our products and services;



•

Timing of the introduction of new products or services and enhancements of existing products or services;



•

Changes in research and development expenses;



•

Our ability to complete fixed-price service contracts without committing additional resources;



•

Changes in industry conditions affecting our customers; and



•

Reorganization.

        As a result, quarterly comparisons may not indicate reliable trends of future performance.

        We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short term. If we have lower revenue, we may not be able to reduce our spending in the short term in response. Any shortfall in revenue would have a direct impact on our results of operations. For these and other reasons, we may not meet the earnings estimates of securities analysts or investors, and the price of our common stock may decline.

        In November 2001, we announced that we were taking actions intended to reduce our expenses by approximately $5 million on an annualized basis. Our current estimate is a reduction of approximately $4.5 million on an annualized basis. However if we are unable to achieve the productivity increases we have planned and if we are unable to achieve other expense reduction goals, we may not achieve this level of annualized savings, which would limit our ability to become profitable.

        Our cost-cutting actions leave us with less available capacity to deliver our products and services. If there is a significant increase in demand from our estimates, it will take us longer to react to satisfy this demand, which would limit our ability to grow our business and potentially become profitable.

Because our sales and implementation cycles are long and unpredictable, our revenues are difficult to predict and may not meet our expectations or those of our investors.

        The lengths of our sales and implementation cycles are difficult to predict and depend on a number of factors, including the type of product or services being provided, the nature and size of the potential customer and the extent of the commitment being made by the potential customer. Our sales cycle is unpredictable and may take six months or more. Our implementation cycle is also difficult to predict and can be longer than one year. Each of these can result in delayed revenues, increased selling expenses and difficulty in matching revenues with expenses, which may contribute to fluctuations in our results of operations and cause our stock price to be volatile. A key element of our strategy is to market our product and service offerings to large organizations. These organizations can have elaborate decision-making processes and may require evaluation periods, which could extend the sales and implementation cycle. Moreover, we often must provide a significant level of education to our prospective customers regarding the use and benefit of our product and service offerings, which may cause additional delays during the evaluation and acceptance process. We therefore have difficulty forecasting the timing and recognition of revenues from sales of our product and service offerings.

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Our revenue is concentrated in a few customers, and if we lose any of these customers our revenue may decrease substantially.

        We receive a substantial majority of our revenue from a limited number of customers. In fiscal 2002, sales to our top customer accounted for 20% of our revenue and sales to our top five customers accounted for 49% of our revenue. In fiscal 2001, sales to our top two customers collectively accounted for 28% of our revenue and sales to our top five customers accounted for 43% of our revenue. We expect that a significant portion of our revenue will continue to depend on sales to a small number of customers. If we do not generate as much revenue from these major customers as we expect to, or if we lose any of them as customers, our total revenue may be significantly reduced.

If we are unable to generate additional sales from existing customers and generate sales to new customers, we may not be able to generate sufficient revenues to become profitable.

        Our success depends on our ability to develop our existing customer relationships and establish relationships with additional pharmaceutical and biotechnology companies. If we lose any significant relationships with existing customers or fail to establish additional relationships, we may not be able to execute our business plan and our business will suffer. Developing customer relationships with pharmaceutical companies can be difficult for a number of reasons. These companies are often very large organizations with complex decision-making processes that are difficult to change. In addition, because our products and services relate to the core technologies of these companies, these organizations are generally cautious about working with outside companies. Some potential customers may also resist working with us until our products and services have achieved more widespread market acceptance. Our existing customers could also reassess their commitment to us, not renew existing agreements or choose not to expand the scope of their relationship with us.

Our revenues and results of operations would be adversely affected if a customer cancels a contract for services with us.

        Our services agreements can be canceled upon prior notice by our customers. Additionally, due to the nature of our services engagements, customers sometimes delay projects because of timing of the clinical trials and the need for data and information that prevent us from proceeding with our projects. These delays and contract cancellations cannot be predicted with accuracy and we cannot assure you that we will be able to replace any delayed or canceled contracts with the customer or other customers. If we are unable to replace those contracts, our revenues and results of operations would be adversely affected.

We may lose existing customers or be unable to attract new customers if we do not develop new products and services or if our offerings do not keep pace with technological changes.

        The successful growth of our business depends on our ability to develop new products and services and incorporate new capabilities, including the expansion of our product to address a broader set of customer needs related to clinical development of drugs and thereby expand the number of its prospective users, on a timely basis. If we cannot adapt to changing technologies, emerging industry standards, new scientific developments and increasingly sophisticated customer needs, we may not achieve revenue growth and our products and services may become obsolete, and our business could suffer. We have suffered product delays in the past, resulting in lost product revenues. In addition, early releases of software often contain errors or defects. We cannot assure you that, despite our extensive testing, errors will not be found in our products before or after commercial release, which could result in product redevelopment costs and loss of, or delay in, market acceptance. Furthermore, a failure by us to introduce new products or services on schedule could harm our business prospects. Any delay or problems in the installation or implementation of new products or services may cause customers to forego purchases from us.

