BONE CARE INTERNATIONAL INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED JUNE 30, 2003

COMMISSION FILE NUMBER 0-27854

BONE CARE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

WISCONSIN 39-1527471
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)

1600 ASPEN COMMONS 53562
MIDDLETON, WISCONSIN (Zip Code)
(Address of Principal Executive Offices)

Registrant's Telephone Number, Including Area Code: (608) 662-7800

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

NONE

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

COMMON STOCK, WITHOUT PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)

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

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

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

The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant was $141,577,720 as of December 31,
2002, assuming solely for purposes of this calculation that all directors and
executive officers of the registrant are "affiliates." This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

As of September 15, 2003, there were 14,283,130 shares of the
Registrant's Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Bone Care International, Inc., Proxy Statement for its
2003 Shareholders Meeting to be held on November 19, 2003 (Part III).

BONE CARE INTERNATIONAL, INC.

INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2003

In this Annual Report on Form 10-K, the "Company", "Bone Care," "we,"
"us" and "our" refer to Bone Care International, Inc., unless the context
suggests otherwise.

Bone Care(R) and Hectorol(R) are registered trademarks of Bone Care
International, Inc., in the U.S. A community trademark application for Hectorol
is pending in the European Community Trademark Office, Japan, and selected other
countries. Hectorol is the brand name for the active drug substance,
doxercalciferol. This filing also includes trademarks of other companies.

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements.
Statements relating to future net sales, costs of sales, other expenses,
profitability, financial resources, or products and production schedules, or
statements that predict or indicate future events and trends and which do not
relate solely to historical matters identify forward-looking statements.
Forward-looking statements are made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and are based on management's beliefs as well as
assumptions made by and information currently available to management.
Accordingly, the Company's actual results may differ materially from those
expressed or implied in such forward-looking statements due to known and unknown
risks and uncertainties that exist in the Company's operations and business
environment, including, among other factors:

o general economic and market conditions in the U.S., Europe and the
rest of the world;

o our expectations and estimates concerning future financial
performance, financing plans and the impact of competition;

o the ability of the Company and its supplier of Hectorol Injection to
meet the Company's anticipated production schedule;

o technical risks associated with the development of new products,
regulatory policies in the U.S. and other countries;

o risks associated with our ability to avoid or minimize delays in/or
interruption of the manufacture and supply of our products, including
the approvals of regulatory authorities in connection therewith;

o reimbursement policies of public and private health care payors;

o introduction and acceptance of new drug therapies;

o competition from existing products and from new products or
technologies;

o the failure by the Company to produce anticipated cost savings or
improve productivity;

o the timing and magnitude of capital expenditures and acquisitions; and

o other risk factors set forth under "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in this Annual Report.

In addition, in this Annual Report, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to Bone Care, our business or our management, are
intended to identify forward-looking statements.

Unless otherwise required by law, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise after the date of this filing. However,
we acknowledge our obligation to disclose material developments related to
previously disclosed information. In light of these risks and uncertainties, the
forward-looking events and circumstances discussed in the filing may not occur,
and actual results could differ materially from those anticipated or implied in
the forward-looking statements.

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PART I

ITEM 1. BUSINESS

OVERVIEW

Bone Care International, Inc., is a specialty pharmaceutical company
engaged in discovering, developing and commercializing improved vitamin
D-hormone therapies to treat secondary hyperparathyroidism in patients with
kidney (or renal) disease, and other diseases, including osteoporosis, psoriasis
and cancers of the prostate, breast and colon. We were founded in 1984 as a
subsidiary of Lunar Corporation, located in Madison, Wisconsin, and we were spun
off from Lunar in 1996.

We licensed our first product, doxercalciferol or Hectorol, as it is known
commercially, in 1987 from the University of Wisconsin, a leading vitamin D
research center. Hectorol is a vitamin D-hormone replacement therapy approved by
the U.S. Food and Drug Administration (FDA) in two formulations to treat
secondary hyperparathyroidism in patients with end-stage renal disease, or ESRD.
Hectorol is a safe and effective therapy for reducing elevated levels of
parathyroid hormone (PTH) in blood in the management of secondary
hyperparathyroidism, a disease characterized by excessive secretion of PTH.
Hyperparathyroidism, if left untreated, can eventually result in cardiovascular
compromise, reduced immunity, muscle weakness, bone loss and fractures.
Virtually all ESRD patients suffer from secondary hyperparathyroidism. We
obtained FDA approval for Hectorol Capsules in June 1999, and we began selling
this orally administered product in the U.S. in October 1999. We obtained FDA
approval for Hectorol Injection in April 2000, we launched this intravenous
product in the U.S. in August 2000, and we received a national Medicare
reimbursement code for Hectorol Injection in January 2002. We are also
developing doxercalciferol and other vitamin D-hormones to expand indications
and treat other diseases. We filed a supplemental New Drug Application with the
FDA in December 2001 to treat secondary hyperparathyroidism in chronic kidney
disease (CKD) patients. We received an "approvable letter" from the FDA in
October 2002, for which we have provided our response. If approved, this would
expand the approved indications for Hectorol Capsules.

BACKGROUND

D-hormones are produced in the body from vitamin D that is either ingested
or generated in the skin from sunlight exposure. D-hormones have essential roles
in human health; they regulate (1) parathyroid hormone secretion by the
parathyroid glands, (2) the absorption of calcium by the small intestine, (3)
muscle function, and (4) the proliferation and maturation of several types of
normal and abnormal cells. D-hormone deficiency in CKD occurs when the kidneys
are unable to produce adequate active D-hormones. Without sufficient active
D-hormone levels, PTH secretion is increased and calcium absorption in the small
intestine is reduced, leading to hypocalcemia and eventually to bone disease.

Hyperparathyroidism is a disease characterized by excessive secretion of
PTH by the parathyroid glands. The medical community classifies
hyperparathyroidism as either "primary" or "secondary," depending on the
underlying cause. Primary hyperparathyroidism is less common and is caused by a
disorder in one or more of the parathyroid glands, usually a tumor. Surgical
removal of the affected parathyroid glands is the only effective treatment.
Secondary hyperparathyroidism is the more common type of hyperparathyroidism and
is caused by diseases unrelated to the parathyroid glands. It is seen in varying
severity in virtually all ESRD patients, in whom normal kidney function is lost
and dialysis is required for survival. Secondary hyperparathyroidism in renal
disease generally continues to worsen unless treated with D-hormone therapy.

The goals of D-hormone therapy in this setting are to decrease blood PTH
levels and to normalize blood calcium, thereby treating or preventing bone
disease, and other adverse effects of elevated PTH. There are other vitamin
D-hormones on the market which have been approved for the treatment of secondary
hyperparathyroidism and are competing with Hectorol. The two key competing
products in the U.S. approved by the FDA are calcitriol and paricalcitol. The
challenge in administering vitamin D hormone therapy is to deliver a sufficient
dose to be effective without causing toxic side effects including:

o Excessive phosphorus and/or calcium in the blood, which increases the
risk that mineral deposits will develop in soft tissues, such as in
the heart and arteries, contributing to cardiac disease, or in the
kidneys, accelerating kidney failure in CKD patients.

o Excessive phosphorus in the blood, which stimulates secretion of PTH
by the parathyroid glands and exacerbates secondary
hyperparathyroidism.

o Excessive calcium in the urine, which increases the risk that
calcium-rich deposits will develop in the kidneys and accelerate
kidney failure in CKD patients.

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Due to the risks of these side effects, D-hormones are customarily
administered at low dosages. Starting dosages are increased cautiously, to
minimize the chance of these toxic side effects and optimize therapeutic
response. The pharmacokinetic profiles of calcitriol and paricalcitol typically
demonstrate supraphysiological spikes occurring rapidly after administration,
followed by trough levels at concentrations below the physiologic range of
activated vitamin D. This is in contrast to the relatively constant blood levels
of D-hormones that are maintained in individuals with normal kidney function
without side effects, yielding consistent, efficient regulation of PTH
secretion.

Currently U.S. physicians and dialysis providers favor intravenous products
because of several factors: (1) Medicare reimbursement is only available for
intravenous products; (2) repeated oral delivery of active D-hormones promotes
their breakdown in the intestine, thereby increasing intestinal absorption of
calcium and reducing the amount delivered to the parathyroid glands; and (3)
healthcare professionals can assure patient compliance with drug administration
at the time of dialysis.

THE BONE CARE SOLUTION

We have two FDA approved products to treat secondary hyperparathyroidism in
ESRD patients: Hectorol Injection and Hectorol Capsules. Hectorol offers:

o Safe and Effective Treatment. Data obtained from our clinical trials
have demonstrated that Hectorol is a safe and effective therapy for
treating secondary hyperparathyroidism in ESRD patients. In these
trials, Hectorol reduced blood levels of PTH in more than 90% of the
treated patients with minimal side effects. Based on these and other
trials, we believe that Hectorol compares favorably to competitive
D-hormones, including calcitriol and paricalcitol; however, we have
not performed comparative trials to demonstrate these conclusions.

o Oral Delivery that Expands Market Opportunities. Hectorol Capsules
provide a safe, convenient and effective oral vitamin D therapy for
the management of PTH levels in patients with ESRD. Oral Hectorol has
the potential to be used in other clinical settings besides ESRD.
Intravenous D-hormone products are used only in hemodialysis patients
under medical supervision. Competitive intravenous D-hormones may be
less well suited for oral delivery because they are fully active on
delivery, which can cause certain cells lining the small intestine to
absorb too much calcium and phosphorus, leading to side effects.
Hectorol, on the other hand, is an inactive pro-hormone that, after
oral delivery, is not immediately available to these intestinal cells.

o A Pro-Hormone that Provides Consistent Levels of Natural D-Hormones.
Hectorol is a vitamin D pro-hormone, an inactive vitamin D analog that
is metabolized by the liver into two active and naturally occurring
D-hormones. Activated Hectorol is released into the bloodstream at a
rate which mimics the normal physiologic production of active
D-hormones by normal kidneys. Normal physiologic blood levels of
D-hormones allow efficient regulation of PTH secretion by the
parathyroid glands with few side effects.

o A Potentially Wider Therapeutic Window. We believe that there is
indirect evidence that Hectorol has a wider range, or therapeutic
window, between a minimum effective dose and a dose with significant
side effects as compared to other D-hormone therapies. Animal studies
have demonstrated that Hectorol has fewer side effects than calcitriol
or alfacalcidol when delivered at doses of equivalent potency. No
clinical trials directly comparing Hectorol to any other D-hormone
therapy in ESRD patients have been conducted. We have not conducted
any comparative trials of D-hormones in any human subjects. A wider
therapeutic window would improve safety and facilitate patient
management.

OUR STRATEGY

Our strategy is to develop new D-hormone products and commercialize our two
approved products, Hectorol Injection and Hectorol Capsules, by:

o Expanding Our Sales and Marketing Infrastructure. We will continue to
develop our internal sales and marketing capabilities to compete in
the $400 million D-hormone market in the U.S. for ESRD patients and
for related markets that could be effectively addressed with a small,
highly targeted sales and marketing effort. We will seek to establish
mutually beneficial alliances or marketing agreements with partners
who can rapidly penetrate geographic markets and therapeutic areas
where we have no current or planned sales presence.

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o Competitively Pricing Hectorol. On a per treatment basis, Hectorol
Injection is priced similar to the older D-hormone, calcitriol, but
below the more recently launched D-hormone, paricalcitol. Hectorol
Capsules also represent an attractive alternative for patients on home
dialysis who do not receive IV therapy. While oral D-hormone therapies
are not currently reimbursed by Medicare, they are favored outside of
the U.S. We are currently the only company with both an oral and
intravenous D-hormone product approved for treatment of dialysis
patients in the U.S., and we believe we are well positioned to compete
in the marketplace if Medicare reimbursement dynamics change in the
future.

o Expanding the Approved Indications for Hectorol Capsules. We filed a
supplemental New Drug Application with the FDA in December 2001 to
treat secondary hyperparathyroidism in CKD (pre-ESRD) patients. We do
not have plans to request FDA approvals for other new indications in
the next two years.

o Developing Additional Product Offerings. We will continue to use our
research, clinical and regulatory expertise to seek to develop our
other patented D-hormones for targeted diseases, such as osteoporosis
in elderly patients, as well as for psoriasis and cancers where
vitamin D therapy may be of benefit, such as cancers of the prostate,
breast and colon.

OUR PRODUCTS

Our objective is to discover, develop and commercialize vitamin D-hormone
therapies with improved safety and efficacy profiles to treat a variety of
diseases where current treatments are either unavailable or inadequate.
Comparative studies in several animal species have demonstrated that our vitamin
D technologies potentially have an improved therapeutic index as compared to
other vitamin D analogs. In pre-clinical models, Hectorol and/or LR-103 are 3 to
30 times less toxic when administered at doses with equivalent potency as
compared to calcitriol and/or alfacalcidol. Additional animal studies have shown
that, unlike Hectorol and LR-103, competitive D-hormone therapies cause
significant calcium deposits in the kidneys when delivered in doses equivalent
to those used to treat patients. We cannot be certain, however, that additional
clinical studies will support our conclusion that Hectorol and LR-103 have wider
therapeutic windows than other D-hormone therapies.

HECTOROL INJECTION

We developed Hectorol Injection for use in the estimated 340,000 ESRD
patients in the U.S. Our FDA submission included data from two Phase III trials,
which included a total of 70 patients and consisted of an eight-week monitoring
period in which no D-hormone therapies were given, followed by a 12-week period
in which patients received open-label treatment with Hectorol Injection at
hemodialysis. The study endpoint for effectiveness was the observed reduction in
blood PTH levels, and the endpoints for safety were the observed rates of
hypercalcemia and hyperphosphatemia. In both trials, after 12 weeks of
open-label treatment, mean blood PTH levels were reduced 40% to 50%. These
reductions were statistically significant (p<0.01). In both studies, blood PTH
reached a predetermined optimal range in more than 70% of treated patients.
Hectorol Injection normalized blood calcium but also caused infrequent episodes
of hypercalcemia and hyperphosphatemia. We obtained FDA approval for Hectorol
Injection in April 2000, and we began selling the product in August 2000. The
FDA previously required us to complete and submit a post-approval Phase IV trial
in pediatric patients with ESRD by August 2004. However, the FDA's rule
requiring that trial was struck down in U.S. Federal Court in October 2002.
Legislation has passed the U.S. Senate and is expected to be passed by the U.S.
House of Representatives and signed into law later this year restoring the FDA's
rule. If this legislation is enacted, we expect the cost of the required
pediatric trial to be approximately $1 million. The Senate bill would allow the
FDA to deem a drug misbranded if Bone Care did not complete the pediatric trials
on a timely basis, which would require us to withdraw Hectorol Injection from
the market.

Hectorol Injection competes with intravenous calcitriol (brand name
Calcijex(R)) and intravenous paricalcitol (brand name Zemplar(R)) both sold by
Abbott Laboratories and the generic form of intravenous calcitriol sold by other
manufacturers. The total annual sales of Calcijex and Zemplar in the U.S. are
approximately $360 million, while the sales of generic injectible calcitriol
have not been significant to date. The competitive products are all approved in
the U.S. for the treatment of elevated PTH in ESRD patients.

