UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended DECEMBER 31, 2001

or

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

For the transition period                    to                   

Commission file number 000-31253

PHARSIGHT CORPORATION

(Exact name of Registrant as specified in its charter)

DELAWARE	77-0401273
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
800 WEST EL CAMINO REAL, MOUNTAIN VIEW, CA	94040
(Address of principal executive offices)	(zip code)
(650) 314-3800
(Registrant’s telephone number, including area code)

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  ý                   NO  o

As of January 31, 2002, there were 18,679,456 outstanding shares of the Registrant’s common stock, $.001 par value.

PHARSIGHT CORPORATION

FORM 10-Q

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
Condensed Balance Sheets as of December 31, 2001 and March 31, 2001
Condensed Statements of Operations for the Three and Nine Months Ended December 31, 2001 and 2000
Condensed Statements of Cash Flows for the Nine Months Ended December 31, 2001 and 2000
Notes to Condensed Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Default Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Report on Form 8-K
Signatures
Exhibit Index

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PART I.         FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS

PHARSIGHT CORPORATION

CONDENSED BALANCE SHEETS

(In thousands, except par value amounts)

	December 31, 2001			March 31, 2001
	(unaudited)			(1)
Assets
Current assets:
Cash and cash equivalents	$	11,492		$	15,414
Short-term investments	1,992			5,959
Accounts receivable, net	3,637			2,901
Recognized income not yet billed	184			102
Prepaids and other current assets	563			1,014
Total current assets	17,868			25,390
Property and equipment, net	2,988			2,952
Intangible assets, net	244			370
Other assets	230			217
Total assets	$	21,330		$	28,929
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	429		$	541
Accrued expenses	1,552			883
Accrued compensation	1,913			1,326
Deferred revenue	3,779			2,251
Current portion of notes payable	1,250			75
Current obligations under capital leases	674			662
Total current liabilities	9,597			5,738
Obligations under capital leases	503			962
Notes payable	1,750			—
Commitments
Stockholders’ equity:
Common stock, $0.001 par value Authorized shares—120,000 at December 31 and March 31, 2001; Issued and outstanding shares—18,641 at December 31, 2001, and 18,382 at March 31, 2001	19			18
Preferred stock, $0.001 par value Authorized shares —5,000 at December 31 and March 31, 2001; Issued and outstanding shares—none at December 31 and March 31, 2001	—			—
Additional paid-in capital	74,699			74,770
Deferred stock compensation	(2,380		)	(5,197		)
Accumulated deficit	(62,763		)	(47,227		)
Accumulated other comprehensive income (loss)	(1		)	8
Notes receivable from stockholders	(94		)	(143		)
Total stockholders’ equity	9,480			22,229
Total liabilities and stockholders’ equity	$	21,330		$	28,929

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

(1)Derived from the Company’s audited financial statements as of March 31, 2001.

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PHARSIGHT CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2001			2000			2001			2000
	(unaudited)
Revenues:
License and renewal	$	1,328		$	915		$	3,628		$	2,623
Services	2,692			2,561			6,852			6,323
Total revenues	4,020			3,476			10,480			8,946
Costs and expenses:
License and renewal (1)	315			570			1,676			1,017
Services (2)	1,539			1,302			4,865			3,559
Research and development (3)	1,399			1,730			5,139			5,832
Sales and marketing (4)	2,185			2,058			6,731			4,795
General and administrative (5)	1,684			1,041			4,589			2,734
Amortization of deferred stock compensation	654			1,801			2,455			5,919
Amortization of intangible assets	29			131			125			440
Restructuring charges	676			—			676			—
Total costs and expenses	8,481			8,633			26,256			24,296
Loss from operations	(4,461		)	(5,157		)	(15,776		)	(15,350		)
Other income (expense):
Interest expense	(67		)	(47		)	(160		)	(173		)
Interest income and other, net	71			396			400			954
Net loss	(4,457		)	(4,808		)	(15,536		)	(14,569		)
Accretion on Series C and Series D redeemable convertible preferred stock	—			—			—			(443		)
Net loss attributable to common stockholders	$	(4,457	)	$	(4,808	)	$	(15,536	)	$	(15,012	)
Basic and diluted net loss per share attributable to common stockholders	$	(0.24	)	$	(0.27	)	$	(0.85	)	$	(1.33	)
Shares used to compute basic and diluted net loss per share attributable to common stockholders	18,495			17,925			18,349			11,272

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

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PHARSIGHT CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(In thousands)

Excluding amortization of deferred stock compensation as follows:

	Three Months Ended December 31,				Nine Months Ended December 31,
	2001		2000		2001		2000
	(unaudited)
(1)   License and renewal	$	43	$	111	$	156	$	356
(2)   Services	39		156		202		715
(3)   Research and development	59		207		247		723
(4)   Sales and marketing	156		454		562		1,416
(5)   General and administrative	357		873		1,288		2,709
	$	654	$	1,801	$	2,455	$	5,919

