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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

|(MARK ONE) |  |                                                                                          
|---------- |  | -----------------------------------------------------------------------------------------
|[x]        |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. 
|           |  | FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003                                        
|           |  | OR                                                                                       
|[  ]       |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM         TO

COMMISSION FILE NUMBER: 0-20772

QUESTCOR PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)


|CALIFORNIA                                                      |  | 33-0476164                          
|--------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction 
of incorporation or organization) |  | (I.R.S. Employer
Identification No.)

3260 Whipple Road
Union City, CA 94587-1217
(Address of Principal Executive Offices)

REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 400-0700

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 prior 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 whether Registrant is an accelerated filer (as
defined in Rule 12B-2 of the Act). Yes [  ] No [x]

At
November 6, 2003 there were 44,379,058 shares of the Registrants
common stock, no par value per share, outstanding.





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TABLE OF CONTENTS



|                           |                                                                                               |                                                                         |  |  |  |  |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- |  |  |  |  |  | 
|                           | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                           |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                                  
|                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                        
|                           |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                        
|                           |                                                                                               | NOTES TO CONDENSED CONSOLIDATED SEPTEMBER 30, 2003 FINANCIAL STATEMENTS
|                           |                                                                                               | Independent Accountants Review Report                                 
|                           | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                           | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                           | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION
|                           | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                           | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                           | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                           | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                           | ITEM 5. OTHER INFORMATION                                                                    
|                           | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                
|Exhibit Index             
|Exhibit 10.30             
|Exhibit 10.31             
|Exhibit 15.1              
|Exhibit 31                
|Exhibit 32                



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##### Table of Contents



QUESTCOR PHARMACEUTICALS, INC.

FORM 10-Q

TABLE OF CONTENTS

|           |  |                                                                                                                 |  |      |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------------- |  | ---- |  | --
|           |  |                                                                                                                 |  | Page
|           |  |                                                                                                                 |  |     
|           |  | PART I. FINANCIAL INFORMATION                                                                                   |  |      |  | 3 
|Item 1     |  | Financial Statements and Notes (Unaudited)                                                                      |  |      |  | 3 
|           |  | Condensed Consolidated Balance SheetsSeptember 30, 2003 and
December 31, 2002                                  |  |      |  | 3 
|           |  | Condensed Consolidated Statements of Operationsfor the three
and nine months ended September 30, 2003 and 2002 |  |      |  | 4 
|           |  | Condensed Consolidated Statements of Cash Flowsfor the nine
months ended September 30, 2003 and 2002           |  |      |  | 5 
|           |  | Notes to Condensed Consolidated Financial Statements                                                            |  |      |  | 6 
|           |  | Independent Accountants Review Report                                                                          |  |      |  | 14
|Item 2     |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                           |  |      |  | 15
|Item 3     |  | Quantitative and Qualitative Disclosures about Market Risk                                                      |  |      |  | 22
|Item 4     |  | Controls and Procedures                                                                                         |  |      |  | 22
|           |  | PART II. OTHER INFORMATION                                                                                      |  |      |  | 22
|Item 1     |  | Legal Proceedings                                                                                               |  |      |  | 22
|Item 2     |  | Changes in Securities and Use of Proceeds                                                                       |  |      |  | 22
|Item 3     |  | Defaults Upon Senior Securities                                                                                 |  |      |  | 23
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                                             |  |      |  | 23
|Item 5     |  | Other Information                                                                                               |  |      |  | 23
|Item 6     |  | Exhibits and Reports on Form 8-K                                                                                |  |      |  | 23
|Signatures |  |                                                                                                                 |  |      |  | 24

2



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ITEM 1. FINANCIAL STATEMENTS

QUESTCOR PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)