HECTOROL CAPSULES

Hectorol Capsules are approved for use in the approximately 340,000 ESRD
patients in the U.S. In addition, we have completed clinical trials of Hectorol
Capsules to gain FDA approval for use in CKD patients, which is a larger disease
population. The FDA approved Hectorol Capsules in June 1999 based on the results
of two Phase III trials involving a total of 211 subjects, of which 138 were
dosed with Hectorol Capsules. Each trial consisted of an eight-week monitoring
period in

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which no D-hormone therapies were given, followed by a 16-week period in which
patients received open-label treatment with Hectorol Capsules at hemodialysis,
and an eight-week period in which patients received, in a double-blinded
randomized fashion, continuing treatment with either Hectorol Capsules or a
matching placebo. The study endpoint for effectiveness was the observed
reduction in blood PTH levels, and the endpoints for safety were the observed
rates of hypercalcemia and hyperphosphatemia. In both trials, after 16 weeks of
open-label treatment, mean blood PTH levels were reduced more than 50%. These
reductions were statistically significant (p<0.01). In addition, blood PTH
reached a pre-determined optimal range in 83% of the treated patients. At the
end of the eight additional weeks of blinded treatment, mean blood PTH levels in
patients receiving Hectorol Capsules remained approximately 50% below those
receiving a matching placebo. Differences in mean blood PTH levels between
patients receiving Hectorol Capsules and those receiving placebo treatments were
clinically and statistically significant. Hectorol Capsules normalized blood
calcium levels but caused infrequent episodes of hypercalcemia and
hyperphosphatemia.

Hectorol Capsules compete with calcitriol (brand name Rocaltrol(R)) sold by
Roche Pharmaceuticals and the generic form of calcitriol sold by TEVA
Pharmaceuticals. The total annual sales of these two competitive products in the
U.S. are approximately $34 million. The competitive products are approved in the
U.S. for the treatment of elevated PTH in both ESRD and CKD patients, while
Hectorol is not yet approved for the treatment of CKD patients.

SECONDARY HYPERPARATHYROIDISM IN CKD PATIENTS. Secondary
hyperparathyroidism begins to develop in patients with modest reductions in
kidney function and becomes more severe as CKD progresses. Evidence from
published clinical research suggests that early intervention with D-hormone
replacement therapy can slow the progression and enhance the treatment of
secondary hyperparathyroidism in CKD patients. Calcitriol is approved in
the U.S., and we believe oral alfacalcidol, which is not FDA approved, is
used in certain foreign markets to treat CKD patients. As with their use in
dialysis patients, however, these competitive oral products may cause side
effects.

We have completed two randomized, double-blind, placebo-controlled
Phase III trials for Hectorol Capsules to treat secondary
hyperparathyroidism in CKD patients. The trials consisted of an eight-week
monitoring period in which no D-hormone therapies were given, followed by a
24-week period in which patients were treated with either Hectorol Capsules
or a matching placebo. The study endpoint for effectiveness was the
observed reduction in blood PTH levels, and the endpoints for safety were
the observed rates of hypercalcemia, hyperphosphatemia and hypercalciuria,
and significant decreases in kidney function. In both studies, preliminary
results show that Hectorol significantly reduced blood PTH levels relative
to a matching placebo and there were no significant differences in side
effects or safety profiles. We used the results from these two trials as
the basis for filing a supplemental New Drug Application with the FDA in
December 2001, requesting approval to market Hectorol Capsules for
secondary hyperparathyroidism in CKD patients.

In October 2003, the National Kidney Foundation (NKF) is scheduled to
issue the clinical practice guidelines for evaluating, classifying and
stratifying CKD patients (the K-DOQI Guidelines). These guidelines stratify
patients with kidney disease into five ranges based on kidney function as
measured by a widely accepted overall measure of kidney function. The
K-DOQI Guidelines reflect recommendations for the treatment of bone disease
and disorders of calcium and phosphorus metabolism which may encourage a
shift in clinical practice to include patients in three of the five
stratifications. The NKF estimates that there are approximately 7,600,000
stage three patients and 400,000 stage four patients. Stage five consists
of the 340,000 dialysis-dependent patient population, of which
approximately 65% are treated with vitamin D hormone therapy. This
potential shift in practice could positively influence our market potential
in the CKD patient population.

SECONDARY HYPERPARATHYROIDISM IN ELDERLY PATIENTS. We plan to further
investigate the use of Hectorol Capsules to treat secondary
hyperparathyroidism in elderly patients. Of the 16 million people in the
U.S. over the age of 75 years, we estimate that two to four million have
secondary hyperparathyroidism associated with osteoporosis. In many elderly
individuals, there is reduced responsiveness of the parathyroid glands, the
small intestine and muscles to D-hormones. Higher D-hormone levels may be
needed in these individuals to control PTH secretion and to maintain both
intestinal calcium absorption and muscle strength. Often these individuals
develop secondary hyperparathyroidism. Left untreated, the elevated level
of PTH in the blood causes bone loss, which increases the risk of
debilitating fractures. In addition, decreased muscle strength increases
the risk of falling, which in turn further increases the risk of fractures.
Fractures often result in disfigurement, decreased mobility and, in some
cases, extensive hospitalization and chronic nursing home care.

There are currently no FDA-approved D-hormone therapies to treat
patients in the U.S. with osteoporosis; however, D-hormone therapies are
approved for osteoporosis in Europe, Asia, Australia and other markets.
Controlled clinical trials conducted in these markets using oral calcitriol
or oral alfacalcidol demonstrated increased or stabilized bone mass and
reduced rates of fractures. However, other trials conducted in the U.S.
have produced mixed results, possibly due to the use of inconsistent doses.
Higher doses of oral calcitriol produced increases in spinal and total body
bone mass, whereas

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lower doses showed little effect. Lower doses were used in several trials
due to the unacceptable frequency of hypercalcemia and hypercalciuria.
Other clinical trials using calcitriol have shown an improvement in muscle
weakness in an elderly population, independent of an effect on bone. These
results suggest that D-hormone therapies with improved safety profiles may
enable more consistent delivery of higher doses for improved therapeutic
effects in elderly patients with secondary hyperparathyroidism and
osteoporosis.

We completed a Phase II trial in 1992 in the U.S. to evaluate Hectorol
Capsules to treat postmenopausal osteoporosis. We and our corporate
collaborators concluded that the data from the trial did not provide a
sufficient basis for initiating pivotal Phase III trials with Hectorol
Capsules to treat postmenopausal osteoporosis. Based on published reports
and FDA acceptance that certain D-hormones have efficacy in patients with
secondary hyperparathyroidism, we are conducting a survey to determine a
possible correlation between elevated PTH levels, vitamin D status, and
frequency of falling in an elderly population. If results are promising, we
will consider clinical trial designs to evaluate doxercalciferol as a
treatment in this population.

HYPERPROLIFERATIVE DISEASES

In addition to having a role in parathyroid function and calcium and
phosphorus metabolism, D-hormones have an important role in regulating skin,
prostate, breast and colon cells. We are investigating the use of Hectorol
Capsules and other development stage D-hormone therapies in diseases associated
with hyperproliferative or neoplastic cell growth such as psoriasis and cancers
of the prostate, breast and colon. Data from preclinical models suggest that
vitamin D analogs inhibit the growth of cancer cells expressing the vitamin D
receptor.

PSORIASIS. We may develop LR-103 as an oral D-hormone therapy for
psoriasis, a chronic disease that most often affects the skin. Psoriatic
lesions are characterized by an abnormal thickening or growth of the skin,
usually on the scalp, elbows, knees and shins. Microscopic examination of
these lesions reveals an increased rate of skin cell division, together
with a decrease in the time required for these cells to migrate to the skin
surface, resulting in thickening or growth of the skin.

According to the National Psoriasis Foundation, psoriasis affects more
than seven million individuals in the U.S. of which approximately 1.5
million are being treated by a physician. A similar prevalence rate is
observed in Europe. Psoriasis affects people of all ages, with most
exhibiting mild or moderate lesions. No cure for psoriasis exists.
Dovonex(R) (topical calcipotriol marketed by Bristol-Myers Squibb Company)
is a synthetic D-hormone analog of calcitriol and is approved to treat
psoriasis in the U.S. Dovonex and tacalcitol, another D-hormone analog, are
approved to topically treat psoriasis in many countries outside of the U.S.
Currently, no oral D-hormones are approved to treat psoriasis in the U.S.

Clinical studies have demonstrated that orally administered D-hormones
can cause significant improvement in psoriatic lesions reducing, in
particular, skin redness, scaling and thickness. In many patients, complete
clearing of psoriatic lesions is observed during the course of D-hormone
treatment.

PROSTRATE, BREAST AND COLON CANCERS. We intend to evaluate Hectorol
and LR-103 capsules in the treatment of cancers which have the potential to
respond to vitamin D therapy, such as prostate, breast and colon cancers.
Pre-clinical models have demonstrated that vitamin D analogs inhibit the
growth of prostate, breast and colon tumor cells in vitro and in vivo.
Oncologists consider D-hormones to be a potentially promising treatment for
cancers expressing the vitamin D receptor. Bone Care's vitamin D compounds,
with their safety profile, have the potential to benefit the treatment of
cancer. Currently, no D-hormone has received marketing approval for cancer
anywhere in the world.

Prostate cancer has become the most commonly diagnosed tumor in
American men. The American Cancer Society (ACS) estimates that in the year
2003, 223,000 men will be diagnosed with, and 89,000 men will die from,
prostate cancer. Breast cancer is the second leading cause of death among
women in the U.S. The ACS estimates that in the year 2003, 211,000 women
will be diagnosed with, and 41,000 women will die from breast cancer. Colon
cancer is the third most common cancer in American men and women. The ACS
estimates that in the year 2003, 147,000 men and women will be diagnosed
with, and 58,000 people will die from, colon cancer.

We have completed a Phase I, dose escalation trial of daily, oral
Hectorol in patients with hormone refractory prostate cancer. A total of 25
patients were enrolled in this study. Oral doses of Hectorol ranging from 5
to 15 (mu)g/day were administered. Patients were closely followed for side
effects in order to determine the maximum tolerated dose of daily, oral
Hectorol. Patients were monitored for response by objective imaging
techniques. Two patients had radiographically confirmed partial responses
while five other patients maintained stable disease for at least 6 months.
The most common toxicity observed during this trial was reversible
hypercalcemia. Based on the results of this study, a

8

maximum daily dose of 12.5 (mu)g was recommended for further evaluation in
Phase II clinical trials in cancer patients. We continue to evaluate
Hectorol in Phase II clinical trials in Hormone Refractory Prostate Cancer.
The results of a Phase II Hectorol monotherapy trial in patients with
hormone refractory prostate cancer are being evaluated. A Phase II study of
oral Hectorol in combination with Taxotere in the treatment of hormone
refractory prostate cancer has also been initiated. Collaborations with the
University of Wisconsin and other institutions to further explore the use
of Hectorol in prostate cancer and other oncology settings are ongoing.

In addition, Bone Care plans to initiate a Phase I study of LR-103 in
cancer patients in 2003.

LR-103 AND BCI-202

We are investigating the use of LR-103, BCI-202 and other research
compounds in pre-clinical studies to evaluate them to treat psoriasis, cancers,
and secondary hyperparathyroidism due to renal disease.

Hectorol's chemical structure differs from that of calcitriol and
alfacalcidol. Results from animal studies indicate that Hectorol shows a 3-
to-15-fold lower incidence of toxic side effects compared to calcitriol and
alfacalcidol at doses having equivalent potency. Consequently, we synthesized
and evaluated a series of compounds with chemical structures related to
Hectorol. From this research, we determined that Hectorol is activated, in part,
to LR-103, whereas calcitriol and alfacalcidol cannot be so activated.

We have synthesized LR-103 and closely related analogs and have continued
to study their pharmacological properties in biological models. LR-103 is as
potent as calcitriol, but is 30 times less likely than calcitriol and
alfacalcidol to cause toxic side effects. In addition, we have observed that
LR-103 inhibits growth of skin cells as well as a variety of cancer cells in
vitro. In a mouse model, LR-103 slowed tumor growth of breast cancer xenografts
without producing any apparent adverse effects on serum calcium. In a mouse
model for secondary hyperparathyroidism, LR-103 reduced parathyroid hormone
levels without producing hypercalcemia. LR-103 is readily absorbed after oral
delivery and circulates through the bloodstream to tissues which respond to
D-hormones. LR-103 currently is in the late stages of pre-clinical research, and
we plan to begin Phase I clinical studies with LR-103 in cancer patients in
2003.

BCI-202 is a novel pro-hormone in an early stage of pre-clinical
development. We cannot be certain that future studies will yield safe and
effective results that warrant continued development.

RESEARCH AND DEVELOPMENT

Our research and development expenses were approximately $6.0 million, $5.7
million and $4.6 million in the years ended June 30, 2003, 2002, and 2001,
respectively.

SALES AND MARKETING

We commercially introduced Hectorol Capsules in October 1999 and Hectorol
Injection in August 2000. Both products are currently marketed for ESRD patients
in the U.S. by our direct sales force. We believe that the ESRD market in the
U.S. is well defined and, therefore, is suitable for a highly focused, direct
sales and marketing effort. In addition, we believe that the clinical benefits
of our product combined with competitive pricing allow us to offer a strong
value proposition to patients and physicians.

We are directing our marketing efforts to the following key decision
makers:

o Nephrologists. The nephrologist is the physician responsible for the
care of patients diagnosed with early and end-stage renal disease.
This care includes delivering D-hormone replacement therapy, which may
be administered based on protocols developed in conjunction with the
dialysis clinics. We estimate that in the U.S. there are approximately
6,300 nephrologists caring for 340,000 dialysis patients and
approximately 400,000 patients with Stage 4 and 7,600,000 patients
with Stage 3 CKD.

o Dialysis Clinics. The nephrologist is generally associated with a
clinic that performs dialysis procedures. In the U.S., a limited
number of large corporations control the majority of these clinics
with the largest five corporations controlling approximately 57% of
in-center dialysis facilities. Generally these clinics bill for
services provided to ESRD patients, including D-hormone therapy. These
clinics work with the nephrologist to maximize both the quality of
patient care and profits.

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o Third-Party Payors. Dialysis clinics that administer intravenous
D-hormones seek reimbursement from third-party payors who generally
are either insurance companies or governmental agencies, including
Medicare and Medicaid. These payors set reimbursement levels for
products and services which the clinics provide to dialysis patients.

As of September 1, 2003, the sales and marketing departments consisted of
58 people, including Vice Presidents of Sales and Marketing and a direct sales
force of 38 people. Additionally, we may seek to establish mutually beneficial
alliances or marketing agreements with partners who can access geographic
markets and therapeutic areas where we have no current or planned sales
presence.

Hectorol is distributed to patients and dialysis centers through both
direct and traditional wholesale and retail channels. We have contracted for
selected administrative and distribution services from a third-party company to
provide services to wholesale and retail customers in the continental U.S.,
Hawaii and Puerto Rico.