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

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PHARSIGHT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended December 31,
	2001			2000
	(unaudited)
Operating activities
Net loss	$	(15,536	)	$	(14,569	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred stock compensation	2,455			5,919
Depreciation	1,172			634
Amortization	126			440
Write-off of assets	81			—
Issuance of options in exchange of services	20			—
Compensation expenses related to accelerated vesting of options	35			—
Changes in operating assets and liabilities:
Accounts receivable	(736		)	(810		)
Recognized income not yet billed	(82		)	12
Prepaids and other assets	438			(566		)
Accounts payable	(112		)	69
Accrued expenses	669			597
Accrued compensation	587			910
Deferred revenue	1,528			598
Accrued interest and other	49			(170		)
Net cash used in operating activities	(9,306		)	(6,936		)
Investing activities
Purchases of property and equipment	(1,289		)	(1,395		)
Purchases of short-term investments	(5,990		)	(10,361		)
Maturities of short-term investments	9,948			14,575
Net cash provided by investing activities	2,669			2,819
Financing activities
Proceeds from the issuance of capital leases	—			757
Proceeds from notes payable	3,000			—
Principal payments on notes payable	(75		)	(2,108		)
Principal payments on capital lease obligations	(447		)	(327		)
Payments to holders of Series C preferred stock	—			(6,109		)
Proceeds from the issuance of common stock	237			26,846
Net cash provided by financing activities	2,715			19,059
Net increase (decrease) in cash and cash equivalents	(3,922		)	14,942
Cash and cash equivalents at the beginning of the period	15,414			5,286
Cash and cash equivalents at the end of the period	$	11,492		$	20,228
Supplemental disclosures of noncash activities
Accretion of preferred stock	$	—		$	443
Conversion of preferred stock to common stock	$	—		$	9,373
Reversal of preferred stock accretion upon conversion	$	—		$	3,548
Deferred stock compensation	$	—		$	10,070
Reversal of deferred stock compensation upon cancellation of unvested options	$	(362	)	$	(325	)

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

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PHARSIGHT CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.    BASIS OF PRESENTATION

Pharsight Corporation (the “Company”) develops and markets products and services that help pharmaceutical and biotechnology companies improve their decision-making in drug development and commercialization. By integrating scientific, clinical and business decision criteria into a dynamic, model-based methodology, the Company helps its customers optimize the value of their drug development programs and portfolios from discovery to post-launch marketing and any point in between.  The Company uses computer–based drug-disease models, dynamic predictive market models, clinical trial simulation and advanced valuation models to create a continuously evolving view of its customers’ development efforts and product portfolios.  The Company was incorporated in California in April 1995 and was reincorporated in Delaware in June 2000.

The accompanying condensed financial statements of the Company have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with these rules and regulations. The information included in this report should be read in conjunction with the Company’s financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2001.

In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and nine months ended December 31, 2001, are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2002, or for any other future period.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

NOTE 2.    NET LOSS PER SHARE

Basic net loss per share is computed using the weighted–average number of vested (i.e. not subject to a right of repurchase) outstanding shares of common stock. Diluted net loss per share is computed using the weighted–average number of shares of vested common stock outstanding and, when dilutive, weighted average number of unvested common stock outstanding, potential common shares from options and warrants to purchase common stock using the treasury stock method and from convertible securities using the as-if-converted basis. All potential common shares have been excluded from the computation of diluted net loss per share for all periods presented because the effect would be antidilutive due to the net loss in each period presented.

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The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three Months Ended December 31,						Nine Months Ended December 31,
	2001			2000			2001			2000
Basic and diluted:
Net loss	$	(4,457	)	$	(4,808	)	$	(15,536	)	$	(14,569	)
Accretion of preferred stock	—			—			—			(443		)
Net loss attributable to common stockholders	$	(4,457	)	$	(4,808	)	$	(15,536	)	$	(15,012	)
Weighted average common shares outstanding	18,611			18,247			18,507			11,642
Less weighted average common shares subject to repurchase	(116		)	(322		)	(158		)	(370		)
Shares used to compute basic and diluted net loss per share	18,495			17,925			18,349			11,272
Basic and diluted net loss per common share	$	(0.24	)	$	(0.27	)	$	(0.85	)	$	(1.33	)

NOTE 3.    COMPREHENSIVE INCOME (LOSS)

The Company’s component of comprehensive income (loss) consists solely of unrealized gain and losses on available for sale investments.  The unrealized gains and losses have been insignificant for the three and nine months ended December 31, 2001 and 2000, and consequently, net loss approximates total comprehensive net loss.