|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |              |         |        |  | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------------- | ----- | ------------ | ------- | ------ |  | 
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         | September 30, |       | December 31,
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         | 2003          |       | 2002        
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         | (Unaudited)   |       | (Note 1)    
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            | ASSETS |         |               |       |              |         |        |  | 
|Current assets:                                                                                                                                                                                                                                    |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|                                                                                                                                                                                                                                                   |                                      | Cash and cash equivalents                                                                                                                                                                     |                                            | $      | 2,284   |               |       | $            | 6,156   |       
|                                                                                                                                                                                                                                                   |                                      | Short-term investments                                                                                                                                                                        |                                            |        | 2,537   |               |       |              | 1,350   |       
|                                                                                                                                                                                                                                                   |                                      | Accounts receivable, net of allowances of
$75 at September 30, 2003 and $49 at December 31, 2002                                                                                              |                                            |        | 2,144   |               |       |              | 1,590   |       
|                                                                                                                                                                                                                                                   |                                      | Inventories, net                                                                                                                                                                              |                                            |        | 1,087   |               |       |              | 391     |       
|                                                                                                                                                                                                                                                   |                                      | Prepaid expenses and other current assets                                                                                                                                                     |                                            |        | 589     |               |       |              | 979     |       
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               | Total current assets                       |        |         | 8,641         |       |              |         | 10,466 | 
|Property and equipment, net                                                                                                                                                                                                                        |                                      |                                                                                                                                                                                               | 657                                        |        |         |               | 585   |             
|Purchased technology, net                                                                                                                                                                                                                          |                                      |                                                                                                                                                                                               | 13,994                                     |        |         |               | 382   |             
|Goodwill and other indefinite lived intangible assets                                                                                                                                                                                              |                                      |                                                                                                                                                                                               | 479                                        |        |         |               | 479   |             
|Deposits and other assets                                                                                                                                                                                                                          |                                      |                                                                                                                                                                                               | 832                                        |        |         |               | 854   |             
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               | Total assets                               |        | $       | 24,603        |       |              | $       | 12,766 | 
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|                                                                                                                                                                                                                                                   | LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                               |                                            |        |         |               |       |              |        
|Current liabilities:                                                                                                                                                                                                                               |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|                                                                                                                                                                                                                                                   |                                      | Accounts payable                                                                                                                                                                              |                                            | $      | 1,025   |               |       | $            | 1,230   |       
|                                                                                                                                                                                                                                                   |                                      | Accrued compensation                                                                                                                                                                          |                                            |        | 519     |               |       |              | 794     |       
|                                                                                                                                                                                                                                                   |                                      | Other accrued liabilities                                                                                                                                                                     |                                            |        | 1,058   |               |       |              | 1,205   |       
|                                                                                                                                                                                                                                                   |                                      | Payable relating to product acquisition                                                                                                                                                       |                                            |        | 2,183   |               |       |              |        |       
|                                                                                                                                                                                                                                                   |                                      | Short-term debt and current portion of long-term debt                                                                                                                                         |                                            |        | 153     |               |       |              | 218     |       
|                                                                                                                                                                                                                                                   |                                      | Current portion of capital lease obligations                                                                                                                                                  |                                            |        |        |               |       |              | 1       |       
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               | Total current liabilities                  |        |         | 4,938         |       |              |         | 3,448  | 
|Convertible debentures, (face amount of $4,000), net
of deemed discount of $721 at September 30, 2003 and
$1,092 at December 31, 2002                                                                                                              |                                      |                                                                                                                                                                                               | 3,279                                      |        |         |               | 2,908 |             
|Other non-current liabilities                                                                                                                                                                                                                      |                                      |                                                                                                                                                                                               | 928                                        |        |         |               | 833   |             
|Commitments and Contingencies                                                                                                                                                                                                                      |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|Preferred stock, no par value, 7,500,000 shares
authorized; 2,155,715 Series A shares issued and
outstanding at September 30, 2003 and December 31, 2002
(aggregate liquidation preference of $10,000 at September
30, 2003 and December 31, 2002) |                                      |                                                                                                                                                                                               | 5,081                                      |        |         |               | 5,081 |             
|Stockholders equity:                                                                                                                                                                                                                              |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|                                                                                                                                                                                                                                                   |                                      | Preferred stock, no par value, 10,000
Series B shares issued and outstanding at
September 30, 2003, net of issuance costs
(aggregate liquidation preference of
$10,000 at September 30, 2003) |                                            |        | 9,178   |               |       |              |        |       
|                                                                                                                                                                                                                                                   |                                      | Common stock, no par value, 105,000,000
shares authorized; 44,342,808 and
38,676,592 shares issued and outstanding at
September 30, 2003 and December 31, 2002,
respectively                  |                                            |        | 84,263  |               |       |              | 77,528  |       
|                                                                                                                                                                                                                                                   |                                      | Deferred compensation                                                                                                                                                                         |                                            |        | (20     | )             |       |              | (22     | )     
|                                                                                                                                                                                                                                                   |                                      | Accumulated deficit                                                                                                                                                                           |                                            |        | (83,044 | )             |       |              | (76,968 | )     
|                                                                                                                                                                                                                                                   |                                      | Accumulated other comprehensive loss                                                                                                                                                          |                                            |        |        |               |       |              | (42     | )     
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               | Total stockholders equity                 |        |         | 10,377        |       |              |         | 496    | 
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |             
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               | Total liabilities and
stockholders equity |        | $       | 24,603        |       |              | $       | 12,766 | 
|                                                                                                                                                                                                                                                   |                                      |                                                                                                                                                                                               |                                            |        |         |               |       |              |         |       

See accompanying notes.

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QUESTCOR PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |        |        | 
|----------------------------------------------------------------------------------------------- | ------------------------------------- | ---------------------------------- | ------ | ------------------ | ----- | ----------------- | ------ | ------------- | ----- | ------------- | ------ | ----- | ------ | - | ------ | ------ | ------ | 
|                                                                                                |                                       |                                    |        | Three Months Ended |       | Nine Months Ended
|                                                                                                |                                       |                                    |        | September 30,      |       | September 30,     |        | September 30, |       | September 30,
|                                                                                                |                                       |                                    |        | 2003               |       | 2002              |        | 2003          |       | 2002         
|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |              
|Revenues:                                                                                       |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |       
|                                                                                                | Net product sales                     |                                    | $      | 3,943              |       |                   | $      | 3,772         |       |               | $      | 9,185 |        |   | $      | 10,885 |       
|                                                                                                | Grant and royalty revenue             |                                    |        | 24                 |       |                   |        | 26            |       |               |        | 58    |        |   |        | 158    |       
|                                                                                                | Technology revenue                    |                                    |        |                   |       |                   |        |              |       |               |        | 250   |        |   |        | 250    |       
|                                                                                                | Services revenue from a related party |                                    |        |                   |       |                   |        | 50            |       |               |        |      |        |   |        | 150    |       
|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |        |       
|                                                                                                |                                       | Total revenues                     |        |                    | 3,967 |                   |        |               | 3,848 |               |        |       | 9,493  |   |        |        | 11,443 | 
|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |        |       
|Operating costs and expenses:                                                                   |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |       
|                                                                                                | Cost of product sales                 |                                    |        | 796                |       |                   |        | 881           |       |               |        | 2,620 |        |   |        | 2,243  |       
|                                                                                                | Selling, general and administrative   |                                    |        | 2,630              |       |                   |        | 2,892         |       |               |        | 7,950 |        |   |        | 8,666  |       
|                                                                                                | Research and development              |                                    |        | 590                |       |                   |        | 582           |       |               |        | 1,912 |        |   |        | 1,692  |       
|                                                                                                | Depreciation and amortization         |                                    |        | 441                |       |                   |        | 262           |       |               |        | 822   |        |   |        | 921    |       
|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |        |       
|                                                                                                |                                       | Total operating costs and expenses |        |                    | 4,457 |                   |        |               | 4,617 |               |        |       | 13,304 |   |        |        | 13,522 | 
|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |        |       
|Loss from operations                                                                            |                                       |                                    | (490   | )                  |       |                   | (769   | )             |       |               | (3,811 | )     |        |   | (2,079 | )     
|Non-cash amortization of deemed discount
on convertible debentures                              |                                       |                                    | (130   | )                  |       |                   | (130   | )             |       |               | (391   | )     |        |   | (305   | )     
|Interest income (expense), net                                                                  |                                       |                                    | (18    | )                  |       |                   | (11    | )             |       |               | (32    | )     |        |   | 3      |       
|Other income (expense), net                                                                     |                                       |                                    | 5      |                    |       |                   | (151   | )             |       |               | (75    | )     |        |   | (261   | )     
|Rental income, net                                                                              |                                       |                                    | 57     |                    |       |                   | 66     |               |       |               | 194    |       |        |   | 212    |       
|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |        |       
|Net loss                                                                                        |                                       |                                    | (576   | )                  |       |                   | (995   | )             |       |               | (4,115 | )     |        |   | (2,430 | )     
|Non-cash deemed dividend related to
beneficial conversion feature of Series B
Preferred Stock   |                                       |                                    |       |                    |       |                   |       |               |       |               | 1,394  |       |        |   |       |       
|Dividends on Series B Preferred Stock                                                           |                                       |                                    | 200    |                    |       |                   |       |               |       |               | 567    |       |        |   |       |       
|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |        |       
|Net loss applicable to common stockholders                                                      |                                       | $                                  | (776   | )                  |       | $                 | (995   | )             |       | $             | (6,076 | )     |        | $ | (2,430 | )     
|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |        |       
|Shares used in computing basic and diluted
net loss per share applicable to
common stockholders |                                       |                                    | 44,275 |                    |       |                   | 38,632 |               |       |               | 40,987 |       |        |   | 38,317 |       
|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |        |       
|Basic and diluted net loss per share
applicable to common stockholders                          |                                       | $                                  | (0.02  | )                  |       | $                 | (0.03  | )             |       | $             | (0.15  | )     |        | $ | (0.06  | )     
|                                                                                                |                                       |                                    |        |                    |       |                   |        |               |       |               |        |       |        |   |        |        |       