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If the security of our customers' data is compromised, we could be liable for damages and our reputation could be harmed.

        As part of implementing our products and services, we inherently gain access to certain highly confidential proprietary customer information. It is critical that our facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Despite our implementation of a number of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. We do not have insurance to cover us for losses incurred in many of these events. If we fail to meet our customers' security expectations, we could be liable for damages and our reputation could suffer.

If we are required to commit unanticipated resources to complete fixed-price service contracts, we may incur losses on these contracts, which could cause our operating results to decline.

        A significant portion of revenue from our short-term agreements has been derived from service contracts that are billed on a fixed-price basis. These contracts specify certain obligations and deliverables to be met by us regardless of our actual costs incurred. Our failure to accurately estimate the resources required for a fixed-price service contract could cause us to commit additional resources to a project, which could cause our operating results to decline. We cannot assure you that we can successfully complete these contracts on budget, and our inability to do so could harm our business.

If we are unable to complete a project due to scientific limitations or otherwise meet our customers' expectations, our reputation may be adversely affected and we may not be able to generate new business.

        Because our projects may contain scientific risks, which are difficult to foresee, we cannot guarantee that we will always be able to complete them. Any failure to meet our customers' expectations could harm our reputation and ability to generate new business. On a few occasions, we have encountered scientific limitations and been unable to complete a project. In each of these cases, we have been able to successfully renegotiate the terms of the project with the particular customer. We cannot assure you that we will be able to renegotiate our customer agreements if such circumstances occur in the future. Moreover, even if we complete a project, we may not meet our customers' expectations regarding the quality of our products and services or the timeliness of our services.

If we are unable to hire additional specialized personnel, we will not be able to grow our business.

        Growth in the demand for our products and services will require additional personnel, particularly qualified scientific and technical personnel. We currently have limited personnel and other resources to staff and complete projects. In addition, as we grow our business, we expect an increase in the number of complex projects and large deployments of our products and services, which require a significant amount of personnel for extended periods of time. However, there is currently a shortage of these personnel worldwide, and competition for these personnel from numerous companies and academic institutions may limit our ability to hire these persons on commercially reasonable terms. Staffing projects and deploying our products and services will also become more difficult as our operations and customers become more geographically diverse. If we are not able to adequately staff and complete our projects, we may lose customers and our reputation may be harmed. Any difficulties we may have in completing customer projects may impair our ability to grow our business.

If we lose key members of our management, scientific or development staff, or our scientific advisors, our reputation may be harmed and we may lose business.

        We are highly dependent on the principal members of our management, scientific and development staff. Our reputation is also in part based on our association with key scientific advisors. The loss of any of these personnel might adversely impact our reputation in the market and harm our business. Failure to attract and retain key management, scientific and technical personnel could prevent us from achieving our strategy and developing our products and services.

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Our business depends on our intellectual property rights, and if we are unable to adequately protect them, our competitive position will suffer.

        Our intellectual property is important to our competitive position. We protect our proprietary information and technology through a combination of patent, trademark, trade secret and copyright law, confidentiality agreements and technical measures. We have filed thirteen patent applications, but do not currently have any patents issued. We cannot assure you that the steps we have taken will prevent misappropriation of our proprietary information and technology, nor can we guarantee that we will be successful in obtaining any patents or that the rights granted under such patents will provide a competitive advantage. Misappropriation of our intellectual property could harm our competitive position. We may also need to engage in litigation in the future to enforce or protect our intellectual property rights or to defend against claims of invalidity, and we may incur substantial costs as a result. In addition, the laws of some foreign countries provide less protection of intellectual property rights than the laws of the United States and Europe. As a result, we may have an increasingly difficult time adequately protecting our intellectual property rights as our sales in foreign countries grow.

If we become subject to infringement claims by third parties, we could incur unanticipated expense and be prevented from providing our products and services.

        We cannot assure you that infringement claims by third parties will not be asserted against us or, if asserted, will be unsuccessful. These claims, whether or not meritorious, could be expensive and divert management resources from operating our company. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could block our ability to provide products or services, unless we obtain a license to such technology. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all.

Future acquisitions could be difficult to integrate, disrupt our business and dilute stockholder value.

        In order to expand our product and service offerings and reach new customers, we may continue to acquire products, technologies or businesses that we believe are complementary. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, services, products and personnel of the acquired company, the diversion of management's attention from other business concerns, the potential loss of key employees of the acquired company and our inability to maintain the goodwill of the acquired businesses. We also cannot predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed.