NOTE 4.    RESTRUCTURING CHARGE

During the three months ended December 31, 2001, the Company implemented a restructuring program to better align operating expenses with anticipated revenues.  The restructuring actions reduced resources in non-core areas such as our Information Products.  The Company recorded a $676,000 restructuring charge, which consists of $402,000 in facility exit costs, $253,000 in personnel severance costs and $21,000 in other exit costs.  The restructuring program resulted in the reduction in force across all company functions of approximately 14% or 20 employees.  As of December 31, 2001 all 20 employees had been terminated as a result of the program.  The restructuring actions did not impact the resources assigned to develop and support current and future Pharsightâ Knowledgebase Server^TM, WinNonlinâ, WinNonMixâ and Trial Simulator^TM product families. At December 31, 2001, the Company had $401,000 of accrued restructuring costs related to monthly lease expenses for two facilities that were exited in 2001, employee severance payments and other exit costs.

The following table depicts the restructuring activity during the nine months ended December 31, 2001:

			Expenditures
Category	Additions		Cash			Non-Cash			Balance at December 31, 2001
(in thousands)
Vacated facilities	$	402	$	(6	)	$	(78	)	$	318
Employee severance	253		(191		)				62
Other costs	21								21
Total	$	676	$	(197	)	$	(78	)	$	401

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NOTE 5.    NOTES PAYABLE

In June 2001 the Company extended and enhanced the previously unused credit facilities with Silicon Valley Bank.  The Company has $7.5 million available under three different facilities.  The credit facilities include $2.5 million of secured revolving credit against 80% of eligible domestic accounts receivable, $1.5 million of secured revolving credit against 90% of eligible foreign accounts receivable and $3.5 million in a term loan secured by certain assets of the Company, excluding Intellectual Property.

In December 2001, the Company borrowed an additional $1.0 million from its Silicon Valley Bank term loan credit facility, increasing the total borrowings to $2.0 million on the term loan.  The secured term loan is payable over forty-eight months, beginning in July 2002.  As of December 2001, the Company continues to have $1 million borrowed from its revolving credit facility.  This revolving credit facility expires in June 2002.

NOTE 6.    RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.”  The new rules require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and goodwill acquired after this date will not be amortized.  Goodwill existing at June 30, 2001, will continue to be amortized through the end of the Company’s fiscal year ended March 31, 2002 and will be tested for impairment using the current method, which uses an undiscounted cash flow test. Beginning in the Company’s first fiscal quarter ended June 30, 2002, goodwill will no longer be amortized but will be subject to annual impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives. Based on acquisitions completed as of June 30, 2001, application of the non-amortization provisions of these rules is not expected to have a significant impact on the Company’s results of operations.

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

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and the results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this quarterly report on Form 10-Q.  This report on Form 10-Q contains forward–looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. These forward-looking statements are usually accompanied by words like “believe,” “anticipate,” “plan,” “seek,” “expect,” “intend” and similar expressions. Our actual results could differ materially from those discussed by these forward–looking statements as a result of factors, which include, but are not limited to, those discussed under “Risk Factors” below.  We caution readers not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgement, belief or expectation only as of the date hereof.

Overview

Pharsight Corporation develops and markets products and services that help pharmaceutical and biotechnology companies improve their decision-making in drug development and commercialization. By integrating scientific, clinical and business decision criteria into a dynamic, model-based methodology, we help our customers optimize the value of their drug development programs and portfolios from discovery to post-launch marketing and any point in between.  We use computer–based drug-disease models, dynamic predictive market models, clinical trial simulation and advanced valuation models to create a continuously evolving view of our customers’ development efforts and product portfolios.

Results of Operations

Three and Nine Months Ended December 31, 2001 and 2000

Revenues

Total revenues increased 16% to $4.0 million in the three months ended December 31, 2001 from $3.5 in the three months ended December 31, 2000.  For the first nine months of fiscal 2002, total revenues increased 17% to $10.5 million from $8.9 million in the comparable period in fiscal 2001.

License and renewal revenues increased 45% to $1.3 million in the three months ended December 31, 2001 from $915,000 in the three months ended December 31, 2000.  For the first nine months of fiscal 2002, license and renewal revenues increased 38% to $3.6 million from $2.6 million in the comparable period in fiscal 2001. The quarter-to-quarter increase was due to sales of our Pharsightâ Knowledgebase Server^TM (PKS), along with a 39% increase in the quantity of licenses sold.  The average selling prices (ASP) of those licenses was relatively constant. The increased quantity is attributed to customers upgrading to and renewing our higher priced WinNonlinâ Enterprise product from earlier versions.  The nine-month period increase was similarly due to sales of our PKS, along with a 21% increase in the quantity of licenses sold.