See accompanying notes.

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QUESTCOR PHARMACEUTICALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

|                                                                            |                                                           |   |                   |       |               |   |        |      |  
|--------------------------------------------------------------------------- | --------------------------------------------------------- | - | ----------------- | ----- | ------------- | - | ------ | ---- | -
|                                                                            |                                                           |   | Nine Months Ended
|                                                                            |                                                           |   |                  
|                                                                            |                                                           |   | September 30,     |       | September 30,
|                                                                            |                                                           |   | 2003              |       | 2002         
|                                                                            |                                                           |   |                   |       |              
|OPERATING ACTIVITIES                                                        |                                                           |   |                   |       |               |   |        |     
|Net loss                                                                    |                                                           | $ | (4,115            | )     |               | $ | (2,430 | )   
|Adjustments to reconcile net loss to net cash
used in operating activities: |                                                           |   |                   |       |               |   |        |     
|                                                                            | Stock-based compensation expense                          |   |                   | 40    |               |   |        | 311  |  
|                                                                            | Amortization of deemed discount on convertible debentures |   |                   | 391   |               |   |        | 305  |  
|                                                                            | Amortization of deferred compensation                     |   |                   | 44    |               |   |        |     |  
|                                                                            | Depreciation and amortization                             |   |                   | 822   |               |   |        | 921  |  
|                                                                            | Other-than-temporary loss on investment                   |   |                   | 51    |               |   |        | 367  |  
|                                                                            | Deferred rent expense                                     |   |                   | 29    |               |   |        | (77  | )
|                                                                            | Loss on the sale of investments                           |   |                   | 14    |               |   |        |     |  
|                                                                            | (Gain)/loss on the sale of equipment, net                 |   |                   | 9     |               |   |        | (37  | )
|Changes in operating assets and liabilities:                                |                                                           |   |                   |       |               |   |        |     
|                                                                            | Accounts receivable                                       |   |                   | (554  | )             |   |        | 260  |  
|                                                                            | Inventories                                               |   |                   | (631  | )             |   |        | (340 | )
|                                                                            | Prepaid expenses and other current assets                 |   |                   | 366   |               |   |        | (523 | )
|                                                                            | Accounts payable                                          |   |                   | (205  | )             |   |        | 275  |  
|                                                                            | Accrued compensation                                      |   |                   | (275  | )             |   |        | 192  |  
|                                                                            | Other accrued liabilities                                 |   |                   | (147  | )             |   |        | 536  |  
|                                                                            | Other non-current liabilities                             |   |                   | 67    |               |   |        |     |  
|                                                                            |                                                           |   |                   |       |               |   |        |     
|Net cash flows used in operating activities                                 |                                                           |   | (4,094            | )     |               |   | (240   | )   
|                                                                            |                                                           |   |                   |       |               |   |        |     
|INVESTING ACTIVITIES                                                        |                                                           |   |                   |       |               |   |        |     
|Purchase of property and equipment                                          |                                                           |   | (307              | )     |               |   | (323   | )   
|Purchase of short-term investments                                          |                                                           |   | (3,029            | )     |               |   |       |     
|Acquisition of purchased technology                                         |                                                           |   | (12,113           | )     |               |   |       |     
|Proceeds from maturities and sales of short-term investments                |                                                           |   | 1,818             |       |               |   |       |     
|Proceeds from sale of property and equipment                                |                                                           |   | 23                |       |               |   | 51     |     
|Decrease in other assets                                                    |                                                           |   | 2                 |       |               |   | 142    |     
|                                                                            |                                                           |   |                   |       |               |   |        |     
|Net cash flows used in investing activities                                 |                                                           |   | (13,606           | )     |               |   | (130   | )   
|                                                                            |                                                           |   |                   |       |               |   |        |     
|FINANCING ACTIVITIES                                                        |                                                           |   |                   |       |               |   |        |     
|Issuance of common stock, net of issuance costs                             |                                                           |   | 5,058             |       |               |   | 557    |     
|Issuance of Series B preferred stock and
warrants, net of issuance costs    |                                                           |   | 9,404             |       |               |   |       |     
|Issuance of convertible debentures                                          |                                                           |   |                  |       |               |   | 4,000  |     
|Short-term borrowings                                                       |                                                           |   | 465               |       |               |   | 1,172  |     
|Repayment of note payable to bank                                           |                                                           |   |                  |       |               |   | (5,000 | )   
|Repayment of short-term and long-term debt                                  |                                                           |   | (531              | )     |               |   | (1,296 | )   
|Payment of Series B preferred stock dividends                               |                                                           |   | (567              | )     |               |   |       |     
|Repayments of capital lease obligations                                     |                                                           |   | (1                | )     |               |   | (43    | )   
|                                                                            |                                                           |   |                   |       |               |   |        |     
|Net cash flows provided by/(used in) financing activities                   |                                                           |   | 13,828            |       |               |   | (610   | )   
|                                                                            |                                                           |   |                   |       |               |   |        |     
|Decrease in cash and cash equivalents                                       |                                                           |   | (3,872            | )     |               |   | (980   | )   
|Cash and cash equivalents at beginning of period                            |                                                           |   | 6,156             |       |               |   | 10,183 |     
|                                                                            |                                                           |   |                   |       |               |   |        |     
|Cash and cash equivalents at end of period                                  |                                                           | $ | 2,284             |       |               | $ | 9,203  |     
|                                                                            |                                                           |   |                   |       |               |   |        |     
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                           |                                                           |   |                   |       |               |   |        |     
|                                                                            | Cash paid for interest                                    |   | $                 | 250   |               |   | $      | 150  |  
|                                                                            |                                                           |   |                   |       |               |   |        |     
|                                                                            | Amount payable relating to product acquisition            |   | $                 | 2,183 |               |   | $      |     |  
|                                                                            |                                                           |   |                   |       |               |   |        |     