COMPETITION

We operate in a field in which new discoveries occur at a rapid pace.
Competitors may succeed in developing technologies or products that are more
effective than ours or in obtaining regulatory approvals for their drugs more
rapidly than us, which could render our products obsolete or noncompetitive.
Competition is intense and is expected to continue to increase. Many
competitors, including biotechnology and pharmaceutical companies, are actively
engaged in the research and development of products in similar areas, including
the fields of hyperparathyroidism, osteoporosis, and prostate, breast and colon
cancer.

A number of pharmaceutical and biotechnology companies are developing new
products for the treatment of the same diseases we have targeted. Dialysis
providers typically select which therapy a patient receives based on safety,
efficacy, and cost. Abbott Laboratories, Inc. markets intravenous calcitriol
(Calcijex(R)) and intravenous paricalcitol (Zemplar(R)) for ESRD patients and is
developing oral paricalcitol for predialysis and dialysis patients. Current
intravenous versions of these drugs are approved to manage secondary
hyperparathyroidism in ESRD patients in the U.S. and in European countries. A
number of companies, including AAI Pharma, American Pharmaceutical Partners,
Faulding Pharmaceuticals and Gensia Sicor have launched or are planning to
launch generic intravenous calcitriol in the U.S. Roche Pharmaceuticals markets
oral calcitriol (Rocaltrol) and TEVA Pharmaceuticals markets generic calcitriol
in the U.S. to manage secondary hyperparathyroidism in CKD patients. A number of
companies, including Leo Pharmaceutical Products A/S, TEVA Pharmaceuticals and
Chugai Pharmaceutical Company Co., Ltd., market oral or intravenous
alfacalcidol, a synthetic analog of calcitriol, in Europe and Asia under various
trade names for both secondary hyperparathyroidism and osteoporosis. Other
companies, including Amgen, Inc. and NPS Pharmaceuticals, Inc. also are
developing new therapies to manage secondary hyperparathyroidism in ESRD
patients in the U.S. and foreign markets. Several companies, including Leo
Pharmaceutical Products A/S, ILEX Oncology, Inc. and Chugai Pharmaceutical Co.
LTD, are developing D-hormone therapies to treat cancers. Leo Pharmaceutical
Products A/S, Bristol-Myers Squibb Company and other companies are marketing a
topical D-hormone (Dovonex) in major markets of the world to treat psoriasis.
Teijin Limited is marketing topical tacalcitol to treat psoriasis outside the
U.S.

INTELLECTUAL PROPERTY

Our success will depend in part on our ability to develop patentable
products and technologies and obtain patent protection for our products and
technologies both in the U.S. and other countries. We currently have over 76
issued patents and over 80 pending applications worldwide. We have several U.S.
patents covering the use of Hectorol for the prevention and treatment of
hyperparathyroidism and metabolic bone disease, including renal osteodystrophy.
Patents covering hyperparathyroidism secondary to end stage renal disease begin
to expire in 2010. Patents covering treatment of hyperparathyroidism begin to
expire in 2008. Patents covering metabolic bone disease begin to expire in 2009.

A corresponding patent for the use of Hectorol to prevent and manage
secondary hyperparathyroidism in kidney dialysis patients has been issued in
Europe, Australia, and Canada, and is pending in the Japanese patent office. All
of these patents expire in 2016. A corresponding patent for the use of Hectorol
to prevent and treat metabolic bone disease has been issued by the European
Patent Office and expires in 2009.

We also own U.S. patents for the use of Hectorol for treating prostate
cancer that expire in 2013. We have filed counterpart patent applications in
Europe and other geographic markets, including Japan, that expire in 2017. We
own U.S. and European patents for delayed sustained release formulations of
Hectorol as a treatment for psoriasis. Foreign counterpart applications are also
pending in Japan and other major markets. The psoriasis-related patents expire
in 2013.

10

The issued composition-of-matter patent covering Hectorol has expired. Our
issued patents relating to Hectorol are method-of-use patents. A method-of-use
patent encompasses the use of a compound or composition to treat a specified
condition but does not encompass the compound itself, the active ingredient used
in the composition or composition itself, or the method of making the
composition or the compound used in the composition. Method-of-use patents
provide less protection than composition-of-matter patents because of the
possibility of off-label prescriptions if other companies market or make the
compound for other uses.

We have a license from the Wisconsin Alumni Research Foundation to practice
several of their process patents for the synthesis of Hectorol. Under this
license, which extends at least through July 2, 2013 and terminates upon the
expiration of the last licensed patent, the Wisconsin Alumni Research Foundation
has agreed not to license to other parties the patents to manufacture Hectorol
for use or sale anywhere in the world as long as the license agreement is in
effect and we pay royalties based on Hectorol sales.

We initially granted Draxis Health Inc. a license to use and sell Hectorol
in Canada for secondary hyperparathyroidism, osteoporosis and other metabolic
bone diseases. We also granted Draxis a license in Canada to all know-how
developed by or on behalf of us relating to the use of Hectorol for those
indications. Draxis received marketing approval for Hectorol Capsules in Canada
in May 2001. Draxis sold its Canadian pharmaceutical business to Shire
Pharmaceuticals Group in July 2003. In conjunction with that sale, Bone Care
entered into a new manufacturing and supply agreement and patent and trademark
license agreement with Shire that replaced and superceded all previous
agreements with Draxis. The patent and trademark agreement transfers to Shire
the exclusive right to use and sell Hectorol previously granted to Draxis and
requires a royalty for use of the Hectorol trademark. The manufacturing and
supply agreement provides for the sale of Hectorol from Bone Care to Shire for
distribution in Canada only.

We own issued patents and have pending patent applications in the U.S. and
other countries relating to other D-hormones. Our patents and pending
applications include claims to compounds, compositions, methods of synthesizing
the compounds and compositions, methods of use and methods of delivery of active
D-hormone and D-hormone analogs.

We and the USDA jointly own rights to LR-103 under issued patents and
pending patent applications. The USDA has granted to us an exclusive worldwide
license to make, use and sell products covered under their rights. This
agreement calls for us to commercialize LR-103 by December 31, 2006, or the USDA
may modify or terminate the license. In any circumstance, however, we would
retain marketing rights under these patents. The USDA license terminates upon
the expiration of the last licensed patent.

In addition to patent protection, we also rely on proprietary information
and trade secrets. We require our employees, consultants and advisors to execute
confidentiality agreements upon commencement of an employment or a consulting
relationship with us.

MANUFACTURING

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

In December 2001, Akorn, Inc. (previously the sole manufacturer of Hectorol
Injection) agreed to halt production of Hectorol Injection until such time as
certain general deviations from the FDA's current Good Manufacturing Practices
could be remediated. The FDA's site inspection, which concluded in February
2003, resulted in additional inspectional observations that preclude submission
of a supplement with respect to the manufacture and process improvements at
Akorn. Akorn is not currently producing Hectorol Injection. Bone Care has
entered into a manufacturing agreement with Draxis Pharma Inc., a subsidiary of
Draxis Health Inc., to serve as a manufacturer of Hectorol Injection. Draxis has
completed the validation process and on February 6, 2003, Bone Care submitted to
the FDA a CBE-30 supplement (changes being effective in 30 days) to add Draxis
as an additional manufacturing site for Hectorol Injection. This submission was
accepted by the FDA and allowed commercial distribution to begin in March 2003.
Management believes that Draxis will have sufficient production capacity to meet
the currently expected demand from existing and new customers and patients.

We purchase our active pharmaceutical ingredient from a sole supplier,
although we are currently in the process of obtaining regulatory approval for an
additional supplier. In addition, Bone Care relies on one supplier to formulate
Hectorol Capsules and another supplier to package Hectorol Capsules. Although
other suppliers, formulators and vendors are available and could provide these
goods and services to Bone Care on comparable terms, any change in suppliers
could cause a delay in manufacturing and a possible loss of sales, which would
affect operating results adversely.

11

All of our suppliers have FDA-inspected facilities that are required to
operate under current Good Manufacturing Practices regulations established by
the FDA. These regulations govern all stages of the drug manufacturing process
and are intended to assure that drugs produced will have the identity, strength,
quality and purity represented in their labeling for all intended uses. If we
were to establish our own manufacturing facility, we would need additional funds
and would have to hire and train additional personnel and comply with the
extensive regulations applicable to the facility. We believe our relationships
with our suppliers are good.

GOVERNMENT REGULATION

Pharmaceutical products are subject to extensive regulation under the
Federal Food, Drug and Cosmetic Act by the FDA in the U.S. and similar health
authorities in foreign countries. This rigorous regulation governs, among other
things, testing for safety and effectiveness, manufacturing, labeling, storage,
record keeping, import, export, advertising, marketing and distribution of
pharmaceutical products. Any new drug candidate must undergo lengthy, rigorous
and costly pre-clinical testing, clinical trials and other procedures mandated
by the FDA and foreign regulatory authorities prior to approval for sale. Before
testing agents with potential therapeutic value in healthy human test subjects,
stringent government requirements for pre-clinical data must be satisfied. The
data, obtained from studies in several animal species, as well as from
laboratory studies, are submitted in an Investigational New Drug Application to
the FDA or its equivalent in countries outside the U.S. where clinical studies
are to be conducted. Pre-clinical data must provide an adequate basis for
evaluating both the safety and the scientific rationale for the initiation of
clinical trials.

Clinical trials are typically conducted in three sequential phases,
although these phases may overlap. Phase I frequently begins with initial
introduction of the compound into healthy human subjects. Prior to patient
introduction, the product is tested for safety, adverse affects, dosage,
tolerance, absorption, metabolism, excretion and preclinical pharmacology. Phase
II typically involves studies in a small sample of the intended patient
population to assess the efficacy of the compound for a specific indication to
determine dose tolerance and the optimal dose range as well as to gather
additional information relating to safety and potential adverse effects. Phase
III trials are undertaken to further evaluate clinical safety and efficacy in an
expanded patient population which suffers from the targeted illness at
geographically dispersed study sites to determine the overall risk-benefit ratio
of the compound and to provide an adequate basis for product labeling. Each
trial is conducted in accordance with certain standards under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the investigational New Drug Application.

Data from pre-clinical and clinical trials are submitted to the FDA as a
New Drug Application for marketing approval and to other health authorities as a
marketing authorization application. The process of completing clinical trials
for a new drug is likely to take a number of years and requires the expenditure
of substantial resources. Preparing a New Drug Application or marketing
authorization application involves considerable data collection, verification,
analysis and expense. There can be no assurance that the FDA, or any other
health authority, will grant approval on a timely basis, if at all. The approval
process is affected by a number of factors, primarily the risks and benefits
demonstrated in clinical trials as well as the severity of the disease and the
availability of alternative treatments. The FDA or other health authorities may
deny a New Drug Application or marketing authorization application if the
authority's regulatory criteria are not satisfied or may require additional
testing or information.

Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety. Additional studies will be
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested and may
be required for Hectorol Injection and Hectorol Capsules. Also, the FDA or other
regulatory authorities require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand
marketing of the products. Further, if there are any modifications to the drug,
including changes in indication, manufacturing process or labeling or a change
in manufacturing facility, an application seeking approval of such changes will
be required to be submitted to the FDA or other regulatory authority.

The manufacture and marketing of Hectorol is subject to ongoing regulation,
including compliance with the FDA's current Good Manufacturing Practices,
adverse event reporting requirements and the FDA's general prohibitions against
promoting products for "off-label" uses, or uses not listed on the FDA-approved
labeling. We also are subject to inspection and market surveillance by the FDA
for compliance with these and other requirements. Any enforcement action
resulting from failure to comply with these requirements could affect the
manufacture and marketing of Hectorol. In addition, the FDA could withdraw a
previously approved product from the market upon receipt of new information.

12

The Company is also subject to various federal and state laws pertaining to
health care fraud and abuse, including anti-kickback laws and false claims laws.
Anti-kickback laws make it illegal for a prescription drug manufacturer to
solicit, offer, receive, or pay any remuneration in exchange for, or to induce,
the referral of business, including the purchase or prescription of a particular
drug. Due to the breadth of the statutory provisions and the absence of guidance
in the form of regulations or court decisions addressing some of the Company's
practices, it is possible that the Company's practices might be challenged under
anti-kickback or similar laws. False claims laws prohibit anyone from knowingly
and willingly presenting, or causing to be presented, for payment to third party
payors (including Medicare and Medicaid) claims for reimbursed drugs or services
that are false or fraudulent, claims for items or services not provided as
claimed, or claims for medically unnecessary items or services. Bone Care's
activities relating to the sale and marketing of its products may be subject to
scrutiny under these laws. Violations of fraud and abuse laws may be punishable
by criminal and/or civil sanctions, including fines and civil monetary
penalties, as well as the possibility of exclusion from federal health care
programs (including Medicare and Medicaid). If the government were to allege
that the Company violated these laws or if the Company were convicted of
violating these laws there could be a material adverse effect on the Company.
The Company's activities could be subject to challenge for the reasons discussed
above as a result of the broad scope of these laws and the increasing attention
being given to them by law enforcement authorities.

Bone Care participates in the Medicaid rebate program established by the
Omnibus Budget Reconciliation Act of 1990, and amendments of that law.
Participation in this program has included extending comparable discounts under
the Public Health Service ("PHS") pharmaceutical pricing program through the
Bureau of Primary Health Care. Under the Medicaid rebate program, the Company
pays a rebate for each unit of its product reimbursed by Medicaid. The amount of
the rebate for each product is set by law as a minimum 15.1% of the average
manufacturer price ("AMP") of that product, or if it is greater, the difference
between AMP and the best price available from the Company to any customer. The
rebate amount also includes an inflation adjustment if AMP increases faster than
inflation. The PHS pricing program extends discounts comparable to the Medicaid
rebate to a variety of community health clinics and other entities that receive
health services grants from the PHS, as well as hospitals that serve a
disproportionate share of poor Medicare and Medicaid beneficiaries. The rebate
amount is recomputed each quarter based on the Company's reports of its current
average manufacturer price and best price for each of its products to the CMS.
The terms of the Company's participation in the program impose an obligation to
correct the prices reported in previous quarters, as may be necessary. Any such
corrections could result in an overage or underage in the Company's rebate
liability for past quarters, depending on the direction of the correction. In
addition to retroactive rebates (and interest, if any), if the Company were
found to have knowingly submitted false information to the government, in
addition to other penalties available to the government, the statute provides
for civil monetary penalties of $100,000 per item of false information.

The Company also makes its products available to authorized users of the
Federal Supply Schedule ("FSS") of the General Services Administration. The
Veterans Health Care Act of 1992 requires that product prices for purchases by
the Veterans Administration, and the Federal PHS (including the Indian Health
Service) be discounted by a minimum of 24% off the AMP to non-federal customers
(the non-federal average manufacturer prices, "non-FAMP"). The Company's
computation and report of non-FAMP is used in establishing the price, and the
accuracy of the reported non-FAMP may be audited by government under applicable
federal procurement laws. Among the remedies available to the government for
infractions of these laws is recoupment of any overages paid by FSS users during
the audited years. In addition, if the Company were found to have knowingly
reported a false non-FAMP, the statute provides for civil monetary penalties of
$100,000 per item that is incorrect.