Service revenues increased 5% to $2.7 million in the three months ended December 31, 2001, from $2.6 million in the three months ended December 31, 2000. For the first nine months of fiscal 2002, service revenues increased 8% to $6.9 million from $6.3 million in the comparable period in fiscal 2001.  While these growth rates are modest, they do reflect continuing productivity improvements in our services organization.  The increases for both the third quarter and first nine months of fiscal 2002 are driven by the addition of services rendered under new consulting agreements as well as expanded services rendered under our existing engagements.  We are continuing to see the percentage of service revenues decline as a percentage of total revenues as we release new versions of software products.

Cost and Expenses

Cost of License and Renewal Revenues. Cost of license and renewal revenues consists of royalty expense and cost of materials for both initial licenses and product updates provided for in our annual license agreements.  Cost of license and renewal revenues decreased 45% to $315,000 in the three months ended December 31, 2001, from $570,000 in the three months ended December 31, 2000.  For the first nine months of fiscal 2002, cost of license and renewal

10

revenues increased 65% to $1.7 million from $1.0 million in the comparable period in fiscal 2001. The quarter-to-quarter decrease reflects the reduction of information products spending in the third quarter of fiscal 2002.  Our restructuring charges included the impact of a reduction in information products headcount compared to the same quarter last year.  We began including our information product team’s costs to convert data from contract providers into customer usable information as cost of revenue in December 2000.  The comparison of the first nine months of fiscal 2002 to the prior year shows spending for the first seven months, until the restructuring charge was effective, compared to no spending in the prior year.  Excluding costs from information products, cost of license and renewal revenues as a percentage of license and renewal revenues was 18% for the three months ended December 31, 2001, compared to 26% in the same period in 2000. For the first nine months of fiscal 2002, cost of license and renewal revenues excluding costs from information products as a percentage of license and renewal revenues was 20%, compared to 26% in the same period in fiscal 2001.  We anticipate the cost of revenues associated with our information products to significantly decrease as a result of the discontinuance of elements of our information products business in our restructuring.

Cost of Service Revenues.  Cost of services revenues increased 18% to $1.5 million in the three months ended December 31, 2001, from $1.3 million in the three months ended December 31, 2000.  For the first nine months of fiscal 2002, cost of services revenues increased 37% to $4.9 million from $3.6 million in the comparable period in fiscal 2001. The increases were due primarily to the increased numbers of consulting personnel in our strategic services group.  In the fourth quarter of fiscal 2001 we hired several key new executives and reorganized our strategic services group, aligning project teams with key customer accounts. The reorganization was implemented to make improvements to our productivity, margins and revenues on an annual basis.  We previously indicated that we would begin seeing the benefits of this transition in the second half of fiscal 2002.  As we are continuing our transition to this new model, we are starting to see meaningful improvements.  Over the past three quarters, cost of service revenues has declined in absolute spending.  Over the same period, these costs as a percentage of services revenue have steadily improved from 98% in the first quarter of fiscal 2002 to 57% in the third quarter of fiscal 2002. These numbers are approaching last year’s percentage rates, which we view as our short-term target. The increase in headcount over the prior year period enables us to have greater capacity later in the calendar year.  There is typically a nine-month ramp to full productivity with our services personnel. Cost of services as a percentage of services revenues was 57% for the three months ended December 31, 2001, compared to 51% in the same period in 2000. For the first nine months of fiscal 2002, cost of services as a percentage of services revenues was 71%, compared to 56% in the same period in fiscal 2001.

Research and development.  Research and development expenses decreased 19% to $1.4 million in the three months ended December 31, 2001 from $1.7 million in the comparable period in 2000. For the first nine months of fiscal 2002, research and development expenses decreased 12% to $5.1 million from $5.8 million in the comparable period in fiscal 2001. Of the twenty people affected by our restructuring actions, five were in the Research and Development organization.  These restructuring actions did not impact the resources assigned to develop and support our current and future Pharsightâ Knowledgebase Server^TM, WinNonlinâ, WinNonMixâ and Trial Simulator^TM product families. Our restructuring actions reduced resources in areas such as the management and development of our Information Products program.  Research and development expenses as a percentage of revenues were 35% for the three months ended December 31, 2001, compared to 50% in the comparable period in 2000. For the first nine months of fiscal 2002, research and development expenses as a percentage of revenues were 49%, compared to 65% in the same period in fiscal 2001. We believe research and development expenses will decline in absolute spending in fiscal 2002 as compared to fiscal 2001.