See accompanying notes.

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QUESTCOR PHARMACEUTICALS, INC.




NOTES TO CONDENSED CONSOLIDATED SEPTEMBER 30, 2003 FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

Questcor Pharmaceuticals, Inc. (the Company) is a specialty
pharmaceutical company that acquires, develops, markets and sells brand name
prescription drugs through a U.S. direct sales force and overseas distributors.
The Company focuses on the treatment of conditions,
including central nervous system (CNS) diseases and gastroenterological
disorders which are served by a concentrated group of physicians, such
as neurologists and gastroenterologists. The Companys strategy is to acquire pharmaceutical products that it
believes have sales growth potential, are promotionally responsive to a
focused, targeted sales and marketing effort and complement
the Companys existing products. In addition, through corporate collaborations,
the Company intends to develop new patented intranasal formulations of
previously FDA approved drugs. The Company currently markets five products in
the U.S.: HP Acthar® Gel (Acthar), an injectable drug that is approved for
the treatment of certain CNS disorders with an inflammatory component including
the treatment of flares associated with Multiple Sclerosis (MS) and is
commonly used in treating patients with infantile spasm;
Nascobal®, the only prescription nasal gel
used for the treatment of various Vitamin B-12 deficiencies; Ethamolin®, an
injectable drug used to treat enlarged weakened blood vessels at the entrance
to the stomach that have recently bled, known as esophageal varices;
Glofil®-125, which is an injectable agent that assesses how well the kidney is
working by measuring glomerular filtration rate, or kidney function; and
VSL#3, a patented probiotic marketed as a dietary supplement to promote normal
gastrointestinal function. Probiotics are living organisms in food and dietary
supplements, which, upon ingestion in certain numbers, improve the health of
the host beyond their inherent basic nutrition. Due to minimal
demand and increasing production costs, the Company discontinued
marketing and selling Inulin in Sodium Chloride on September 30, 2003. On
June 17, 2003, the Company acquired Nascobal®, a nasal gel formulation of
Cyanocobalamin USP (Vitamin B-12), from Nastech Pharmaceutical Company, Inc.
(Nastech). The Company began distributing Nascobal in July 2003. The Company
markets Nascobal for patients with severe deficiencies of Vitamin
B-12 associated with MS and Crohns Disease as these patients
are at high risk of developing severe deficiencies of
Vitamin B-12 due to a compromised ability to absorb Vitamin B-12 through the
gastrointestinal system. In June 2002, the Company signed a license agreement
with Fabre Kramer Pharmaceuticals, Inc., whereby Fabre Kramer will manage and
provide funding for the clinical development programs for Hypnostat (an
intranasal triazolam for the treatment of insomnia) and Panistat (an
intranasal alprazolam for the treatment of panic disorders).

The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States and applicable Securities and Exchange Commission
regulations for interim financial information. These financial statements do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The unaudited financial statements should be read in conjunction
with the audited financial statements and related footnotes included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2002, as
filed on March 26, 2003 with the Securities and Exchange Commission. The
accompanying balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date. In the opinion of the Companys
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for the fair presentation of interim financial information
have been included. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. Certain amounts in the prior quarters financial statements
have been reclassified to conform with the current quarters presentation. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

2. RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This Statement establishes new standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS
No. 150 on July 1, 2003 did not have a material impact on the Consolidated Financial Statements.