Before our products can be marketed outside of the U.S., they are subject
to regulatory approval similar to FDA requirements in the U.S., although the
requirements governing the conduct of clinical trials and other premarket
approval requirements vary widely from country to country, and the time spent in
gaining approval varies from that required for FDA approval. FDA approval does
not assure approval by other regulatory authorities, and we cannot predict
whether foreign regulatory approvals will be granted. In some countries, the
sales price of a drug product must also be approved. The pricing review period
often begins after market approval is granted. Even if a foreign regulatory
authority approves any of our products, we cannot predict whether satisfactory
prices for our products will be approved.

We must also comply with numerous federal, state and local laws,
regulations and recommendations relating to safe working conditions, current
Good Laboratory Practices, current Good Manufacturing Practices and the
experimental use of animals. We cannot predict the extent of governmental
regulation or the impact of new governmental regulations which might have an
adverse effect on the discovery, development, production and marketing of our
products and require us to incur significant costs to comply with the
regulations.

Our research and development processes involve the controlled use of
hazardous materials, chemicals and radioactive materials and produce waste
products. We are subject to federal, state and local laws and regulations
governing the use,

13

manufacture, storage, handling and disposal of such materials and waste
products. Although we believe that our safety procedures for handling and
disposing of such materials comply with the standards prescribed by such laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be eliminated completely. In the event of such an accident, we
could be held liable for any damages that result, and any such liability could
exceed our financial resources. We believe we comply in all material respects
with applicable environmental laws and regulations.

Completing the multitude of steps necessary before marketing a new drug or
obtaining a new indication for Hectorol requires the expenditure of considerable
resources and a lengthy period of time. Delay or failure in obtaining the
required approvals, clearances or permits by us, our corporate partners or our
licensees would have a material adverse effect on our ability to generate sales
or royalty revenue. The impact of new or changed laws or regulations cannot be
predicted with any accuracy.

EMPLOYEES

As of September 1, 2003, we had 109 full-time employees, including 15 in
research and development, 21 in compliance, quality and regulatory affairs, 58
in sales and marketing and 15 in administration. Four of our employees have
Ph.D. degrees and one is a MD. None of our employees are represented by a union,
and we consider our employee relations to be good.

CUSTOMERS

Bone Care's customers primarily consist of wholesale distributors of
pharmaceutical products. Bone Care utilizes these wholesale distributors as the
principal means of distributing its products to clinics and hospitals. Five
individual wholesaler distributors comprise $3,933,000, or 88%, of the gross
accounts receivable balance as of June 30, 2003. These same five wholesaler
distributors represented 92% of Bone Care's net revenues for the year ended June
30, 2003, with the largest of the five wholesaler distributors representing 34%
of net revenues. Metro Medical, Amerisource/Bergen, and American Medical
Distributors each comprise greater than 10% of net revenues.

AVAILABLE INFORMATION

Bone Care makes available free of charge on its website at www.bonecare.com
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable
after electronically filing or furnishing such material to the Securities and
Exchange Commission.

RISK FACTORS

Investors and prospective investors in Bone Care should consider carefully
the risks described below, in addition to other information in this filing. Each
of these risk factors could adversely affect Bone Care's business, financial
condition and results of operations as well as adversely affect the value of an
investment in our common stock.

RISKS RELATED TO OUR BUSINESS

OUR BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT AND WE DO NOT HAVE A
SIGNIFICANT HISTORY FOR YOU TO EVALUATE US ON.

Our business is at an early stage of development, and we currently do not
have significant revenues or positive cash flow. We face many obstacles before
we can generate enough revenue to achieve positive cash flow and finance our
operations. In June 1999, we received FDA approval to market Hectorol Capsules
in the U.S. to manage secondary hyperparathyroidism in kidney dialysis patients
and began selling Hectorol Capsules in October 1999. In April 2000, we received
FDA approval to market Hectorol Injection to manage secondary
hyperparathyroidism in dialysis patients and began selling Hectorol Injection in
the U.S. in August 2000. We do not have FDA approval to market Hectorol for
other indications or to market any other products. All of our other product
candidates require extensive research and development and clinical testing
before we can submit a New Drug Application to the FDA.

WE HAVE A HISTORY OF LOSSES AND EXPECT OUR LOSSES TO CONTINUE.

We have incurred losses since we began operating. As of June 30, 2003, our
accumulated deficit was approximately $53.2 million. To date, we have spent our
funds primarily on product development and more recently on sales and marketing
expenses incurred to launch Hectorol Injection and Hectorol Capsules. In fiscal
year 2004 and subsequent fiscal years, we plan to make large expenditures to
market and sell Hectorol and to develop other new products, which may result in
losses in future

14

periods. These expenditures include costs associated with performing clinical
trials for new products, continuing our research and development and seeking
foreign regulatory approvals for Hectorol. The amount of these expenditures is
difficult to forecast accurately and cost overruns may occur. We expect our
operating losses to continue. It is possible, depending on the rate at which our
revenues increase and our marketing and research and development activities
expand, that our losses will continue at least through 2004. Our ability to
generate revenues in the near future will depend primarily on our success in
marketing and selling Hectorol Injection and Hectorol Capsules. We do not know
whether we will achieve profitability or, if we do, whether we will be able to
sustain profitability. We believe that we have sufficient cash and investments
to allow us to continue operating our business for at least the next year.

WE MAY FAIL TO SATISFY THE FDA'S CONDITIONS FOR MARKETING APPROVAL FOR
HECTOROL INJECTION, AND FOR HECTOROL CAPSULES, SLOWING THE PROGRESS OF OUR
BUSINESS.

The FDA previously required us to complete and submit a post-approval Phase
IV trial in pediatric patients with ESRD by August 2004. However, the FDA rule
requiring that trial was struck down in U.S. Federal Court in October 2002.
Legislation has passed the U.S. Senate and is expected to be passed by the U.S.
House of Representatives and signed into law later this year restoring the FDA's
rule. If this legislation is enacted, we expect the cost of the required
pediatric trial to be approximately $1 million. If Bone Care did not complete
the pediatric trials on a timely basis, the Senate bill would allow the FDA to
deem our drug misbranded which would require us to withdraw Hectorol Injection
from the market.

The FDA also allowed us to market Hectorol Capsules to ESRD patients, but
required us to complete post-approval Phase IV research and development
pertaining to the analysis of this product and its active ingredients by July
2000. We have already completed and submitted the results of our Phase IV
commitments for Hectorol Capsules to the FDA. We do not know if the FDA will be
fully satisfied or will require additional Phase IV commitments.

Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety. Additional studies will be
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested and may
be required for Hectorol Injection and Hectorol Capsules. Also, the FDA or other
regulatory authorities may require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand
marketing of the products. Further, if there are any modifications to the drug,
including changes in indication, manufacturing process or labeling or a change
in manufacturing facility, the FDA or other regulatory authorities may require
an application seeking approval of such changes.

If we experience delays or are unable to receive approval of our Phase IV
commitments for Hectorol Injection and Hectorol Capsules from the FDA, our
operating results and business will be substantially impaired.

WE MAY NOT BE ABLE TO COMMERCIALIZE HECTOROL IN FOREIGN MARKETS OR FOR
OTHER INDICATIONS IF WE DO NOT ENTER INTO STRATEGIC ALLIANCES OR OTHER MARKETING
ARRANGEMENTS.

If we do not find corporate partners for Hectorol in foreign markets or for
other indications, we may have to reduce our rate of product development or
increase our capital expenditures. Our strategy for the development, testing,
manufacturing and commercialization of our products is to enter into various
collaborations with partners, licensors, licensees and others. We have been in
discussions with several potential collaborators in foreign markets but have not
entered into any agreements. We may not be able to negotiate collaborative
arrangements on acceptable terms, if at all. If we are not able to establish
collaborative arrangements, we will have to either delay further development of
some of our programs or increase our capital expenditures and undertake the
development activities at our own expense. We may encounter significant delays
in commercializing our products or find that the development, manufacture or
sale of our products is hindered by the absence of collaborative agreements.

WE DO NOT HAVE EXTENSIVE EXPERIENCE COMMERCIALIZING PRODUCTS AND MAY NOT BE
ABLE TO SUCCESSFULLY DO SO.

We began selling Hectorol Capsules in the U.S. in October 1999, and we
began selling Hectorol Injection in the U.S. in August 2000. As of September 1,
2003, we have 38 full-time direct sales people. We will need to invest a
significant amount of money to complete the development of our sales and
marketing resources.

We cannot assure you that we will be able to sell and market Hectorol
successfully. We have a sales force that is limited in number, experience and
training. We may not be able to establish and maintain a commercial
infrastructure with the technical expertise to support distribution
capabilities. If we are unable to successfully commercialize Hectorol, our
growth prospects will be diminished.

15

ADDITIONAL CLINICAL TRIALS MAY NOT PROVE THAT HECTOROL IS SAFER OR MORE
EFFICACIOUS THAN COMPETING D-HORMONE THERAPIES WHICH MAY LIMIT ITS MARKET
ACCEPTANCE OR LIMIT OUR EFFORTS TO COMMERCIALIZE HECTOROL.

We have not conducted head-to-head clinical trials comparing Hectorol and
competitive D-hormone therapies in ESRD patients. We, and others not affiliated
with us, have compared the toxicity and efficacy of Hectorol to competitive
D-hormone therapies in several animal species. In animal studies, Hectorol shows
a 3- to 15-times lower incidence of toxic side effects when delivered at doses
with equivalent potency. We cannot be sure, however, that the results of
additional clinical trials will prove that our assumptions, based on animal
studies, are correct. Hectorol may not compare favorably to existing or new
D-hormone therapies. If Hectorol, or our follow-on products, do not prove to be
superior to competing products, we may face severe difficulties and may incur
greater expenses in marketing Hectorol. If additional clinical trials prove that
Hectorol is inferior to competitive D-hormone therapies, we may be forced to
suspend our efforts to commercialize Hectorol and to delay or suspend our
planned efforts to develop Hectorol and follow-on compounds for additional
indications.

IF THE MEDICAL COMMUNITY DOES NOT ACCEPT HECTOROL, OUR BUSINESS WILL
SUFFER.

The success of Hectorol depends on its acceptance by the medical community.
Similarly, the success of any products we develop in the future will depend on
the adoption of these products by our targeted markets. Existing and future
products, therapies and technological approaches will compete directly with our
products. Competing products may provide greater therapeutic benefits for a
specific problem or may offer comparable performance at a lower cost. If doctors
and patients do not use our products, we may not become profitable. We cannot
predict how quickly, if at all, the medical community will accept Hectorol or
our future products or the extent to which these products will be used. If we
encounter difficulties introducing Hectorol or future products into our targeted
markets, our operating results and business may be substantially impaired. To
facilitate Hectorol's acceptance in the U.S. market, we have priced Hectorol at
a modest premium to the older D-hormone, calcitriol, but below the more recently
launched D-hormone, paricalcitol.

MEDICARE REIMBURSEMENT FOR HECTOROL COULD BE REDUCED OR MODIFIED.

The Center for Medicare and Medicaid Services (CMS) controls Medicare
reimbursement for D-hormone therapies administered intravenously during
hemodialysis. CMS issued a nationwide reimbursement code for Hectorol Injection
in January 2002, which effectively provides for reimbursement to the dialysis
providers on a "fee-for-service" basis.

Third party payors, who generally are either insurance companies or
governmental agencies, including Medicare and Medicaid, have increasingly
focused on containing costs, which has impacted the reimbursement of various
products and, in turn, affected clinical use of certain products. CMS recently
issued a proposed rule which would revise the formula for reimbursing drugs
provided to ESRD patients. In publishing the proposed rule, CMS indicated that
it intends to reduce the amount paid for drugs, but increase the payments for
dialysis in order to more accurately pay for separately billable drugs without
reducing the overall payments to the ESRD facilities. This proposed rule is
subject to comments and final enactment, but could be implemented in 2004. The
terms of any final rule, including any terms that would reduce the reimbursement
for Hectorol, or reduce that reimbursement compared to competitive products,
could have a material adverse impact on our business.

CMS could decide to eliminate "fee-for-service" coverage for intravenous
D-hormone therapies and instead make a fixed payment to dialysis providers for
the total care of each patient, otherwise known as capitation, which would
include oral or intravenous D-hormone therapy. CMS recently announced plans to
conduct a four-year demonstration project starting in early 2004 to study
capitation for Medicare beneficiaries with ESRD. The four-year demonstration
project is voluntary and only a minority of the dialysis clinics are expected to
participate. If CMS adopts a capitated payment system, providers may use lower
cost oral vitamin D therapies instead of injectible vitamin D therapies, which
could have a material adverse impact on our business.

In addition, Medicare reimbursement policies are set locally by fiscal
intermediaries which administer claims from dialysis providers. These fiscal
intermediaries have authority to implement local policies which can limit
reimbursement and possibly favor competitive drug therapies and oral therapies.

Currently, oral D-hormone products are not reimbursed for use by
hemodialysis patients, although both the U.S. House of Representatives and
Senate have passed legislation which would create a drug benefit under Medicare.
If enacted, we do not expect this legislation to have a significant impact on
the market for intravenous vitamin D in the U.S., although it could increase
coverage and access for oral vitamin D products.

16

FAILURE TO RAISE ADDITIONAL FUNDS IN THE FUTURE MAY DELAY OR ELIMINATE SOME
OR ALL OF OUR EFFORTS TO DEVELOP, MANUFACTURE AND SELL HECTOROL AND ANY OF OUR
FUTURE PRODUCTS.

In recent years we have significantly increased our sales and marketing
expenditures and we continue to spend significant amounts on research and
development. We cannot be sure that our estimates of capital expenditures for
Hectorol and the development of our other new products will be accurate. We
could have significant cost overruns that could reduce our ability to
commercialize new products.

Based upon our current plans, we believe that we have sufficient funds to
meet our operating expenses and capital requirements for at least the next year.
Thereafter, we may need to raise additional capital to fund our operations. The
scope and amount of our liquidity and capital requirements will depend upon many
factors, including the extent to which Hectorol Injection gains market
acceptance, the progress and success of our clinical trials, the timing and cost
involved in obtaining regulatory approvals, the timing and cost of developing
sales and marketing programs, our ability to enter into strategic alliances,
manufacturing and research and development activities and competitive
developments. Additional required financing may not be available on satisfactory
terms, if at all. If we are unable to obtain financing in the future, we may
have to seek alternative sources of capital or re-evaluate our operating plans,
or we may be required to delay, reduce or eliminate some or all of our research
and development activities or sales and marketing efforts, in which case our
operating results and business may be substantially impaired.

WE LACK SUFFICIENT LONG-TERM DATA REGARDING THE SAFETY AND EFFICACY OF OUR
PRODUCTS AND WE COULD FIND THAT OUR LONG-TERM DATA DO NOT SUPPORT OUR CURRENT
CLINICAL RESULTS.

Hectorol is supported by less than four years of patient follow-up, and
therefore, we could discover that our current clinical results cannot be
supported by actual clinical experience. If longer-term patient studies or
clinical experience indicate that treatments with our products do not provide
patients with sustained benefits, our sales could decline. If longer-term
patient studies or clinical experience indicate that our procedures cause tissue
or muscle damage, motor impairment or other negative effects, we could be
subject to significant liability. We are not certain how long it may take for
patients to show significant increases in side effects. Further, because some of
our data have been produced in studies that are not randomized and involved
small patient groups, our data may not be reproduced in wider patient
populations.