Sales and marketing.  Sales and marketing expenses increased 6% to $2.2 million in the three months ended December 31, 2001, from $2.1 million in the three months ended December 31, 2000. For the first nine months of fiscal 2002, sales and marketing expenses increased 40% to $6.7 million from $4.8 million in the comparable period in fiscal 2001. The increase in sales and marketing expenses is related primarily to an expansion in our sales force personnel. Sales and marketing expenses as a percentage of total revenues were 54% for the three months ended December 31, 2001, compared to 59% in the comparable period in 2000. For the first nine months of fiscal 2002, sales and marketing expenses as a percentage of revenues was 64%, compared to 54% in the same period in fiscal 2001. The increase in sales and marketing expenses as a percentage of total revenues reflects the growth in the number of professionals selling and marketing our products and services. We estimate our sales and marketing expenses will decrease as a percentage of revenue as we experience increased productivity related to changes in sales and marketing management and a more focused sales process.

General and administrative.  General and administrative expenses increased 62% to $1.7 million in the three months ended December 31, 2001, from $1.0 million in the three months ended December 31, 2000. For the first nine months

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of fiscal 2002, general and administrative expenses increased 68% to $4.6 million from $2.7 million in the comparable period in fiscal 2001. This increase is due to severance expenses, as well as increased expenses associated with being a public company and the cost to enhance our internal management systems infrastructure. General and administrative expenses as a percentage of total revenues were 42% for the three months ended December 31, 2001, compared to 30% in the comparable period in 2000. For the first nine months, general and administrative expenses as a percentage of revenues were 44% for fiscal 2002, compared to 31% in the same period in 2001. We expect to see the rate of growth decline now that we have assembled our operations team and strengthened our internal infrastructure.

Deferred Stock Compensation. During the three months ended December 31, 2001 and 2000, we recorded amortization of deferred compensation of $654,000, and $1.8 million, respectively, representing the difference between the exercise price of stock options granted and the then deemed fair value of our common stock.  For the first nine months of fiscal 2002, deferred stock compensation expenses decreased 59% to $2.5 million from $5.9 million in the comparable period in fiscal 2001. The amortization of deferred compensation is charged to operations over the vesting period of the options using the graded method for employee options, and the straight-line method for non-employee options.

Restructuring Charges. During the three months ended December 31, 2001, we implemented a restructuring program to better align operating expenses with anticipated revenues.  Our restructuring actions reduced resources in non-core areas such as our Information Products.  We recorded a $676,000 restructuring charge, which consists of $402,000 in facility exit costs, $253,000 in personnel severance costs and $21,000 in other exit costs.  The restructuring program resulted in the reduction in force across all company functions of approximately 14% or 20 employees.  As of December 31, 2001 all 20 employees had been terminated as a result of the program.  The restructuring actions did not impact the resources assigned to develop or support our current and future PKS, WinNonlinâ, WinNonMixâ and Trial Simulator^TM product families. At December 31, 2001, we had $401,000 of accrued restructuring costs related to monthly lease expenses for two facilities that were exited in 2001, employee severance payments and other exit costs.  We estimate that the restructuring program will save the company approximately $4.5 million of expenses on an annualized basis.  We do not anticipate future restructuring actions at this time.

Other income (expense).  Interest income and other, net, decreased to $71,000 in the three months ended December 31, 2001, from $396,000 in the three months ended December 31, 2000. For the first nine months of fiscal 2002, interest income and other, net, decreased 58% to $400,000 from $954,000 in the comparable period in fiscal 2001. This change occurred as a result of lower interest income resulting from a lower average balance of cash and short–term investments and lower interest rates.  Interest expense, representing expenses incurred for our capital leases, was relatively unchanged between the comparable periods.

Provision for income taxes.  As a result of our cumulative net operating losses, no provision for income taxes was recorded for the three or nine months ended December 31, 2001 and 2000.

Liquidity and Capital Resources

As of December 31, 2001, we had $13.5 million in cash, cash equivalents and short–term investments, a decrease of $7.9 million from cash, cash equivalents and short–term investments held as of March 31, 2001.  As of December 31, 2001, there were $3.0 million in borrowings under our borrowing arrangements / credit facilities.  These included a $1 million increase in borrowings in the third quarter of fiscal 2002.  Our working capital, defined as current assets less current liabilities, at December 31, 2001, was $8.3 million, a decrease of $11.4 million in working capital from March 31, 2001. The decrease in the working capital is attributable to losses from operations, additional equipment purchases and an increase in deferred revenue.

Net cash used in operating activities for the nine months ending December 31, 2001 was $9.3 million and primarily reflects our net loss for the period, partially offset by $3.9 million of non-cash charges related to deferred stock compensation and depreciation and amortization, as well as $1.5 million of deferred revenue, and the remainder being other changes in operating assets and liabilities.  These changes were partially offset by an increase in liabilities due to the implementation of the restructuring program announced on November 1, 2001.

Net cash provided by investing activities was $2.7 million for the nine months ending December 31, 2001. This consisted of the proceeds from maturities of short-term investments, net of purchases of short-term investments, partially offset by $1.3 million of purchases of property and equipment.