In November 2002, the Emerging Issues Task Force (or EITF) of the
Financial Accounting Standards Board (or FASB) issued EITF 00-21, Revenue
Arrangements with Multiple Deliverables, which addresses certain aspects of
the accounting for arrangements that involve the delivery or performance of
multiple products, services and/or rights to use assets. Under EITF 00-21,
revenue arrangements with multiple deliverables should be divided into separate
units of accounting if the deliverables meet certain criteria, including
whether the fair value of the delivered items can be determined and whether
there is evidence of fair value of the undelivered items. In addition, the
consideration should be allocated among the separate units of accounting based
on their fair values, and the applicable revenue recognition criteria should be
considered separately for each of the separate units of accounting.
EITF 00-21

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is effective for revenue arrangements
the Company enters into after June 30,
2003. The adoption of EITF 00-21 did not have a material impact
on the Consolidated Financial Statements as of September 30,
2003. The Company will evaluate the impact of EITF 00-21 on future revenue
arrangements it enters into.

3. STOCK-BASED COMPENSATION

The Company generally grants stock options to its employees for a fixed
number of shares with an exercise price equal to the fair value of the shares
on the date of grant. As allowed under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations in
accounting for stock awards to employees. Accordingly, no compensation expense
is recognized in the Companys financial statements in connection with stock
options granted to employees with exercise prices not less than fair value.
Deferred compensation for options granted to employees is determined as the
difference between the fair value of the Companys common stock
on the date options were granted and the exercise price. For purposes of
disclosures pursuant to SFAS 123, as amended by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure, the estimated fair value of options is amortized to
expense over the options vesting periods.

Compensation expense for options granted to non-employees has been
determined in accordance with SFAS 123 and EITF 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
conjunction with Selling Goods or Services, as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. Compensation expense for options granted
to non-employees is periodically re-measured as the underlying options vest.

The following table illustrates the effect on net loss per common share if
the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per share amounts):

|                                                                        |                                                                                                           |   |                                  |       |                                 |   |        |       |      |   |        |        |   |   |        |        |  
|----------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | - | -------------------------------- | ----- | ------------------------------- | - | ------ | ----- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                                                                        |                                                                                                           |   | Three months ended September 30, |       | Nine months ended September 30,
|                                                                        |                                                                                                           |   |                                  |       |                                
|                                                                        |                                                                                                           |   | 2003                             |       | 2002                            |   | 2003   |       | 2002
|                                                                        |                                                                                                           |   |                                  |       |                                 |   |        |       |     
|Net loss applicable to common stockholders as reported                  |                                                                                                           | $ | (776                             | )     |                                 | $ | (995   | )     |      | $ | (6,076 | )      |   | $ | (2,430 | )     
|                                                                        | Add: Stock-based employee compensation expense
included in reported net loss                              |   |                                  | 37    |                                 |   |        | 2     |      |   |        | 51     |   |   |        | 9      |  
|                                                                        | Deduct: Total stock-based employee compensation
expense determined under fair value method for all
awards |   |                                  | (343  | )                               |   |        | (303  | )    |   |        | (1,010 | ) |   |        | (1,076 | )
|                                                                        |                                                                                                           |   |                                  |       |                                 |   |        |       |      |   |        |        |   |   |        |       
|Net loss applicable to common stockholders, pro forma                   |                                                                                                           | $ | (1,082                           | )     |                                 | $ | (1,296 | )     |      | $ | (7,035 | )      |   | $ | (3,497 | )     
|                                                                        |                                                                                                           |   |                                  |       |                                 |   |        |       |      |   |        |        |   |   |        |       
|Basic and diluted net loss per share
applicable to common stockholders: |                                                                                                           |   |                                  |       |                                 |   |        |       |      |   |        |        |   |   |        |       
|                                                                        | As reported                                                                                               |   | $                                | (0.02 | )                               |   | $      | (0.03 | )    |   | $      | (0.15  | ) |   | $      | (0.06  | )
|                                                                        |                                                                                                           |   |                                  |       |                                 |   |        |       |      |   |        |        |   |   |        |       
|                                                                        | Pro forma                                                                                                 |   | $                                | (0.02 | )                               |   | $      | (0.03 | )    |   | $      | (0.17  | ) |   | $      | (0.09  | )
|                                                                        |                                                                                                           |   |                                  |       |                                 |   |        |       |      |   |        |        |   |   |        |       

4. REVENUE RECOGNITION

Revenues from product sales of Acthar, Nascobal, Ethamolin, Glofil-125,
Inulin and VSL#3 are recognized based upon shipping terms, net of estimated
reserves for sales returns, government chargebacks, Medicaid rebates, and
discounts. The Company discontinued marketing and selling Inulin in Sodium
Chloride on September 30, 2003. Revenue is recognized upon shipment of
product, provided the title to the products has been transferred at the point
of shipment. If title of product transfers at point of receipt by the customer,
revenue is recognized upon customer receipt of the shipment. The Company
records estimated sales allowances against product revenues for expected
returns, chargebacks, Medicaid rebates and discounts based on historical sales
returns, chargebacks, and Medicaid rebates, analysis of return merchandise
authorizations and other known factors such as shelf life of products, as
required. The Company continually assesses the historical returns and other
experience including customers compliance with return goods policy and adjusts
its allowances as appropriate. The Companys return policy allows customers to
return expired product for exchange within six months beyond the expiration
date. Effective August 12, 2002 the Company changed its return goods policy
such that it no longer issues credit memorandums for returns. Rather, returns
are exchanged for replacement product, and estimated costs for such exchanges,
which include actual product material costs and related shipping charges, are
included in Cost of Product Sales. Returns are subject to quality assurance
reviews prior to acceptance. The Company sells product to wholesalers, who in
turn sell its products to pharmacies and hospitals. In the case of VSL#3, the
Company sells directly to consumers. The Company does not require collateral
from its customers.

Revenue earned under collaborative research agreements is recognized as
the research services are performed. Amounts received in advance of services to
be performed are recorded as deferred revenue until the services are performed.

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The Company has received government grants that support the Companys
research effort in specific research projects. These grants provide for
reimbursement of approved costs incurred as defined in the various awards.