WE HAVE NO EXPERIENCE MANUFACTURING PHARMACEUTICAL PRODUCTS SO WE MUST RELY
EXCLUSIVELY ON SUPPLIERS WHO ARE OUTSIDE OF OUR CONTROL TO MANUFACTURE OUR
PRODUCTS, INCLUDING HECTOROL.

The manufacture of pharmaceutical products requires significant expertise
and capital investment. We do not have the internal capability to manufacture
pharmaceutical products, and we currently use others to manufacture active
pharmaceutical ingredients and to formulate and package Hectorol. Our
manufacturers are required to adhere to regulations enforced by the FDA. Our
dependence upon others to manufacture our products may adversely affect our
profit margins and our ability to develop and commercialize products on a timely
and competitive basis. Delays or difficulties with contract manufacturers in
producing, packaging or distributing our products would adversely affect the
sales of Hectorol or introduction of other products. If we have to seek
alternative sources of supply, we may be unable to enter into alternative supply
arrangements on commercially acceptable terms, if at all. We employ a small
number of employees to coordinate and manage the actions of these parties. Any
disruption of these activities could impede our ability to sell Hectorol, which
would result in reduced revenue.

In December 2001, Akorn, Inc. (previously the sole manufacturer of Hectorol
Injection) agreed to halt production of Hectorol Injection until such time as
certain general deviations from the FDA's current Good Manufacturing Practices
could be remediated. The FDA's site inspection, which concluded in February
2003, resulted in additional inspectional observations that preclude submission
of a supplement with respect to the manufacture and process improvements at
Akorn. Akorn is not currently producing Hectorol Injection. Bone Care has
entered into a manufacturing agreement with Draxis Pharma Inc., a subsidiary of
Draxis Health Inc., to serve as a manufacturer of Hectorol Injection. Draxis has
completed the validation process and on February 6, 2003, Bone Care submitted to
the FDA a CBE-30 supplement (changes being effective in 30 days) to add Draxis
as an additional manufacturing site for Hectorol Injection. This submission was
accepted by the FDA and allowed commercial distribution to begin in March 2003.
Management believes that Draxis will have sufficient production capacity to meet
the currently expected demand from existing and new customers and patients.

We purchase our active pharmaceutical ingredient from a sole supplier,
although we are currently in the process of obtaining regulatory approval for an
additional supplier. In addition, Bone Care relies on one supplier to formulate
Hectorol Capsules and another supplier to package Hectorol Capsules. Although
other suppliers, formulators and vendors are available

17

and could provide these goods and services to Bone Care on comparable terms, any
change in suppliers could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.

While we currently do not intend to manufacture any products ourselves, we
may choose to do so in the future. If we were to manufacture products ourselves,
we would need substantial additional financing to build manufacturing
facilities. We also would be subject to additional regulatory requirements and
would be subject to risks associated with delays or difficulties encountered in
manufacturing a product. We may not be able to manufacture any products
successfully or in a cost-effective manner.

WE CANNOT ASSURE YOU THAT WE WILL OBTAIN REGULATORY APPROVALS FOR ANY OF
OUR FUTURE PRODUCTS.

Obtaining required regulatory approvals may take several years to complete
and consume substantial capital resources. There is no assurance that the FDA or
any other regulatory authority will act quickly or favorably on any of our
current or future requests for product approval, or that the FDA or any other
regulatory authority will not require us to provide additional data that we do
not currently anticipate to obtain product approvals. We cannot apply for FDA
approval to market our future products until each product successfully completes
its pre-clinical and clinical trials. We have filed a supplemental New Drug
Application with the FDA in December 2001, requesting approval to market
Hectorol Capsules for secondary hyperparathyroidism in CKD patients. Several
factors could prevent successful completion or cause significant delays of these
trials, including an inability to enroll the required number of patients or
failure to demonstrate adequately that the product is safe and effective for use
in humans. If safety problems develop, the FDA could stop our trials before
completion. If we are not able to obtain regulatory approvals for use of our
future products, or if the patient populations for which they are approved are
not sufficiently broad, the commercial success of these products could be
limited.

OUR FAILURE TO OBTAIN REGULATORY APPROVALS IN FOREIGN JURISDICTIONS WOULD
PREVENT US FROM MARKETING HECTOROL ABROAD.

We also intend to market our products in international markets, including
the European Union and Japan. We must obtain separate regulatory approvals in
order to market our products in the European Union, Japan and many other foreign
jurisdictions. The regulatory approval processes differ among these
jurisdictions. Approval in any one jurisdiction does not ensure approval in a
different jurisdiction. We intend to collaborate with others to pursue foreign
regulatory approvals and to sell our products in these markets. Hectorol
Injection and Hectorol Capsules have not been approved for marketing by any
governmental entity outside of the U.S. We will require substantial additional
funds to develop the product, conduct clinical trials and gain the necessary
regulatory approvals for Hectorol Injection or Hectorol Capsules in foreign
countries. As a result, revenues from sales of Hectorol outside the U.S. will
require us to invest additional resources or enter into arrangements with
partners.

OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL, THE LOSS OF WHOM COULD IMPAIR OUR
BUSINESS.

Our success depends upon our ability to attract and retain qualified
scientific and technical personnel. Pharmaceutical companies, academic and
government organizations, research institutions and other entities compete for
the services of qualified scientists, technicians and managerial personnel. We
may not be able to attract and retain such personnel. Furthermore, our
anticipated growth and expansion into areas and activities requiring additional
expertise will require additional personnel.

OUR FAILURE TO EXPAND OUR MANAGEMENT SYSTEMS AND CONTROLS TO SUPPORT
ANTICIPATED GROWTH COULD HARM OUR BUSINESS.

Our operations continue to grow and we expect this expansion to continue as
we execute our business strategy. Sustaining our growth has placed significant
demands on management and our administrative, operational, information
technology, financial and personnel resources. Accordingly, our future operating
results will depend on the ability of our officers and other key employees to
continue to implement and improve our operational, quality compliance,
regulatory support and financial control systems, and effectively expand, train
and manage our employee base. We may not be able to manage our growth
successfully, which could seriously harm our operating results and business.

18

RISKS RELATED TO OUR INDUSTRY

WE HAVE MANY COMPETITORS, SEVERAL OF WHICH HAVE SIGNIFICANTLY GREATER
FINANCIAL AND OTHER RESOURCES.

We face competition from several companies that are focused on developing
D-hormone therapies, particularly to treat secondary hyperparathyroidism and
hyperproliferative diseases. We also compete with other companies that produce
D-hormones and D-hormone analogs for international marketplaces where these
treatments have already been approved for secondary hyperparathyroidism and
hyperproliferative diseases. We expect competition to increase further as
additional companies begin to enter our markets and/or modify their existing
products to compete directly with ours. Companies also compete indirectly with
us utilizing different therapeutic approaches. Many of our competitors have
substantially greater financial, research and development and marketing
resources than we do and are better equipped to develop, manufacture and market
products, for example:

o Abbott Laboratories, Inc., markets intravenous calcitriol (Calcijex),
and intravenous paricalcitol (Zemplar), both of which compete with
Hectorol Injection.

o A number of companies, including AAI Pharma, American Pharmaceutical
Partners, Faulding Pharmaceuticals and Gensia Sicor have launched or
are planning to launch generic intravenous calcitriol in the U.S.

o Roche Pharmaceuticals markets oral calcitriol (Rocaltrol) and TEVA
Pharmaceuticals markets a generic form of oral calcitriol. These
products are approved to manage secondary hyperparathyroidism in
kidney dialysis and CKD patients in the U.S. and in European
countries. Oral calcitriol is also approved in Japan.

o A number of companies market oral and intravenous alfacalcidol, a
synthetic analog of calcitriol, in Europe and Japan under various
trade names.

o Other companies, including Amgen, Inc., Chugai Pharmaceutical Co.,
Ltd., and NPS Pharmaceuticals, Inc., also are developing new therapies
to manage secondary hyperparathyroidism in kidney dialysis patients in
the U.S., European or Asian markets.

o Leo Pharmaceuticals Products A/S and TEVA Pharmaceuticals are
marketing alfacalcidol in Europe to manage secondary
hyperparathyroidism in kidney dialysis patients or to treat
osteoporosis in elderly patients associated with secondary
hyperparathyroidism.

o Leo Pharmaceuticals Products A/S and ILEX Oncology, Inc., are
developing D-hormone therapies to treat certain cancers.

o Leo Pharmaceuticals Products A/S and Bristol-Myers Squibb Company are
marketing topical Dovonex in the U.S. and Europe to treat psoriasis.
Teijin Ltd. is marketing topical tacalcitol to treat psoriasis outside
the U.S.

Our competitors may have broad product lines which allow them to negotiate
exclusive, long-term supply contracts and offer comprehensive pricing for their
products. Broader product lines may also provide our competitors with a
significant advantage in marketing competing products to group purchasing
organizations and other managed care organizations that are increasingly seeking
to reduce costs through centralized purchasing. Greater financial resources and
product development capabilities may allow our competitors to respond more
quickly to new or emerging technologies and changes in customer requirements
that may render our products obsolete. These technological developments which
result in Hectorol becoming obsolete or non-competitive may occur before we are
able to achieve profitability. We also face competition for marketing,
distribution and collaborative development agreements, for establishing
relationships with academic and research institutions and for licenses to
intellectual property. Our competitors compete with us in attracting and
retaining qualified scientific and management personnel as well as in acquiring
technologies complementary to our programs.

OUR PRODUCTS AND DEVELOPMENT ACTIVITIES ARE SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION, WHICH COULD MAKE IT MORE EXPENSIVE AND TIME-CONSUMING FOR US TO
CONDUCT OUR BUSINESS.

Any new drug product must undergo lengthy and rigorous clinical testing and
other extensive, costly and time-consuming procedures mandated by the FDA and
foreign regulatory authorities. We may elect to delay or cancel our anticipated
regulatory submissions for new indications for Hectorol or proposed new products
for a number of reasons, including:

o unanticipated clinical testing results;

o lack of sufficient resources;

o changes in, or adoption of, new FDA regulations;

o unanticipated enforcement of existing regulations or guidelines;

o unexpected technological developments; and

o developments by our competitors.

19

The FDA continues to review products even after they receive FDA approval.
The manufacture and marketing of Hectorol is subject to ongoing regulation,
including compliance with the FDA's current Good Manufacturing Practices,
adverse event reporting requirements and the FDA's general prohibitions against
promoting products for "off-label" uses, or uses not listed on the FDA-approved
labeling. We also are subject to inspection and market surveillance by the FDA
for compliance with these and other requirements. Any enforcement action
resulting from failure to comply with these requirements could adversely affect
the manufacturing and marketing of Hectorol. In addition, the FDA could withdraw
a previously approved product from the market upon receipt of new information.

We must also comply with numerous federal, state and local laws,
regulations and recommendations relating to safe working conditions, current
Good Laboratory Practices, current Good Manufacturing Practices and the
experimental use of animals. We cannot predict the extent of government
regulation or the impact of new governmental regulations which might have an
adverse effect on the discovery, development, production and marketing of our
products, and require us to incur significant costs to comply with the
regulations.

RISKS RELATED TO OUR STOCK

CONCENTRATION OF OWNERSHIP IN OUR COMPANY BY CERTAIN SHAREHOLDERS MAY MAKE
IT MORE DIFFICULT TO REPLACE OR REMOVE OUR CURRENT MANAGEMENT.

Based on the number of shares outstanding at September 1, 2003, our
executive officers and directors beneficially own approximately 24% of the
outstanding shares of our common stock and, as a result, have significant
control of us, which they could exert to make it more difficult to replace or
remove our current management.

OUR FUTURE OPERATING RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK IS
LIKELY TO FLUCTUATE SUBSTANTIALLY IN THE FUTURE.

Our stock price has fluctuated substantially since we became a public
company in May 1996. Our stock price, like that of many other biotechnology and
pharmaceutical companies, is likely to remain volatile. The trading price of our
common stock may fluctuate widely as a result of a number of factors, some of
which are not in our control, including:

o market perception and customer acceptance of our products;

o our efforts to increase sales of our Hectorol products;

o quarter-to-quarter variations in our operating results;

o timely implementation of new and improved products;

o our level of investment in research and development;

o increased competition;

o our establishment of strategic alliances or acquisitions;

o changes in our relationships with suppliers;

o litigation concerning intellectual property rights in the industry;

o announcements regarding clinical activities or new products by us or
our competitors;

o timing of regulatory actions, such as product approvals or recalls;

o costs we incur in anticipation of future sales, such as inventory
purchases or expansion of manufacturing facilities;

o general and economic conditions in the biotechnology and
pharmaceutical industry and the state of healthcare cost containment
efforts, including reimbursement policies;

o limited research coverage by independent securities analysts; and

o changes in earnings estimates by analysts.

In addition, the market for our stock has experienced extreme price and
volume fluctuations, which have often been unrelated to our operating
performance. We believe that period-to-period comparisons of our historical and
future results will not necessarily be meaningful and that investors and
prospective investors in Bone Care should not rely on them as an indication of
future performance. To the extent we experience the factors described above, our
future operating results may not meet the expectations of securities analysts or
investors from time to time, which may cause the market price of our common
stock to decline or be volatile.

20

SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY
DEPRESS OUR STOCK PRICE.

Most of our outstanding shares of common stock are freely tradable. The
market price of our common stock could drop due to sales of a large number of
shares or the perception that such sales could occur, including sales or
perceived sales by our directors, officers or principal shareholders. These
factors also could make it more difficult to raise funds through future
offerings of common stock.

RISKS RELATED TO INTELLECTUAL PROPERTY

IF WE ARE UNABLE TO PROTECT OUR PATENTS, OUR COMPETITIVENESS AND BUSINESS
PROSPECTS MAY BE MATERIALLY DAMAGED.

Our success will depend to a significant degree on our ability to obtain
and enforce patents and licenses to patent rights, both in the U.S. and in other
countries. The patent position, however, of pharmaceutical companies is often
uncertain and involves complex legal and factual questions, not the least of
which is that we cannot predict the breadth of patent claims in pharmaceutical
patents. In addition, a substantial backlog of pharmaceutical patent
applications exists at the U.S. Patent and Trademark Office. The backlog may
delay review and potential issuance of patents.

To date, we have filed a number of patent applications in the U.S. and
other countries. Our issued patents and pending patent applications relating to
Hectorol are method-of-use patents which cover only the use of certain compounds
to treat specified conditions, rather than composition-of-matter patents which
would cover the chemical composition of the active ingredient. Method-of-use
patents provide less protection than composition-of-matter patents because of
the possibility of off-label uses if other companies market or make the compound
for other uses. We actively continue to file applications as appropriate for
patents covering our products, uses and processes. We cannot guarantee that we
will obtain patent protection for our products or processes.

We also cannot guarantee that competitors will not successfully challenge
our patents, if issued, on the basis of validity and/or enforceability. Nor can
we guarantee that they will not circumvent or design around our patent position.
We could face increased competition as a result of the failure of patents to be
issued on our pending applications or a finding of invalidity and/or
unenforceability of one of our patents.