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Net cash provided by financing activities was $2.7 million for the nine months ending December 31, 2001. Cash from financing activities was provided primarily from the borrowing of $3.0 million from our Silicon Valley Bank credit facilities.  Decreasing this amount were principal payments on capital leases, offset in part by proceeds from the issuance of common stock upon the exercise of stock options.

We currently anticipate that our current cash, cash equivalents, investments and available credit facilities will be sufficient to meet our anticipated cash needs for the working capital and capital expenditures for at least the next 12 months.

This estimate reflects a belief that we will continue to generate revenue growth with the current level of resources.  There can be no assurance that we will realize this goal.  We may need to raise additional funds through public or private financings or other sources to fund our operations, or for potential acquisitions. We may not be able to obtain adequate or favorable financing at that time. Failure to raise capital when needed could harm our business. If we raise additional funds through the issuance of equity securities, these equity securities might have rights, preferences or privileges senior to our common stock. In addition, the necessity of raising additional funds could force us to incur debt on terms that could restrict our ability to make capital expenditures and incur additional indebtedness.

In June 2001 we extended and enhanced the previously unused credit facilities with Silicon Valley Bank.  We have $7.5 million available under three different facilities.  The credit facilities include $2.5 million of secured revolving credit against 80% of eligible domestic accounts receivable, $1.5 million of secured revolving credit against 90% of eligible foreign accounts receivable and $3.5 million in a term loan secured by certain of our assets, excluding intellectual property.

In December 2001, we borrowed an additional $1.0 million from its Silicon Valley Bank term loan credit facility, increasing the total borrowings to $2.0 million on the term loan.  The secured term loan is payable over forty-eight months, beginning in July 2002.  As of December 2001, we continue to have $1 million borrowed from our revolving credit facility.  We are in compliance with all of the covenants on the revolving credit facilities.   These revolving credit facilities expire in June 2002.

The following covenants apply to our Silicon Valley Bank term loan facility: Quick Ratio greater than 1.0, Debt Ratio under 1.0, RML (remaining months liquidity) of 6 months, Liquidity of 2 times the term loan advance, and Net Losses within 20% of our plan.  We are in compliance with each of these covenants.

The following table depicts contractual obligations as of December 31, 2001:

Contractual Obligations			Payments Due by Period
(in thousands)	Total		Less Than 1 Year		1 - 3 Years		4 - 5 Years
Long Term Debt	$	3,000	$	1,250	$	1,000	$	750
Capital Lease Obligations	$	1,177	$	674	$	503	$	0
Operating Leases	$	3,109	$	1,664	$	1,264	$	181
Total Contractual Cash Obligations	$	7,286	$	3,588	$	2,767	$	931

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Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.”  The new rules require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and goodwill acquired after this date will not be amortized.  Goodwill existing at June 30, 2001, will continue to be amortized through the end of our fiscal year ended March 31, 2002 and will be tested for impairment using the current method, which uses an undiscounted cash flow test. Beginning in our first fiscal quarter ended June 30, 2002, goodwill will no longer be amortized but will be subject to annual impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives. Based on acquisitions completed as of June 30, 2001, application of the non-amortization provisions of these rules is not expected to have a significant impact on our results of operations.

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

RISK FACTORS

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

We commenced our operations in April 1995 and have incurred net losses since that time. As of December 31, 2001, we had an accumulated deficit of $62.8 million. We expect to incur further losses as we continue to develop our business. Since the amounts we may determine to invest to grow our business are uncertain, we are unable to be certain when, if ever, we may become profitable. We have announced that as a result of our recent restructuring actions, we intend to achieve breakeven (ebitda) during the second-half of calendar 2002; however, this expectation is based on a number of assumptions, including some outside of our control, including the state of the overall economy and the demand for our products, and if these assumptions do not prove to be accurate then we may never generate sufficient revenues to achieve profitability. Furthermore, even if we do achieve profitability and positive operating cash flow, we may not be able to sustain or increase profitability or positive operating cash flow on a quarterly or annual basis. If our losses exceed the expectations of investors, the price of our common stock may decline.

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

We expect our quarterly operating results may fluctuate in the future, and may vary from securities analysts’ and investors’ expectations, depending on a number of factors described below and elsewhere in this “Risk Factors” section of Form 10-Q, including:

•variances in demand for our products and services;

•timing of the introduction of new products or services and enhancements of existing products or services;

•changes in research and development expenses;

•our ability to complete fixed–price service contracts without committing additional resources; and

•changes in industry conditions affecting our customers.

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

We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short term. If we have lower revenue, we may not be able to reduce our spending in the short term in response. Any shortfall in revenue would have a direct impact on our results of operations.

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For these and other reasons, we may not meet the earnings estimates of securities analysts or investors, and the price of our common stock may decline.