        Future acquisitions may result in:

•

Potentially dilutive issuances of equity securities;



•

The incurrence of additional debt;



•

The assumption of known and unknown liabilities; and



•

The write-off of software development costs, and the amortization of expenses related to intangible assets and charges against earnings.

        Any of the above factors, if they occur, could harm our business.

International sales of our product account for a significant portion of our revenue which exposes us to risks inherent in international operations.

        We market and sell our products and services in the United States and internationally. International sales of our products and services accounted for approximately 36% of our total revenues for the year ending March 31, 2002. We have a total of 12 employees based outside the United States

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that market and sell our products and services, including a sales/consulting/product support office in London with seven employees. In addition, we may in the future open offices in other countries. The expansion of our existing international operations and entry into additional international markets may require significant management attention and financial resources. We cannot be certain that our existing international operations or the expansion of our operations to other countries will produce desired levels of revenue. We currently have limited experience in developing localized versions of our products and services and marketing and distributing our products internationally. Our operations in the United States and Europe also expose us to the following general risks associated with international operations:

•

Disruptions to commercial activities or damage to our facilities as a result of political unrest, war, terrorism, labor strikes and work stoppages;



•

Difficulties and costs of staffing and managing foreign operations;



•

The impact of recessions in economies outside the United States;



•

Greater difficulty in accounts receivable collection and longer collection periods;



•

Potential adverse tax consequences, including higher tax rates generally in Europe;



•

Tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers imposed by foreign countries;



•

Unexpected changes in regulatory requirements of foreign countries, especially those with respect to software, pharmaceutical and biotechnology companies; and



•

Fluctuations in the value of currencies.

        To the extent that such disruptions and costs interfere with our commercial activities, our results of operations could be harmed.

Risks Related To Our Industry

Our market may not develop as quickly as expected, and companies may enter our market, thereby increasing the amount of competition and impairing our business prospects.

        Because our products and services are new and still evolving, there is significant uncertainty and risk as to the demand for, and market acceptance of, these products and services. As a result, we are not able to predict the size and growth rate of our market with any certainty. In addition, other companies, including potential strategic partners, may enter our market. Our existing customers may also elect to terminate our services and internally develop products and services similar to ours. If our market fails to develop, grow more slowly than expected or become saturated with competitors, our business prospects will be impaired.

Government regulation of the pharmaceutical industry may restrict our operations or the operations of our customers and, therefore, adversely affect our business.

        The pharmaceutical industry is regulated by a number of federal, state, local and international governmental entities. Although our products and services are not directly regulated by the United States Food and Drug Administration or comparable international agencies, the use of some of our analytical software products by our customers may be regulated. We currently provide assistance to our customers in achieving compliance with these regulations. The regulatory agencies could enact new regulations or amend existing regulations with regard to these or other products that could restrict the use of our products or the business of our customers, which could harm our business.

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Consolidation in the pharmaceutical industry could cause disruptions of our customer relationships and interfere with our ability to enter into new customer relationships.

        In recent years, the worldwide pharmaceutical industry has undergone substantial consolidation. If any of our customers consolidate with another business, they may delay or cancel projects, lay off personnel or reduce spending, any of which could cause our revenues to decrease. In addition, our ability to complete sales or implementation cycles may be impaired as these organizations undergo internal restructuring.

Reduction in the research and development budgets of our customers may impact our sales.

        Our customers include researchers at pharmaceutical and biotechnology companies, academic institutions and government and private laboratories. Fluctuations in the research and development budgets of these researchers and their organizations could have a significant effect on the demand for our products. Research and development budgets fluctuate due to changes in available resources, spending priorities, internal budgetary policies and the availability of grants from government agencies. Our business could be harmed by any significant decrease in research and development expenditures by pharmaceutical and biotechnology companies, academic institutions or government and private laboratories.

Risks Related to Our Stock

The public market for our common stock may be volatile.

        The market price of our common stock has been, and we expect it to continue to be, highly volatile and to fluctuate significantly in response to various factors, including:

•

Actual or anticipated variations in our quarterly operating results;



•

Announcements of technological innovations or new services or products by us or our competitors;



•

Timeliness of our introductions of new products;



•

Changes in financial estimates by securities analysts;



•

Changes in the conditions and trends in the pharmaceutical market; and



•

We have experienced very low trading volume in our stock, and so small purchases and sales can have a significant effect on our stock price.

        In addition, the stock markets, including the Nasdaq National Market, have experienced extreme price and volume fluctuations, particularly in the past year, that have affected the market prices of equity securities of many technology companies. These fluctuations have often been unrelated or disproportionate to operating performance. These broad market factors may materially affect the trading price of our common stock. General economic, political and market conditions, such as recessions and interest rate fluctuations, may also have an adverse effect on the market price of our common stock.

We are at risk of having our stock delisted from the Nasdaq National Market.