The Company has received payments in exchange for proprietary licenses
related to technology and patents. The Company classifies these payments as
Technology Revenue. These payments are recognized as revenues upon receipt of
cash and the transfer of intellectual property, data and other rights licensed,
assuming no continuing material obligations exist.

Shipping and handling costs are included in Cost of Product Sales.

5. NASCOBAL ACQUISITION

On June 17, 2003, the Company acquired Nascobal, a nasal gel formulation
of Cyanocobalamin USP (Vitamin B-12), from Nastech. Under the terms of the
Nascobal Asset Purchase Agreement, the Company made an initial cash payment of
$9 million upon the closing of the acquisition, an additional cash payment of
$3 million in the third quarter and is required to pay an additional $2.2
million payable on or before December 31, 2003. The $2.2 million payable is
included in Payable Relating to Product Acquisition on the accompanying
Condensed Consolidated Balance Sheet. As part of the acquisition, the Company
is also acquiring rights to Nascobal nasal spray, an improved dosage form, for
which a New Drug Application (NDA) is expected to be filed by Nastech with
the FDA before the end of 2003. Nastech retains a security interest in the
patents, trademarks, and other intellectual property relating to Nascobal.
Subject to the approval of the NDA for the new Nascobal nasal spray dosage form
by the FDA, the Company is required to make a $2 million payment for the
transfer of the NDA from Nastech to the Company. Further, subject to the
approval of the NDA for the new Nascobal nasal spray dosage form and upon
issuance of a pending U.S. patent for the new Nascobal nasal spray dosage form,
the Company is required to make a second $2 million payment. The Company and
Nastech have also entered into a long term supply agreement under which Nastech
will continue to manufacture Nascobal for the Company at its FDA approved, cGMP
manufacturing facility in Hauppauge, New York.

The Company accounted for the product acquisition as an asset purchase and
allocated the purchase price based on the fair value of the assets acquired. Of
the purchase cost of $14.3 million, which includes acquisition costs of $0.1
million, $14.2 million was attributed to Purchased technology, and $0.1 million
to inventory. Purchased technology will be amortized over the estimated life of
15 years. Amortization expense was $276,000 for the three and nine month
periods ended September 30, 2003. Amortization expense will be approximately
$511,000 for 2003, approximately $949,000 per year from 2004 through 2017, and
approximately $435,000 for 2018.

6. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers highly liquid investments with maturities from the
date of purchase of three months or less to be cash equivalents. The Company
had cash, cash equivalents and short-term investments of $4,821,000 and
$7,506,000 at September 30, 2003, and December 31, 2002,
respectively.

Following is a summary of investments, at fair value, based on quoted
market prices for these investments (in thousands):

|                        |                              |                |       |                 |       |            |           |     |   |   |       |       | 
|----------------------- | ---------------------------- | -------------- | ----- | --------------- | ----- | ---------- | --------- | --- | - | - | ----- | ----- | 
|                        |                              |                | Gross |                 | Gross |            | Estimated
|September 30, 2003      |                              | Amortized Cost |       | Unrealized Gain |       | Fair Value
|                        |                              |                |       |                 |       |           
|Cash equivalents:       |                              |                |       |                 |       |            |           |     |   |   |       |      
|                        | Money market funds           |                | $     | 2,172           |       |            | $         |    |   |   | $     | 2,172 | 
|                        |                              |                |       |                 |       |            |           |     |   |   |       |       | 
|                        |                              | $              | 2,172 |                 |       | $          |          |     |   | $ | 2,172 |      
|                        |                              |                |       |                 |       |            |           |     |   |   |       |       | 
|Short-term investments: |                              |                |       |                 |       |            |           |     |   |   |       |      
|                        | Commercial paper             |                | $     | 250             |       |            | $         |    |   |   | $     | 250   | 
|                        | Corporate bonds              |                |       | 2,287           |       |            |           |    |   |   |       | 2,287 | 
|                        |                              |                |       |                 |       |            |           |     |   |   |       |       | 
|                        |                              | $              | 2,537 |                 |       | $          |          |     |   | $ | 2,537 |      
|                        |                              |                |       |                 |       |            |           |     |   |   |       |       | 
|                       
|                        |                              |                | Gross |                 | Gross |            | Estimated
|December 31, 2002       |                              | Amortized Cost |       | Unrealized Loss |       | Fair Value
|                        |                              |                |       |                 |       |           
|Cash equivalents:       |                              |                |       |                 |       |            |           |     |   |   |       |      
|                        | Money market funds           |                | $     | 5,400           |       |            | $         |    |   |   | $     | 5,400 | 
|                        | Commercial paper             |                |       | 499             |       |            |           |    |   |   |       | 499   | 
|                        |                              |                |       |                 |       |            |           |     |   |   |       |       | 
|                        |                              | $              | 5,899 |                 |       | $          |          |     |   | $ | 5,899 |      
|                        |                              |                |       |                 |       |            |           |     |   |   |       |       | 
|Short-term investments: |                              |                |       |                 |       |            |           |     |   |   |       |      
|                        | Commercial paper             |                | $     | 498             |       |            | $         |    |   |   | $     | 498   | 
|                        | Corporate bonds              |                |       | 761             |       |            |           |    |   |   |       | 761   | 
|                        | Corporate equity investments |                |       | 133             |       |            |           | (42 | ) |   |       | 91    | 
|                        |                              |                |       |                 |       |            |           |     |   |   |       |       | 
|                        |                              | $              | 1,392 |                 |       | $          | (42       | )   |   | $ | 1,350 |      
|                        |                              |                |       |                 |       |            |           |     |   |   |       |       | 

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In 2003, the Company recognized an other-than-temporary loss of $51,000
and a realized loss of $14,000 related to its Rigel equity investment. These
amounts are included in Other Income (Expense) on the accompanying
Consolidated Statement of Operations.

7. INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method)
or market and consist of the following (in thousands):

|                                                   |  |               |       |              |  |   |     |  
|-------------------------------------------------- |  | ------------- | ----- | ------------ |  | - | --- | -
|                                                   |  | September 30, |       | December 31,
|                                                   |  | 2003          |       | 2002        
|                                                   |  |               |       |             
|Raw materials                                      |  | $             | 522   |              |  | $ | 70  |  
|Finished goods                                     |  |               | 850   |              |  |   | 397 |  
|Less allowance for excess and obsolete inventories |  |               | (285  | )            |  |   | (76 | )
|                                                   |  |               |       |              |  |   |     |  
|                                                   |  | $             | 1,087 |              |  | $ | 391 |  
|                                                   |  |               |       |              |  |   |     |  

8. INTANGIBLE ASSETS

Goodwill and assembled workforce no longer subject to amortization
amounted to $479,000 at September 30, 2003 and December 31, 2002. In accordance
with SFAS 141 and 142, the Company discontinued the amortization of goodwill on
January 1, 2002. The Company performed an impairment test of goodwill as of
January 1, 2003, which did not result in an impairment charge. The Company will
continue to monitor the carrying value of goodwill through the annual
impairment tests or more frequently if indicators of potential impairment
exist. As of September 30, 2003, no indicators of potential impairment
existed. No such impairment losses have been recorded to date.

Purchased technology at September 30, 2003 includes $14.2 million related
to the Nascobal acquisition; see Note 4  Nascobal Acquisition. The Nascobal
purchased technology is being amortized over its estimated life of 15 years.
The remaining purchased technology net balance of $39,000 at September 30, 2003 and $382,000 at
December 31, 2002 is being amortized over the estimated sales life of the
associated product (seven years) and will be amortized in full during the
fourth quarter of 2003.

9. LINE OF CREDIT

In January 2002, the Company entered into a revolving accounts receivable
line of credit with Pacific Business Funding, a division of Greater Bay
Bancorp. Under the agreement, the Company can borrow up to the lesser of 80% of
its eligible accounts receivable balance or $3,000,000. Interest accrues on
outstanding advances at an annual rate equal to prime rate plus four and
one-half percent. The term of the agreement is one year and the agreement
automatically renews annually, unless terminated by the Company. There were no
borrowings under this line of credit as of September 30, 2003. The line of
credit is secured by a blanket lien on all assets including intellectual
property. As of September 30, 2003, $1,346,000 was available for borrowing
under the line of credit.

10. COMMITMENTS, INDEMNIFICATIONS AND CONTINGENCIES

The Company, as permitted under California law and in accordance with its
Bylaws, indemnifies its officers and directors for certain events or
occurrences while the officer or director is or was serving at the Companys
request in such capacity. The potential future indemnification limit is to the
fullest extent permissible under California law; however, the Company has a
director and officer insurance policy that limits its exposure and may enable
it to recover a portion of any future amounts paid. The Company believes the
fair value of these indemnification agreements is minimal. Accordingly, the
Company has no liabilities recorded for these agreements as of September 30,
2003.

From time to time, the Company may become involved in claims and other
legal matters arising in the ordinary course of business. Management is not
currently aware of any matters that will have a material adverse affect on the
financial position, results of operations or cash flows of the Company.

11. NET LOSS PER SHARE APPLICABLE TO COMMON STOCKHOLDERS

Basic and diluted net loss per share applicable to common
stockholders is based on net loss applicable to common stockholders for the
relevant period, divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share applicable to common
stockholders gives effect to all potentially dilutive common shares outstanding
during the period such as options, warrants, convertible preferred stock, and
contingently issuable shares. Diluted net loss per share applicable to common
stockholders has not been presented separately as, due to the Companys net
loss position, it is anti-dilutive.

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Had the Company been in a net income
position for the periods ended September 30, 2003,
shares used in calculating diluted earnings per share applicable to common
stockholders would have included the dilutive effect of an additional 9,743,336
stock options, 12,780,446 convertible preferred shares, 2,531,646 shares
issuable upon conversion of debentures (if dilutive), placement unit options
for 127,676 shares and 10,340,711 warrants.

12. EQUITY TRANSACTIONS

In March 2003, a warrant was exercised through a cashless exercise in
accordance with the terms of the warrant, and 315,827 shares of common stock
were issued.

In May 2003, the number of authorized shares of the Companys no par value
common stock was increased from 75,000,000 to 105,000,000.

In May 2003, the Companys 2003 Employee Stock Purchase Plan was approved
by shareholders. The Company has reserved 900,000 shares of common stock for
issuance under the plan.

In May 2003, the aggregate number of shares of Common Stock authorized for
issuance under the Companys 1992 Employee Stock Option Plan was increased by
1,000,000 shares, from 12,500,000 shares to 13,500,000 shares.

In June 2003, a warrant was exercised through a cashless exercise in
accordance with the terms of the warrant, and 72,168 shares of common stock
were issued.

On June 11, 2003, the Company consummated a private placement of its
Common Stock and warrants to purchase Common Stock. The Company issued
4,979,360 shares of Common Stock in the private placement at $1.01 per share,
which was the volume weighted average price of the Common Stock for the five
days prior to and including the close of the private placement. Gross proceeds
to the Company from the private placement were approximately $5 million. Net of
issuance costs, the proceeds to the Company were $4.8 million.

The purchasers of the Common Stock also received for no additional
consideration warrants exercisable for an aggregate of 2,987,616 shares of
Common Stock at an exercise price of $1.26 per share, which represented a 25%
premium to the volume weighted average price of the Common Stock for the five
days prior to and including the close of the private placement. The warrants
expire in June 2008.