On November 1, 2001, we announced that we are taking actions intended to reduce our expenses by approximately $5 million on an annualized basis.  Our current estimate is a reduction of approximately $4.5 million on an annualized basis. However if we are unable to achieve the productivity increases we have planned and if we are unable to achieve other expense reduction goals, we may not achieve this level of annualized savings, which would limit our ability to become profitable.

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

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

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

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

We receive a substantial majority of our revenue from a limited number of customers. In fiscal 2001, sales to our top two customers collectively accounted for 28% of our revenue and sales to our top five customers accounted for 43% of our revenue. In the first nine months of fiscal 2002, sales to our top two customers collectively accounted for 27% of our revenue and sales to our top five customers for the first nine months accounted for 47% of our revenue. We expect that a significant portion of our revenue will continue to depend on sales to a small number of customers. If we do not generate as much revenue from these major customers as we expect to, or if we lose any of them as customers, our total revenue may be significantly reduced.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Progress with our information products has been slow, and we have discontinued portions of this business.  Our future revenue and operating results could be harmed if our Clinical Workbench^TM product, which incorporates our information products technology, does not achieve commercial success.

We recently decided to suspend all marketing and acquisition of data for its information products business. However, we continue to sell our Clinical Workbench^TM (CWB) product and as of December 31, 2001, we had generated very limited revenues from this product.  The CWB product, which can be used in conjunction with our strategic services, enables customers to access, organize and search their large databases containing patient level information.  Because the market for this product is new and emerging, it continues to be difficult to predict the level of market acceptance.  Consequently, our future business could be harmed if this product does not achieve commercial success.

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

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

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

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

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

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

Future acquisitions may result in:

•potentially dilutive issuances of equity securities;

•the incurrence of additional debt;

•the assumption of known and unknown liabilities; and

• the write–off of software development costs, and the amortization of expenses related to goodwill and other intangible assets and charges against earnings.

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

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

We market and sell our products and services in the United States and internationally.  International sales of our products and services accounted for approximately 34% of our total revenues for the quarter ending December 31, 2001.  We have a total of thirteen employees based outside the United States that market and sell our products and services, including a sales/consulting/product support office in London with eight employees.  In addition, we may in the future open offices in other countries.  The expansion of our existing international operations and entry into additional international markets may require significant management attention and financial resources.  We cannot be certain that our existing international operations or the expansion of our operations to other countries will produce desired levels of revenue.  We currently have limited experience in developing localized versions of our products and services and marketing and distributing our products internationally.  Our operations in the United States and Europe also expose us to the following general risks associated with international operations:

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

•difficulties and costs of staffing and managing foreign operations;

•the impact of recessions in economies outside the United States;

•greater difficulty in accounts receivable collection and longer collection periods;

•potential adverse tax consequences, including higher tax rates generally in Europe;

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

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

•fluctuations in the value of currencies.

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

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Risks Related To Our Industry

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

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

Laws protecting the privacy of confidential patient information may limit the range of services we can provide and, if we violate any of these laws, could subject us to civil and criminal penalties.

The healthcare industry is regulated by a number of federal, state, local and international governmental entities. These entities may enact laws that limit our operations or the operations of our customers. In particular, state laws aimed at protecting the privacy of confidential patient health information, including information regarding conditions like AIDS, substance abuse and mental illness, vary widely. Recently, the Bush administration put into effect the patient privacy rule under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Covered entities are expected to come into compliance with the new rule beginning April 14, 2003. The application of these and other laws in the context of research and internet health services is evolving. While these laws primarily are directed at healthcare providers, facilities and payors, and generally do not apply to the “anonymized” data we use, from which patient identifiable information has been removed, some of these laws could be applied to aspects of our business or to limit providers’ ability to provide us with access to such data. We cannot predict which laws might be found applicable to our business, or assure you that our operations would be found to be in full compliance. Compliance with regulatory laws may be expensive and may limit our ability to provide a full range of services. In addition, a challenge under any of these laws could result in adverse publicity and, if successful, imposition of civil and criminal penalties, any of which could harm our business.

Existing or future laws that apply to communications and commerce over the Internet could harm our business.

Laws and regulations that specifically apply to communications and commerce over the Internet are becoming more prevalent. Existing laws and regulations as well as new laws and regulations could place restrictions or impose costs on us that adversely affect our business. The United States Congress has passed laws regarding, among other things, Internet privacy, copyrights and taxation. The Federal Trade Commission has recently recommended that Congress enact further federal legislation protecting consumer privacy on the Internet. The European Union has also enacted its own directive regarding privacy in relation to the Internet. We have not fully assessed how these laws and regulations may affect our business. However, we have access to, manage, transmit and store sensitive customer information that may be subject to these privacy and other laws and regulations. As a result, in the future we may be subject to claims associated with invasion of privacy or inappropriate disclosure, use or loss of this information. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could harm our reputation and our business. In addition, these laws may make it more costly to enter into, or prevent us from entering into, additional license agreements with information providers for our information products.