        Our common stock is listed on the Nasdaq National Market, which has minimum quantitative listing criteria that are required to be maintained. Two of these criteria are a minimum stock price of one dollar per share and, beginning in November 2002, minimum stockholders' equity of $10 million. If our stock price were to decline to below one dollar per share, The Nasdaq Stock Market may take action to have our common stock delisted from the Nasdaq National Market. In addition, we currently do not have $10 million in stockholders' equity, and do not expect to have stockholders' equity in excess of $10 million in November 2002. If The Nasdaq Stock Market chooses to do so, it may take

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action to have our common stock delisted from the Nasdaq National Market after November 2002 if we do not meet this requirement. Our failure to complete the second tranche of our current two-tranche financing may increase the likelihood of the delisting of our Common Stock.

Because our executive officers and directors have substantial control of our voting stock, takeovers not supported by them will be more difficult, possibly preventing you from obtaining optimal share price.

        The control of a significant amount of our stock by insiders could adversely affect the market price of our common stock. Our executive officers and directors beneficially owned or controlled 7,765,687 shares, or 41.4%, of the outstanding common stock, calculated on an as-if-converted basis, as of May 31, 2002. In addition, our two largest stockholders with which two of our directors are affiliated, purchased in June 2002, 761,920 shares of our preferred stock and will, subject to the necessary stockholder approval of the additional issuance, purchase an additional 1,052,742 shares of our preferred stock which would increase the holdings of our executive officers and directors to 16,838,997 shares, or 60.5%, of our outstanding common stock, calculated on an as-if-converted basis. If our executive officers and directors choose to act or vote together, they will have the power to significantly influence all matters requiring the approval of our stockholders, including the election of directors and the approval of significant corporate transactions. Without the consent of these stockholders, we could be prevented from entering into transactions that could result in our stockholders receiving a premium for their stock.

Our charter documents contain anti-takeover provisions that may discourage take-over attempts and may reduce our stock price.

        Our board of directors has the authority to issue up to 3,185,338 shares of preferred stock (less any shares of preferred stock to be issued as dividends) and to determine the preferences, rights and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of any preferred stock that may be issued in the future. Other provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of us without the consent of our board of directors, even if the changes were favored by a majority of the stockholders. These include provisions that provide for a staggered board of directors, prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings.

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ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS

        We have considered the provisions of Financial Reporting Release No. 48, "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent In Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments." We have no holdings of derivative financial or commodity-based instruments at March 31, 2002. A review of our other financial instruments and risk exposures at that date revealed that we have exposure to interest rate and foreign currency exchange rate risks. At March 31, 2002, we performed sensitivity analyses to assess the potential effect of these risks and concluded that near-term changes in interest rates and foreign currency exchange rates would not materially affect our financial position, results of operations or cash flows.

        We have operated primarily in the United States and all funding activities and sales have been denominated in U.S. dollars. Accordingly, we have not had very little exposure to foreign currency rate fluctuations.

        Our interest income is sensitive to changes in the general level of United States interest rates, particularly since the majority of our investments are in debt instruments. Due to the nature of our short-term investments, we believe that there is no material market risk exposure. As of March 31, 2002, our cash, cash equivalents and short-term investments consisted primarily of demand deposits, money market funds, treasury instruments and commercial paper.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Supplementary Data

        The following tables set forth unaudited quarterly supplementary data for each of the years in the two-year period ended March 31, 2002.

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INDEX TO FINANCIAL STATEMENTS

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Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Pharsight Corporation

We have audited the accompanying balance sheets of Pharsight Corporation as of March 31, 2002 and 2001, and the related statements of operations, redeemable convertible preferred stock and stockholders' equity (deficit) and cash flows for each of the three years in the period ended March 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pharsight Corporation at March 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

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PHARSIGHT CORPORATION
BALANCE SHEETS
(In thousands, except share and per share amounts)

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

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PHARSIGHT CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)

(1)

Excluding $192, $457 and $126 in amortization of deferred stock-based compensation for the years ended March 31, 2002, 2001, and 2000, respectively.

(2)

Excluding $226, $842 and $501 in amortization of deferred stock-based compensation for the years ended March 31, 2002, 2001, and 2000, respectively.

(3)

Excluding $291, $889 an $531 in amortization of deferred stock-based compensation for the years ended March 31, 2002, 2001, and 2000, respectively.

(4)

Excluding $684, $1,749 and $579 in amortization of deferred stock-based compensation for the years ended March 31, 2002, 2001, and 2000, respectively.

(5)

Excluding $1,600, $3,615 and $443 in amortization of deferred stock-based compensation for the years ended March 31, 2002, 2001, and 2000, respectively.

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

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PHARSIGHT CORPORATION
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)

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

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PHARSIGHT CORPORATION
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
(In thousands)