In the U.S., patent applications are maintained in secrecy until a patent
issues. We cannot be certain that others have not filed patent applications for
compounds, uses or processes covered by our pending applications. We also cannot
be certain that we were the first to invent or discover the compound, use or
process that is the subject of our applications. Competitors may have filed
applications for, or may have received patents and may obtain additional patents
and proprietary rights relating to, compounds, uses or processes that block or
compete with our patents and rights. We are aware of a significant number of
patent applications relating to D-hormones filed by, and patents issued to,
third parties. If any of our competitors have filed patent applications in the
U.S. that claim compounds, uses or processes also claimed by us, we may have to
participate in an interference proceeding declared by the U.S. Patent and
Trademark Office to determine priority of invention and the corresponding right
to a patent for the compounds, uses or processes in the U.S. A proceeding could
result in substantial cost to us even if the outcome is favorable.

We have not filed patent applications in every country. In certain
countries, obtaining patents for our products, processes and uses may be
difficult or impossible. Patents issued in countries and regions other than the
U.S., Japan and Europe may be harder to enforce than, and may not provide the
same protection as, patents obtained in the U.S., Europe and Japan.

IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS AND TRADE SECRETS, OUR
COMPETITIVENESS AND BUSINESS PROSPECTS MAY BE MATERIALLY DAMAGED.

Operation of our business also relies on our ability to protect proprietary
information and trade secrets. We require our employees, consultants and
advisors to execute confidentiality agreements upon commencement of employment
or consulting relationships with us. We cannot guarantee, however, that these
agreements will provide meaningful protection or adequate remedies for our
proprietary information and trade secrets in the event of unauthorized use or
disclosure of such information nor can we guarantee that the parties to the
agreements will not breach their agreements. We also cannot guarantee that third
parties will not know, discover or develop independently equivalent proprietary
information or techniques, that they will not gain access to our trade secrets
or disclose our trade secrets to the public. Therefore, we cannot guarantee that
we can maintain and protect unpatented proprietary information and trade
secrets.

21

WE MAY BE ACCUSED OF INFRINGING UPON THE PROPRIETARY RIGHTS OF OTHERS AND
ANY RELATED LITIGATION COULD DAMAGE OUR BUSINESS.

Our commercial success depends significantly on our ability to operate our
business without infringing upon the patents and other proprietary rights of
third parties. We cannot guarantee that our compounds, uses or processes do not
and will not infringe upon the patents and proprietary rights of third parties.
In the event of an infringement determination, we may be enjoined from research,
development or commercialization of our products. We may also be required to
enter into royalty or license arrangements with third parties claiming
infringement or otherwise to design around their patents. Any required license,
if available at all, may not be obtained on commercially reasonable terms. If we
do not obtain the licenses or are unable to design around the patent, we may be
delayed or prevented from pursuing the development of some of our product
candidates.

ITEM 2. PROPERTIES

We currently lease approximately 34,000 square feet of office and
laboratory space in Middleton, Wisconsin. This lease expires in January 2006. We
believe our facilities are adequate to meet our needs for the foreseeable
future.

ITEM 3. LEGAL PROCEEDINGS

We may be a defendant from time to time in actions arising out of our
ordinary business operations. There are no material legal proceedings pending.

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

None.

PART II

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

Our common stock is quoted on the Nasdaq National Market under the symbol
"BCII" and has been publicly traded since May 1996. The following table sets
forth high and low sales prices per share of our common stock, as reported on
the Nasdaq National Market for fiscal years 2002 and 2003 as indicated.

As of September 15, 2003, approximately 180 shareholders of record held our
common stock. This does not reflect beneficial shareholders who hold their stock
in nominee or "street" name through various brokerage firms.

We have never declared or paid any cash dividends on our common stock, and
we do not plan on paying any in the near future. Any future determination as to
the declaration and payment of dividends will be at the discretion of our board
of directors and will depend on then existing conditions, including our
financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and other factors our board of directors deem
relevant.

22

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected statements of operations data and
balance sheet data for the fiscal years ended June 30, 1999, 2000, 2001, 2002
and 2003. The financial data with respect to our statements of operations for
the fiscal years ended June 30, 2001, 2002 and 2003 and with respect to our
balance sheets as of June 30, 2002 and 2003 are derived from our audited
financial statements that appear elsewhere in this filing. The following
statements of operations data for fiscal years ended June 30, 1999 and 2000 and
balance sheet data as of June 30, 1999, 2000 and 2001 are derived from our
audited financial statements not included in this filing. You should read the
financial statement data in conjunction with the discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements and the related notes to those audited
financial statements included elsewhere in this filing. We did not declare or
pay any cash dividends over the five-year period presented in this table.

23

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

The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the related notes
included elsewhere in this filing.

OVERVIEW

Bone Care is a specialty pharmaceutical company engaged in discovering,
developing and commercializing improved vitamin D-hormone therapies to treat
secondary hyperparathyroidism in patients with kidney (or renal) disease, and
other diseases, including osteoporosis, psoriasis and cancers of the prostate,
breast and colon. We were founded in 1984 as a subsidiary of Lunar Corporation,
located in Madison, Wisconsin, and we were spun off from Lunar in 1996.

We licensed our first product, doxercalciferol or Hectorol, as it is known
commercially, in 1987 from the University of Wisconsin, a leading vitamin D
research center. Hectorol is a vitamin D-hormone replacement therapy approved by
the FDA in two formulations to treat secondary hyperparathyroidism in patients
with end-stage renal disease, or ESRD. Hectorol is a safe and effective therapy
for reducing elevated levels of parathyroid hormone (PTH) in blood in the
management of secondary hyperparathyroidism, a disease characterized by
excessive secretion of PTH. Hyperparathyroidism, if left untreated, can
eventually result in cardiovascular compromise, reduced immunity, muscle
weakness, bone loss and fractures. Virtually all ESRD patients suffer from
secondary hyperparathyroidism. We obtained FDA approval for Hectorol Capsules in
June 1999, and we began selling this orally administered product in the U.S. in
October 1999. We obtained FDA approval for Hectorol Injection in April 2000, and
we launched this intravenous product in the U.S. in August 2000, and we received
a national Medicare reimbursement code for Hectorol Injection in January 2002.
We are also developing doxercalciferol and other vitamin D-hormones to treat
several other diseases. We filed a supplemental New Drug Application with the
FDA in December 2001 to treat secondary hyperparathyroidism in chronic kidney
disease (CKD) patients. We received an "approvable letter" from FDA in October
2002, for which we have provided our response. If approved, this would expand
the approved indications for Hectorol Capsules.

From our inception in 1984, we have generated minimal revenue from
operations, and from our inception substantially all of our resources have been
dedicated to:

o the development, patenting, pre-clinical testing, and clinical trials
of Hectorol Capsules and Hectorol Injection;

o the development of manufacturing processes for Hectorol Capsules and
Hectorol Injection;

o pursuing U.S. regulatory approvals of Hectorol Capsules and Hectorol
Injection;

o the sales and marketing associated with the launch of Hectorol
Capsules and Hectorol Injection; and

o research and development and pre-clinical testing of other potential
product candidates.

We have lost money since inception and, as of June 30, 2003 have an
accumulated deficit of approximately $53.2 million. Our only sources of revenue
have been:

o revenues from the launch of Hectorol Capsules and Hectorol Injection;

o licensing fees associated with our early stage research
collaborations, which licenses have since expired; and

o fees from conducting incidental laboratory assay services.

We estimate that total operating expenses will continue to increase in
fiscal 2004 and we do not expect to achieve profitable operating levels until
the fourth quarter of fiscal year 2004. Further, development of LR-103, BCI-202
and other product candidates, or expansion of Hectorol into other therapeutic
areas, will require significant, time-consuming and costly research and
development, pre-clinical testing and extensive clinical trials prior to
submission of any regulatory application for commercial use. We plan to continue
pre-clinical testing of LR-103 and BCI-202 and we currently plan to begin Phase
I clinical trials on LR-103 in fiscal year 2004. We expect to incur losses into
the year ended June 30, 2004 until revenues from the sale of Hectorol products
are sufficient to offset those expenses. The amount and timing of our operating
expenses will depend on many factors, including:

24

o the extent to which Hectorol Capsules and Hectorol Injection obtain
expanded market acceptance;

o the costs of sales and marketing activities associated with Hectorol
Capsules and Hectorol Injection;

o the status of our research and development activities;

o the costs involved in preparing, filing, prosecuting, maintaining,
protecting and enforcing our patent claims and other proprietary
rights;

o our ability to maintain our current manufacturing capabilities through
relationships with third parties or establish those capabilities
internally;

o technological and other changes in the competitive landscape; and

o evaluation of the commercial viability or potential of product
candidates, which could significantly affect future expenditures for
sales, marketing and product development.

As a result, we believe that period-to-period comparisons of our financial
results are not necessarily meaningful.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our significant accounting policies are described in Note 1 to the Notes to
the Financial Statements included elsewhere in this filing. Those financial
statements have been prepared in accordance with accounting principles generally
accepted in the U.S. of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, we evaluate our estimates, including those
related to our provision for sales returns and allowances, allowance for
doubtful accounts, and our estimate of excess and obsolete inventory. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis of judgments regarding the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

Sales Returns and Allowances

When revenue is recognized, Bone Care simultaneously records an estimate of
various costs, which reduce product sales. These costs include estimates for
product returns, chargebacks, rebates, and discounts. Estimates are based on a
variety of factors including historical return experience, rebate and chargeback
agreements, inventory levels at our wholesale customers, and estimated sales by
our wholesale customers to other third parties who have contracts with us,
respectively. Actual experience associated with any of these items may differ
materially from our estimates. Factors are reviewed that influence our estimates
and, if necessary, adjustments are made when we believe that actual product
returns, chargebacks, rebates, and discounts may differ from established
reserves.

Allowance for Doubtful Accounts

An allowance is maintained for estimated losses resulting from the
inability of customers to make required payments. Credit terms are extended on
an uncollateralized basis primarily to wholesale drug distributors and
independent clinics throughout the U.S. Management specifically analyzes
accounts receivable, historical bad debts, customer credit-worthiness,
percentage of accounts receivable by aging category, and changes in customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. If the financial condition of our customers were to deteriorate,
resulting in impairment in their ability to make payments, additional allowances
may be required. Our actual losses from uncollectible accounts have been
immaterial to date.

Excess and Obsolete Inventory

Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out method. In evaluating whether inventory is stated at
the lower of cost or market, management considers such factors as the amount of
inventory on hand, expiration dates, and the estimated time to sell such
inventory. As appropriate, provisions are made to reduce inventories

25

to their net realizable value. Cost of inventories that potentially may not sell
prior to expiration or are deemed of no commercial value have been written-off
when identified.

RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED JUNE 30, 2003 COMPARED TO JUNE 30,
2002

Product sales increased to $19,518,274 for the year ended June 30, 2003,
from $14,990,749 for the year ended June 30, 2002. This increase resulted from
increased sales of Hectorol Injection offset by a decrease in sales of Hectorol
Capsules. Hectorol Injection, launched in August 2000, generated sales of
$15,122,224 during the year ended June 30, 2003 compared to $9,448,115 in the
year ended June 30, 2002, reflecting increased market acceptance in spite of our
inability to supply Hectorol Injection for approximately 3 months between
December 2002 and March 2003. Hectorol Capsule sales were $4,396,050 for the
year ended June 30, 2003, compared to $5,542,634 for the year ended June 30,
2002. Fiscal year 2002 Hectorol Capsule revenues benefited from a temporary
supply shortage of the competitive drug Rocaltrol between August and December
2001.

Gross margins on product sales were $12,535,099, or 64% of product sales,
for the year ended June 30, 2003 compared to $11,434,062, or 76% of product
sales, for the year ended June 30, 2002. The gross margin on Hectorol Injection
sales was 59% and 71% for the years ended June 30, 2003 and 2002, respectively.
The gross margin on Hectorol Capsule sales was 83% and 85% for the years ended
June 30, 2003 and 2002, respectively. Overall gross margins were lower as a
percentage of sales in fiscal year 2003 compared to fiscal year 2002 due to an
increased cost of Hectorol Injection supplied by Draxis Pharma Inc. as compared
to Akorn, Inc., increased spending for quality assurance, and costs associated
with the validation activities for the Hectorol Injection manufacturing
processes. Validation costs for Hectorol Injection were $1,078,859 for the year
ended June 30, 2003. No validation costs were incurred in the year ended June
30, 2002.

Our research and development expenses were $6,018,693 in the year ended
June 30, 2003, compared to $5,739,152 in the year ended June 30, 2002. The
$279,541 increase is attributable to consulting expenses related to validating
computer network systems used in operating clinical software, and internal costs
to file the supplemental new drug application (SNDA) for 0.5mcg Hectorol
Capsules.

Sales and marketing expenses increased $3,157,948 to $13,433,861 in the
year ended June 30, 2003, from $10,275,913 in the year ended June 30, 2002.
These increases are attributable to the addition of senior level positions
within the sales and marketing departments and increased market research and
promotional spending related to the peritoneal dialysis and chronic kidney
disease markets.

General and administrative expenses increased $1,754,850 to $5,334,913 in
the year ended June 30, 2003, from $3,580,063 in the year ended June 30, 2002.
The increase was attributable to costs associated with the compensation package
for the new President and CEO, increases in insurance premiums for property,
casualty, and liability policies, and increases in legal fees.

Interest income decreased $682,776 to $574,395 in the year ended June 30,
2003, from $1,257,171 in the year ended June 30, 2002. The decrease was due to
lower average cash and marketable security balances for the year ended June 30,
2003, as well as a decline in yield on our investments.

RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED JUNE 30, 2002 COMPARED TO JUNE 30,
2001

Product sales increased to $14,990,749 for the year ended June 30, 2002,
from $5,997,282 for the year ended June 30, 2001. This increase resulted from
increased sales of both Hectorol Injection and Hectorol Capsules. Hectorol
Injection, launched in August 2000, generated sales of $9,448,115 during the
year ended June 30, 2002 compared to $5,022,454 in the year ended June 30, 2001.
Hectorol Capsule sales were $5,542,634 for the year ended June 30, 2002,
compared to $974,828 in the year ended June 30, 2001.

Gross margins on product sales were $11,434,062, or 76% of product sales,
for the year ended June 30, 2002 compared to $4,092,443, or 68% of product
sales, for the year ended June 30, 2001. The gross margin on Hectorol Injection
sales was 71% and 72% for the years ended June 30, 2002 and 2001, respectively.
The gross margin on Hectorol Capsule sales was 85% and 51% for the years ended
June 30, 2002 and 2001, respectively. The increase in Hectorol Capsule gross
margins was the result of selling inventory that was previously written-off.
Cost of sales includes a writedown of $98,373 of excess Hectorol Capsule
inventory in fiscal year 2002, $260,000 in fiscal year 2001 and $364,000 in
fiscal 2000, representing amounts we estimated would not be sold prior to the
expiration date. During the year ended June 30, 2002, Bone Care subsequently
recovered approximately $300,000 of Hectorol Capsule inventory that was
previously written-off when the FDA agreed to extend the expiration date from
four to five years. We also wrote off $67,444 of Hectorol Injection inventory in
the year ended June 30, 2002 that did not meet quality control release test
standards.