Laws regulating communications and commerce over the Internet remain largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, content, libel and taxation apply to the Internet. The adoption or modification of laws or regulations relating to the Internet, or interpretations of existing law, could harm our business.

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

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

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

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

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

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

Risks Related to Our Stock

The public market for our common stock may be volatile.

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

•actual or anticipated variations in our quarterly operating results;

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

•timeliness of our introductions of new products;

•changes in financial estimates by securities analysts;

•changes in the conditions and trends in the pharmaceutical market; and

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

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

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

The control of a significant amount of our stock by insiders could adversely affect the market price of our common stock. Our executive officers and directors beneficially owned or controlled 8,027,724 shares, or 42.4%, of the outstanding common stock, as of May 31, 2001. If our executive officers and directors choose to act or vote together, they will have the power to significantly influence all matters requiring the approval of our stockholders, including the election of directors and the approval of significant corporate transactions. Without the consent of these stockholders, we could be prevented from entering into transactions that could result in our stockholders receiving a premium for their stock.

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

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of any preferred stock that may be issued in the future. Other provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of us without the consent of our board of directors, even if the changes were favored by a majority of the stockholders. These include provisions that provide for a staggered board of directors, prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings.

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ITEM 3.                  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market and currency risk disclosures set forth in Item 7A of our Annual Report on Form 10-K for the year ended March 31, 2001 have not changed significantly.

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PART II.                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not Applicable

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On August 14, 2000, we closed the sale of a total of 3,000,000 shares of our common stock, par value $0.001 per share, at a price of $10.00 per share in a firm commitment underwritten public offering. Of the $20.3 million in net proceeds raised by us in the offering, after deducting underwriting discounts and commissions, offering expenses and the repayment of $6.1 million to our holders of Series C preferred stock:

1.  approximately $17.6 million was used to fund ongoing operations, including research and development of new and existing products; acquisitions; and

2.  the remainder of the proceeds from the offering, approximately $2.7 million, remains invested in investment grade securities.

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

As of December 31, 2001 we had a total of $13.5 million of cash and short-term investments.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

Not Applicable

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

Not Applicable

ITEM 5. OTHER INFORMATION

Effective January 17, 2002, Robert Powell, was promoted to Senior Vice-President—Strategic Services.

Effective January 17, 2002, James Negrette, was appointed Vice-President of Research and Development.

Effective January 17, 2002, Michael Schwartz, was appointed Vice-President of Marketing.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)       EXHIBITS.

The following exhibits are filed with this report:

Exhibit
Number	Description Of Document
3.2*	Amended and Restated Certificate of Incorporation of Pharsight.
3.3*	Bylaws of Pharsight.
4.1	Reference is made to Exhibits 3.2 and 3.3.
4.2*	Amended and Restated Investors’ Rights Agreement, dated as of September 2, 1999, by and among Pharsight and the investors listed on Exhibit A attached thereto.
10.23	Severance Agreement, Dated November 16, 2001, between the Company and Michael Emley.
10.24	Employment Letter, Dated December 14, 2001, between the Company and Robin Kehoe.
10.25	Services Agreement, Dated October 4, 2001, between the Company and David Powell, Inc.

*                 Filed as the like-numbered exhibit to our Registration Statement on Form S-1 (Registration No. 333-34896), originally

filed on April 17, 2000, as amended, and incorporated herein by reference.

(b)      REPORTS ON FORM 8-K.

No reports on Form 8-K were filed by Pharsight during the quarter ended December 31, 2001.

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SIGNATURE

Pursuant to the requirements 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.

	PHARSIGHT CORPORATION
Date:  February 13, 2002	By:		/s/	Charles K. Faas
		Charles K. Faas
		Vice President, Finance and
		Chief Accounting Officer
		(Duly Authorized Officer)

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EXHIBIT INDEX

Exhibit Number	Description Of Document
3.2*	Amended and Restated Certificate of Incorporation of Pharsight.
3.3*	Bylaws of Pharsight.
4.1	Reference is made to Exhibits 3.2 and 3.3.
4.2*	Amended and Restated Investors’ Rights Agreement, dated as of September 2, 1999, by and among Pharsight and the investors listed on Exhibit A attached thereto.
10.23	Severance Agreement, Dated November 16, 2001, between the Company and Michael Emley.
10.24	Employment Letter, Dated December 14, 2001, between the Company and Robin Kehoe.
10.25	Services Agreement, Dated October 4, 2001, between the Company and David Powell, Inc.

*Filed as the like-numbered exhibit to our Registration Statement on Form S-1 (Registration No. 333-34896), originally filed on April 17, 2000, as amended, and incorporated herein by reference.

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