26

Our research and development expenses were $5,739,152 in the year ended
June 30, 2002 compared to $4,556,061 in the year ended June 30, 2001. The
$1,183,091 increase is attributable to expanded preclinical studies designed to
evaluate early stage compounds in the treatment of psoriasis and prostate,
breast, and colon cancers; an increase of one preclinical and two clinical
positions and related salaries and benefits; and increased facility costs at our
new Middleton, Wisconsin, site.

Sales and marketing expenses increased $3,078,074 to $10,275,913 in the
year ended June 30, 2002 from $7,197,839 in the year ended June 30, 2001. These
increases are attributable to an increase in the sales force from 29 to 40
during the year ended June 30, 2002. We also increased the clinical support
staff from 5 to 7, and the marketing staff from 4 to 9 during the year ended
June 30, 2002. We implemented these headcount increases in anticipation of a
national J-code that became effective January 1, 2002. This code was issued by
the Centers for Medicare and Medicaid Services (CMS) for reimbursement of
Hectorol Injection during hemodialysis.

General and administrative expenses increased $918,328 to $3,580,063 in the
year ended June 30, 2002 from $2,661,735 in the year ended June 30, 2001. The
increase was the result of our overall growth and related expansion of
infrastructure to support Bone Care's increased commercial activities. These
increases include costs associated with the executive search for the President
and CEO position, increased insurance premiums, salaries and general legal fees.

Interest income decreased $51,770 to $1,257,171 in the year ended June 30,
2002 from $1,308,941 in the year ended June 30, 2001. The decrease was due to
lower average cash and marketable security balances for the year ended June 30,
2002, as well as a decline in yield on our investments.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $5,457,961 in fiscal year 2003,
$6,639,200 in fiscal year 2002 and $12,581,831 in fiscal year 2001. The cash
used by operating activities was used primarily to fund research and development
as well as marketing and commercialization efforts for Hectorol Capsules and
Hectorol Injection.

We have experienced negative cash flows from operations since our inception
and do not anticipate generating sufficient positive cash flows to fund our
operations until we achieve, if ever, sufficient revenues from the sale of
Hectorol Capsules and Hectorol Injection. We have expended, and expect to
continue to expend in the future, substantial funds for our:

o research and development programs;

o pre-clinical and clinical testing;

o regulatory processes, including completion of FDA post-approval Phase
IV commitments for Hectorol Capsules and Hectorol Injection;

o manufacturing expenses;

o sales and marketing programs; and

o other operating expenses.

Cash, cash equivalents and short- and long-term marketable securities were
$17,603,445 at June 30, 2003 and $24,180,661 at June 30, 2002. Cash and cash
equivalents and investments are currently comprised primarily in money market
funds, short-term investment grade U.S. government, municipal and corporate debt
securities.

Bone Care's working capital requirements will depend on numerous factors,
including the progress of commercialization and marketing activities; the
progress of its research and development programs; the progress of preclinical
and clinical testing; the time and cost involved in obtaining regulatory
approvals; the cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights; competing technological and
market developments; changes and developments in Bone Care's existing licensing
relationships and the terms of any new collaborative, licensing, co-promotion or
distribution arrangements that Bone Care may establish; the cost of
manufacturing preclinical and clinical products; and other factors not within
our control.

27

Based upon our current plans, we believe that we will have sufficient funds
to meet our operating expenses and capital requirements for at least the next
year. If necessary, additional capital to fund our operations may be sought
through equity or debt offerings or other financings. There is no assurance that
such additional funds will be available on acceptable terms, if at all.

At June 30, 2003, we had state tax net operating loss carryforwards of
approximately $44,337,000 and state research and development tax credit
carryforwards of approximately $621,000, which will begin expiring in 2006 and
2011, respectively. We also had federal net operating loss carryforwards of
approximately $48,770,000 and research and development tax credit carryforwards
of approximately $2,040,000, which will begin expiring in 2011 and 2012,
respectively.

COMMITMENTS

As outlined in Note 6 of the notes to financial statements of Bone Care
included in this annual report on Form 10-K, we have entered into various
contractual obligations and commercial commitments. The following table
summaries these contractual obligations as of June 30, 2003.

(1) Represents extended terms on purchases of active pharmaceutical
ingredient used in Hectorol production.

(2) Represents office and laboratory facilities in Middleton, WI.

(3) Purchase commitment for active pharmaceutical ingredients used in
Hectorol production and pre-clinical research.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN No. 45 requires that a guarantor must recognize, at the inception
of a guarantee, a liability for the fair value of the obligation that it has
undertaken in issuing a guarantee. FIN No. 45 also addresses the disclosure
requirements that a guarantor must include in its financial statements for
guarantees issued. The disclosure requirements in this interpretation are
effective for financial statements ending after December 15, 2002. The initial
recognition and measurement provisions of this interpretation are applicable on
a prospective basis to guarantees issued or modified after December 31, 2002.
Bone Care has not issued guarantees of indebtedness as of June 30, 2003.

In December 2002, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation" and provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
No. 123 to require more prominent and more frequent disclosures in financial
statements of the effects of stock-based compensation. The interim disclosure
requirements of SFAS No. 148 are effective for interim periods beginning after
December 15, 2002. Bone Care's stock-based compensation related to employees and
non-employee directors is recognized using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and thus there is no compensation expense for
options granted with exercise prices equal to the fair value of Bone Care's
common stock on the date of the grant.

28

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our sales from inception to date have been made solely to U.S.
customers, and as a result, we have not had any exposure to factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. However, in future periods, we expect to sell in foreign
markets, including Europe and Asia. As our sales are made in U.S. dollars, a
strengthening of the U.S. dollar could make our products less competitive in
foreign markets.

As of June 30, 2003, we held $13,624,826 of short-term marketable
securities and $913,401 of long-term marketable securities. The investments have
been made for investment (as opposed to trading) purposes. Interest rate risk
with respect to our investments is not significant as all such investments are
in U.S. dollar cash equivalents and are:

o short-term investments, which are by their nature less
sensitive to interest rate movements, or

o have maturities in excess of one year and are expected to be
held to maturity, thereby eliminating the risks associated
with interest rate changes.

29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

BONE CARE INTERNATIONAL, INC.

INDEX TO FINANCIAL STATEMENTS

30

INDEPENDENT AUDITORS' REPORT

To the Shareholders of
Bone Care International, Inc.:

We have audited the accompanying balance sheets of Bone Care International,
Inc. as of June 30, 2003 and 2002, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. Our audits also
included the 2003 and 2002 financial statement schedules included in Item 14.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the 2003 and 2002 financial statements and financial statement
schedules based on our audits. The financial statements and financial schedule
for the year ended June 30, 2001, before the inclusion of the transitional
disclosures required by Statement of Financial Accounting Standard ("SFAS") No.
142 Goodwill and Other Intangible Assets discussed in Note 1 of the financial
statements, were audited by other auditors who have ceased operations. Those
other auditors expressed an unqualified opinion on those financial statements
and stated that such 2001 financial statement schedule, when considered in
relation to the 2001 basic financial statements taken as a whole, presented
fairly, in all material respects, the information set forth therein, in their
report dated August 1, 2001.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 2003 and 2002 financial statements present fairly, in
all material respects, the financial position of Bone Care International, Inc.
as of June 30, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
2003 and 2002 financial statement schedules, when considered in relation to the
2003 and 2002 basic financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.

As discussed above, the financial statements of Bone Care International,
Inc. for the year ended June 30, 2001, were audited by other auditors who have
ceased operations. As described in Note 1, these financial statements have been
revised to include the transitional disclosures required by SFAS No. 142, which
was adopted by the Company as of July 1, 2001. Our audit procedures with respect
to the disclosures in Note 1 with respect to 2001 included (i) comparing the
previously reported net income to the previously issued financial statements and
the adjustments to reported net income representing amortization expense
(including any related tax effects) recognized in those periods related to
goodwill to the Company's underlying records obtained from management, and (ii)
testing the mathematical accuracy of the reconciliation of adjusted net income
to reported net income and the related loss-per-share amounts. In our opinion,
the disclosures for 2001 in Note 1 are appropriate. However, we were not engaged
to audit, review, or apply any procedures to the 2001 financial statements of
the Company other than with respect to such disclosures and, accordingly, we do
not express an opinion or any other form of assurance on the 2001 financial
statements taken as a whole.

Deloitte & Touche LLP

Milwaukee, Wisconsin
August 1, 2003

31

THIS REPORT SET FORTH BELOW IS A COPY OF A PREVIOUSLY ISSUED AUDIT REPORT BY
ARTHUR ANDERSEN LLP AND INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED JUNE 30, 2001. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP, AND ARTHUR ANDERSEN LLP HAS NOT CONSENTED TO ITS USE IN THIS FORM
10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To: The Board of Directors and Shareholders of
Bone Care International, Inc.:

We have audited the accompanying balance sheets of Bone Care International,
Inc. (a Wisconsin corporation) as of June 30, 2001 and 2000, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements 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 Bone Care International,
Inc., as of June 30, 2001 and 2000, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 2001 in
conformity with accounting principles generally accepted in the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at item
14.1 is the responsibility of the Company's management and is presented for the
purposes of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Milwaukee, Wisconsin
August 1, 2001

32

BONE CARE INTERNATIONAL, INC.
BALANCE SHEETS
AS OF JUNE 30, 2002 AND 2003

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

33

BONE CARE INTERNATIONAL, INC.

STATEMENTS OF OPERATIONS

YEARS ENDED JUNE 30, 2001, 2002 AND 2003

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

34

BONE CARE INTERNATIONAL, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED JUNE 30, 2001, 2002, AND 2003

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

35

BONE CARE INTERNATIONAL, INC.

STATEMENTS OF CASH FLOWS

YEARS ENDED JUNE 30, 2001, 2002, AND 2003

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

36

BONE CARE INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2001, 2002 AND 2003

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Bone Care International, Inc. (Bone Care) is engaged in discovering,
developing and commercializing improved D-hormone therapies. In June 1999, Bone
Care received approval from the U.S. Food and Drug Administration for an oral
formulation of Hectorol, and in May 2000, Bone Care received approval for the
intravenous formulation. Hectorol Injection has not been approved for sale
outside of the U.S. and Hectorol Capsules are approved for sale only in the U.S.
and Canada. Hectorol is a synthetic D-hormone analog to manage secondary
hyperparathyroidism in kidney dialysis patients.

Revenue Recognition

Bone Care records sales and the related costs of Hectorol Capsules and
Hectorol Injection based on shipments to its customers reduced by the estimated
future returns and allowances. The terms of sale for all product sales are
F.O.B. shipping point. Revenue is recognized at the time of shipment as risk of
loss has transferred to the customer, delivery has occurred, and collectibility
is reasonably certain. Customers have a right to return product if they are
unable to sell it prior to the expiration date. In accordance with Statement of
Financial Accounting Standard (SFAS) No. 48, "Revenue Recognition When Right of
Return Exists", Bone Care's June 30, 2003 and 2002 balance sheets include an
accrual of $336,620 and $226,100, respectively for the estimated amount of
future returns, based on historical experience, related to Hectorol Capsules and
Hectorol Injection.

Cash, Cash Equivalents and Marketable Securities

Highly liquid investments with original maturities of ninety days or less
at the time of purchase are considered to be cash equivalents. Other highly
liquid marketable securities with remaining maturities of one year or less at
the balance sheet date are classified as marketable securities. Bone Care
classifies its investment securities as available for sale or held to maturity
when management has the positive intent and ability to hold the securities to
maturity. Those investments classified as available-for-sale are carried in the
balance sheet at fair value, with unrealized gains and losses recorded within
accumulated other comprehensive income, net of tax. Those investments classified
as held to maturity are carried in the balance sheet at amortized cost, net of
unamortized discounts or premiums. Dividends, interest income and amortization
of discounts and premiums are recorded in current earnings.

Inventory

Inventory is stated at the lower of cost or market; cost is determined by
the first-in, first-out method. Inventory consists of:

Bone Care periodically reviews its inventory carrying levels. During fiscal
years 2001, 2002 and 2003, Bone Care wrote-off $260,000, $165,817 and $11,144,
respectively, of inventory representing amounts, which Bone Care estimates will
not be sold prior to expiration.

37

BONE CARE INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JUNE 30, 2001, 2002 AND 2003

Shipping and Handling Costs

Shipping and handling costs associated with product sales are included in
cost of sales.

Depreciation and Amortization

Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives. Accelerated methods of depreciation are used for financial statement and
income tax reporting purposes for all asset classes except for leasehold
improvements, which are depreciated based on straight-line for financial
statement reporting and accelerated methods for income tax reporting. The cost
of property, plant and equipment are depreciated over the following estimated
useful lives:

Long-Lived Assets

The Company periodically evaluates the carrying value of property and
equipment in accordance with SFAS No. 144,"Accounting for the Impairment or
Disposal of Long-Lived Assets." Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized for the differences
between the fair value and the carrying value of the asset.

Intangible Assets

Legal costs incurred to register patents are amortized on a straight line
basis over the life of the patent. Bone Care continuously evaluates whether
events and circumstances have occurred that indicate the remaining estimated
useful life of intangibles may warrant revision or that the remaining balance of
intangibles may not be recoverable. When factors indicate that intangibles
should be evaluated for possible impairment, Bone Care assesses recoverability
from expected future operations using undiscounted cash flows. Impairment would
be recognized in operating results if a permanent diminution in value occurred.
Impairment would be measured using fair value. The average remaining useful life
of our patents as of June 30, 2003 was 9.9 years.

The aggregate amounts of anticipated amortization of intangible assets for
each of the next five fiscal years and thereafter are as follows:

On July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, existing goodwill at June 30, 2001 will
no longer be amortized. Instead, an assessment of fair value will be used to
test for impairment of goodwill on an annual basis or when circumstances
indicate a possible impairment. The Company performed the

38

BONE CARE INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JUNE 30, 2001, 2002 AND 2003

transitional impairment assessment of goodwill on December 31, 2001 and the
annual assessment on June 30, 2002 and 2003 and found no instances of
impairment. Prior to adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over fifteen years.

The results for periods prior to adoption of SFAS No. 142 have not been
restated. The following table reconciles net loss and per share amounts to that
which would have resulted if SFAS 142 had been adopted prior to fiscal 2001.

Research and Development Costs

Materials, labor and overhead expenses related to research and development
projects are charged to operations as incurred.

Stock-based Compensation

Stock-based compensation related to employees and non-employee directors is
recognized using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
thus there is no compensation expense for options granted with exercise prices
equal to the fair value of Bone Care's common stock on the date of the grant.

Net Loss Per Share

Net loss per share is based on a weighted average number of shares of
common stock of 12,883,632, 14,084,313, and 14,174,594 for the years ended June
30, 2001, 2002 and 2003, respectively. Options to purchase common stock have
been excluded from the calculation of diluted earnings per share as the impact
of these options on diluted earnings per share would be antidilutive. The
excluded options totaled 1,018,683, 689,133, and 1,931,233 for the years ended
June 30, 2001, 2002 and 2003, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and credit carry forwards. Deferred tax assets and
liabilities are measured using enacted rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The amount of deferred tax assets is reduced to the amount of any tax

39

BONE CARE INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JUNE 30, 2001, 2002 AND 2003

benefits that Bone Care believes are more likely than not to be realized.
Because Bone Care has not yet reached profitability and future profitability
cannot be assured, no value has been recorded for deferred tax assets.

Fair Value of Financial Instruments

The fair value of financial instruments, which consisted of cash and cash
equivalents, receivables, accounts payable and accrued liabilities, approximated
their carrying values at June 30, 2002 and 2003 due to the short-term nature or
underlying terms of these instruments. The fair value of marketable securities
is based on quoted market prices.

Concentration of Risk

Bone Care has no internal manufacturing capabilities. Bone Care relies on
third party contractors to produce our active pharmaceutical ingredient and for
the subsequent manufacturing and packaging of finished drug products.

Bone Care purchases the active pharmaceutical ingredient in Hectorol from a
single supplier. Management is working toward qualifying an additional active
pharmaceutical ingredient supplier. In addition, Bone Care utilizes one supplier
to formulate Hectorol IV, one supplier to formulate Hectorol capsules and
another supplier to package Hectorol Capsules. However, management believes that
other suppliers, formulators, and vendors are available and could provide these
goods and services to Bone Care on comparable terms. A change in suppliers,
however, could cause a delay in manufacturing and a possible loss of sales,
which would adversely affect operating results.

In December 2001, Akorn, Inc. (previously the sole manufacturer of Hectorol
Injection) agreed to halt production of Hectorol Injection until such time as
certain general deviations from the FDA's current Good Manufacturing Practices
could be remediated. The FDA's site inspection, which concluded in February
2003, resulted in additional inspectional observations that preclude submission
of a supplement with respect to the manufacture and process improvements at
Akorn. Akorn is not currently producing Hectorol Injection. Bone Care has
entered into a manufacturing agreement with Draxis Pharma Inc., a subsidiary of
Draxis Health Inc., to serve as a manufacturer of Hectorol Injection. Draxis has
completed the validation process and on February 6, 2003, Bone Care submitted to
the FDA a CBE-30 supplement (changes being effective in 30 days) to add Draxis
as an additional manufacturing site for Hectorol Injection. This submission was
accepted by the FDA and allowed commercial distribution to begin in March 2003.
Management believes that Draxis will have sufficient production capacity to meet
the currently expected demand from existing and new customers and patients.

Bone Care's customers primarily consist of wholesale distributors of
pharmaceutical products. Bone Care utilizes these wholesale distributors as the
principal means of distributing its products to clinics and hospitals. Five
individual wholesale distributors comprise $3,933,000, or 88%, of the gross
accounts receivable balance as of June 30, 2003. These same five wholesale
distributors represented 92% of Bone Care's net revenues for the year ended June
30, 2003, with the largest of the five wholesale distributors representing 34%
of net revenues. As of June 30, 2002 five individual customers comprised
$4,316,000, or 71%, of the gross accounts receivable balance. These same five
customers represented 69% of Bone Care's net revenues for the year ended June
30, 2002, with the largest of the five companies representing 27% of net
revenues.

The majority of cash and cash equivalents are maintained with two major
financial institutions in the U.S. Deposits with these banks may exceed the
amount of insurance provided on such deposits; however, these deposits typically
may be redeemed upon demand and, therefore, bear minimal risk.

40

BONE CARE INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JUNE 30, 2001, 2002 AND 2003

Use of Estimates

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

Advertising Expenses

Bone Care expenses advertising costs as incurred. Advertising expenses were
$1,075,300, $688,758, and $944,362 for years ended June 30, 2001, 2002 and 2003,
respectively.

(2) SHAREHOLDERS' EQUITY

In December 2000, Bone Care completed a public offering of 2,300,000 shares
of common stock at a price of $16.00 per share. Bone Care received proceeds of
$33,657,000 from the sale, net of offering expenses. In January 2001, the
underwriters of the Company's December 2000 common stock offering exercised
their over-allotment option to acquire 145,000 additional shares of common stock
at a price of $16.00 per share. Bone Care received proceeds of $2,115,800 from
the sale, net of offering expenses.

(3) STOCK OPTIONS

Bone Care has granted options to key employees and directors under two
separate programs.

Under the first option program, titled the Bone Care International, Inc.,
1996 Stock Option Plan, a total of 1,000,000 shares of common stock were made
available. This stock option plan was amended in November 2000 and November 2001
to increase the number of available shares to 2,300,000 of which 58,567 remained
available for grant at June 30, 2003. Options granted under this program have an
exercise price equal to the Company's common stock trading price on the date of
the grant and vest over periods ranging from one to five years. The options will
expire 10 years from the grant date, or upon termination of employment.

Under the second option program, titled the Bone Care International, Inc.,
2002 Stock Incentive Plan, a total of 750,000 shares of common stock were made
available in November 2002 of which 600,000 remained available for grant at June
30, 2003. Under the 2002 Plan, the Committee may grant to eligible participants
non-qualified stock options and incentive stock options to purchase shares of
common stock. Options granted under this program have an exercise price equal to
the Company's common stock trading price on the date of the grant and vest over
a period of three years. The options will expire 10 years from the grant date,
or upon termination of employment.

41

BONE CARE INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JUNE 30, 2001, 2002 AND 2003

A summary of stock option activity and related information is presented
below:

The options outstanding at June 30, 2003 have been segregated into six
ranges for additional disclosure as follows:

Bone Care has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its employee stock options, and as a result, no compensation
expense for stock options was recognized. For disclosure purposes only under the
SFAS No. 123, Accounting for Stock-Based Compensation, the Black-Scholes option
pricing model was used to calculate the "fair value" of stock options using the
following weighted-average assumptions:

No dividends are expected to be paid.

42

BONE CARE INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JUNE 30, 2001, 2002 AND 2003

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Bone Care's
pro forma information follows:

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

(4) SHAREHOLDERS' RIGHTS PLAN AND PREFERRED STOCK

In 1996, Bone Care adopted a Shareholders' Rights Plan. Under this plan,
each share of common stock has associated with it one preferred share purchase
right (a Right). Under certain circumstances, each Right would entitle holders
to purchase from Bone Care 1/200th of one share of Series A Junior Participating
Preferred Stock for the price of $12.50 per 1/200th of a share. The Rights do
not have voting or dividend rights and, until they become exercisable, have no
dilutive effect on per-share earnings. The Rights are not presently exercisable
and are transferable only with the related shares of common stock. The Board of
Directors has designated 140,000 shares of the Preferred Stock as Series A
Junior Participating Preferred Stock in connection with the Rights.

43

BONE CARE INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JUNE 30, 2001, 2002 AND 2003

(5) INCOME TAXES

As of June 30, 2003, Bone Care has federal net operating losses of
$48,770,000 and R&D tax credit carryforwards of $2,040,000, which expire in 2011
through 2023. As of June 30, 2003, Bone Care also has state net operating losses
of $44,337,000 and R&D tax credit carry-forwards of $621,000, which expire in
2006 through 2023.

Significant components of Bone Care's deferred tax assets at June 30, 2002
and 2003 are as follows:

The net change in the valuation allowance for the years ended June 30, 2002
and 2003 was an increase of $2,949,000 and $4,867,000, respectively. Realization
of deferred tax assets is dependent upon generating sufficient taxable income
prior to the expiration of the related carryforward period. Management believes
it is more likely than not that such deferred tax assets may expire unused and,
accordingly, has established a valuation allowance against them. The difference
between the federal statutory rate and the Company's effective tax rate is the
result of state taxes and the valuation allowance.

(6) COMMITMENTS

Bone Care has an operating lease for its office and laboratory facilities
which commenced in January 2001 and terminates in January 2006. Lease payments
under this lease include utilities, operating costs, and property taxes. The
lease agreement provides for lease payments, which average $55,670 per month.
Total lease expense was $412,212, $649,182, and $668,045 for the years ended
June 30, 2001, 2002, and 2003, respectively.

Minimum future payments under this lease as of June 30, 2003, are as
follows:

2004 .................... 676,739
2005 .................... 695,350
2006 .................... 352,391
Thereafter .............. --
----------
Total ......... $1,724,480
==========

At June 30, 2003, the Company had a purchase commitment for $1,080,000 and
$370,000 for the active pharmaceutical ingredient to be used in Hectorol
production and for the active pharmaceutical ingredient to be used in
pre-clinical research, respectively.

44

BONE CARE INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JUNE 30, 2001, 2002, AND 2003

At June 30, 2003, the Company owed $696,000, due July 31, 2004, for the
purchase of the active pharmaceutical ingredient to be used in Hectorol
production.

(7) PROFIT-SHARING PLAN

Bone Care has established a 401(k) profit sharing plan covering
substantially all employees. Employer contributions to the plan are at the
discretion of the Board of Directors. Bone Care's policy is to fund profit
sharing plan contributions as they accrue. Profit sharing expense amounted to
$61,205, $166,675 and $163,072 for the years ended June 30, 2001, 2002, and
2003, respectively.

(8) MARKETABLE SECURITIES

Securities classified as Held-to-Maturity include the following:

Securities classified as Available-for-Sale include the following:

Scheduled maturities of marketable securities at June 30, 2003:

45

BONE CARE INTERNATIONAL, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JUNE 30, 2001, 2002, AND 2003

(9) RELATED PARTY

Martin Barkin, M.D. is a board member of Bone Care and is the President and
Chief Executive Officer of Draxis Health, Inc. (a pharmaceutical company).

Bone Care initially granted Draxis Health Inc. a license to use and sell
Hectorol in Canada for secondary hyperparathyroidism, osteoporosis and other
metabolic bone diseases. Bone Care also granted Draxis a license in Canada to
all know-how developed by or on behalf of Bone Care relating to the use of
Hectorol for those indications. Draxis received marketing approval for Hectorol
Capsules in Canada in May 2001. Draxis sold its Canadian pharmaceutical business
to Shire Pharmaceuticals Group in July 2003. In conjunction with that sale, Bone
Care entered into a new manufacturing and supply agreement and patent and
trademark license agreement with Shire that replaced and superceded all previous
agreements with Draxis. The patent and trademark agreement transfers to Shire
the exclusive right to use and sell Hectorol previously granted to Draxis and
requires a royalty for use of the Hectorol trademark. The manufacturing and
supply agreement provides for the sale of Hectorol from Bone Care to Shire for
distribution in Canada only. As of June 30, 2003, no balance was reported as
part of accounts receivable for amounts owed from Draxis.

In April 2002, Bone Care entered into a manufacturing agreement with Draxis
Pharma, a division of Draxis Health Inc. to produce Hectorol Injection in
Canada. Bone Care began receiving commercial shipments in March 2003 for
customer sales in the U.S. Bone Care purchased approximately $1,994,962 of
Hectorol Injection from Draxis Pharma in the six months ended June 30, 2003.

(10) QUARTERLY FINANCIAL DATA (UNAUDITED)

Summary quarterly financial data for the years ended June 30, 2003 and 2002
are summarized as follows:

46

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On July 8, 2002, Bone Care filed a Form 8-K announcing the dismissal of
Arthur Andersen LLP and the engagement of Deloitte & Touche LLP as our
independent accountants.

ITEM 9A. CONTROLS AND PROCEDURES

As of June 30, 2003, Bone Care's management, including its Chief Executive
Officer and Chief Financial Officer, have conducted an evaluation of the
effectiveness of disclosure controls and procedures, pursuant to Rule 13a-15 of
the Securities Exchange Act of 1934, as amended. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this annual report has been made known to
them in a timely fashion.

In connection with the evaluation by Bone Care's management, including the
Chief Executive Officer and Chief Financial Officer, of our internal control
over financial reporting, pursuant to Exchange Act Rule 13a-15(d), no changes
during the quarter ended June 30, 2003 were identified that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Bone Care incorporates by reference the information required by Item 10
from Bone Care's definitive Proxy Statement for its 2003 Shareholders Meeting to
be held on November 19, 2003 ("Proxy Statement"), which will be filed with the
Securities and Exchange Commission not later than 120 days after the end of our
fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

Bone Care incorporates by reference the information required by Item 11
from the Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Bone Care incorporates by reference the information required by Item 12
from the Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Bone Care incorporates by reference the information required by Item 13
from the Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year.

47

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K -

(a1. Financial statements Reference is made to the separate index to Bone
Care's financial statements contained on page 30 hereof.

2. Financial statement schedule

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JUNE 30, 2003, 2002, AND 2001

3. Exhibits
Reference is made to the separate exhibit index contained on page 50 hereof.

(b) Reports on Form 8-K

On April 25, 2003, we filed a Form 8-K under Items 7 and 9 (pursuant to
Item 12) relating to our April 24, 2003 press release setting forth our
third-quarter 2003 financial results.

48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

BONE CARE INTERNATIONAL, INC.

/S/ PAUL L. BERNS
-------------------------------------------
By: Paul L. Berns
President and Chief Executive Officer

Date: September 26, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated have signed this report below.

/S/ PAUL L. BERNS President and Chief Executive Officer September 26, 2003
- --------------------------------- (Principal Executive Officer)
Paul L. Berns

/S/ ROBERT A. BECKMAN Vice President - Finance September 26, 2003
- --------------------------------- (Principal Financial and Accounting Officer)
Robert A. Beckman

/S/ RICHARD B. MAZESS, PH.D. Chairman and Director September 26, 2003
- ---------------------------------
Richard B. Mazess, Ph.D.

/S/ MARTIN BARKIN, M.D. Director September 26, 2003
- ---------------------------------
Martin Barkin, M.D.

/S/ CHARLES R. KLIMKOWSKI, CFA Director September 26, 2003
- ---------------------------------
Charles R. Klimkowski, CFA

/S/ GARY E. NEI Director September 26, 2003
- ---------------------------------
Gary E. Nei

/S/ MICHAEL D. CASEY Director September 26, 2003
- ---------------------------------
Michael D. Casey

/S/ EDWARD STAIANO Director September 26, 2003
- ---------------------------------
Edward Staiano, Ph.D.

49

BONE CARE INTERNATIONAL, INC.
INDEX TO EXHIBITS

- ----------

(1) Incorporated by reference to exhibits filed with Registrant's
Form 10 Registration Statement (Registration Number 02-27854)
filed under the Securities Exchange Act of 1934. Parenthetical
references to exhibit numbers are to the exhibit numbers in
the Form 10 or, if applicable, the amendment to the Form 10.

(2) Incorporated by reference to exhibits filed with the
Registrant's Form S-1 Registration Statement (Registration
Number 333-43923) filed under the Securities Act of 1933.
Parenthetical references to exhibit numbers are to exhibit
numbers in the Form S-1.

(3) Incorporated by reference to the exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996 (File No. 0-27854). Parenthetical
references to exhibit numbers are to the exhibit numbers in
the Form 10-Q.

(1) Incorporated by reference to exhibits filed with the
Registrant's Form S-1/A Registration Statement (Registration
Number 333-43923) filed under the Securities Act of 1933.
Parenthetical references to exhibit numbers are to exhibit
numbers in the Form S-1/A.

(2) Filed as Exhibit A and incorporated herein by reference from
the Registrant's proxy statement for its annual meeting of
shareholders on November 15, 2002 (File No. 0-27854).

* Indicates a management contract or compensatory plan or
arrangement.

** Indicates a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form
10-K.

50