13. SERIES B CONVERTIBLE PREFERRED STOCK

In January 2003, the Company completed a private placement of Series B
Convertible Preferred Stock and warrants to purchase common stock to various
investors. Gross proceeds to the Company from the private placement were $10
million. Net of issuance costs, the proceeds to the Company were $9.4 million.

The Series B Preferred Stock has an aggregate stated value of $10 million
and each holder is entitled to a quarterly dividend at an initial rate of 8%
per year, which rate will increase to 10% per year on and after January 1,
2006, and to 12% on and after January 1, 2008. The dividends are paid in cash
on a quarterly basis. In addition, on the occurrence of designated events,
including the failure to maintain Net Cash, Cash Equivalent and Eligible
Investment Balances, as defined in the Companys Certificate of Determination
of Series B Preferred Stock (the Certificate of Determination), of at least
50% of the aggregate stated value of the outstanding shares of Series B
Preferred Stock, the dividend rate will increase by an additional 6% per year.
The Series B Preferred Stock is entitled to a liquidation preference over the
Companys common stock and Series A Preferred Stock upon a liquidation,
dissolution or winding up of the Company. The Series B Preferred Stock is
convertible at the option of the holder into the Companys common stock at a
conversion price of $0.9412 per share, subject to certain anti-dilution
adjustments. The Company has the right commencing on January 1, 2006 (assuming
specified conditions are met) to redeem the Series B Preferred Stock at a price
of 110% of stated value, together with all accrued and unpaid dividends and
accrued interest. In addition, upon the occurrence of designated Optional
Redemption Events (as defined below), the holders have the right to require the
Company to redeem the Series B Preferred Stock at 100% of stated value,
together with all accrued and unpaid dividends and interest. The Optional
Redemption Events include any of the following:



| |  |  | If the Company consolidates or merges with or into another entity
where the shareholders of the Company do not own at least 51% of the
surviving entity and such consolidation or merger is approved by the
Companys Board of Directors;                 
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | If the Company adopts any amendment to its Amended and Restated
Articles of Incorporation which materially and adversely affects the
rights of the holders of Series B Preferred Stock in respect of their
interests in shares of Common Stock that can be

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| |   |  | acquired upon conversion of shares of Series B Preferred Stock in a manner
different and more adverse than it affects the rights of holders of Common
Stock generally;                                                                                                                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | If the Company fails to declare or pay dividends in full on the
applicable dividend date, other than in circumstances where such
declaration or payment would not be permitted by Section 500 or 501 of
the California Corporations Code, or fails to pay certain redemption
prices on any share of Series B Preferred Stock when due;
|
| |  |  | If the Company fails to issue shares of Common Stock to any Series B
holder upon conversion or upon exercise of warrants when due;                                                                                                                                                                                                    
|
| |  |  | If the Company commits certain breaches under, or otherwise violates
certain terms of, the transaction documents entered into in connection
with the issuance of the Series B Preferred Stock;                                                                                                                                        
|
| |  |  | If the Companys representations and warranties made in the
transaction documents entered into in connection with the issuance of
the Series B Preferred Stock are false or misleading in any material way
when made or deemed made; and                                                                                              
|
| |  |  | If the Company institutes a voluntary bankruptcy or similar
proceeding;                                                                                                                                                                                                                                                               

The redemption events described above are all within the control of the
Company. Therefore, in accordance with EITF Topic D-98, the Company has
classified the Series B Preferred Stock in permanent equity. In addition, the
Company initially recorded the Series B Preferred Stock at its fair value on
the date of issuance. The Company has elected not to adjust the carrying value
of the Series B Preferred Stock to the redemption value of such shares, since
it is uncertain whether or when the redemption events described above will
occur. Subsequent adjustments to increase the carrying value to the redemption
value will be made when it becomes probable that such redemption will occur. As
of September 30, 2003, the redemption value of the Series B Preferred Stock was
$10 million.

The terms of the Series B Preferred Stock contain a variety of affirmative
and restrictive covenants, including limitations on indebtedness and liens.
Each share of Series B Preferred Stock is generally entitled to a number of
votes equal to 0.875 times the number of shares of Common Stock issuable upon
conversion of such share of Series B Preferred Stock. In addition, the Company
agreed that two of the investors are each entitled to appoint a representative
to attend Company Board of Directors meetings in a nonvoting observer capacity.

The purchasers of the Series B Preferred Stock also received for no
additional consideration warrants exercisable for an aggregate of 3,399,911
shares of Common Stock at an exercise price of $1.0824 per share, subject to
certain anti-dilution adjustments. The warrants expire in January 2007. The
warrants issued to the Series B holders were assigned a value of $1,527,000
which decreased the carrying value of the preferred stock. The warrants were
valued using the Black-Scholes method with the following assumptions: a risk
free interest rate of 3%; an expiration date of January 15, 2007; volatility of
82% and a dividend yield of 0%. In connection with the issuance of the Series B
Preferred Stock and warrants, the Company recorded $1,301,000 related to the
beneficial conversion feature on the Series B Preferred Stock as a deemed
dividend, which increased the carrying value of the preferred stock. A
beneficial conversion feature is present because the effective conversion price
of the Series B Preferred Stock was less than the fair value of the Common
Stock on the commitment date. The deemed dividend increased the loss applicable
to common stockholders in the calculation of basic and diluted net loss per
common share.

On June 13, 2003, the Company entered into agreements with the holders of
record of its Series B Preferred Stock, whereby the holders of Series B
Preferred Stock waived certain covenants and rights to receive additional
dividends as provided in the Certificate of Determination, which may have been
triggered as a result of the Nascobal acquisition and the use of the Companys
cash resources to pay the purchase price (the Acquisition). Specifically, the
holders of Series B Preferred Stock waived their right to receive an additional
aggregate six percent dividend in the event that the Acquisition resulted in
the Company being unable to satisfy the test set forth in Sections 500 and 501
of the California Corporations Code to allow for the Company to redeem all of
the issued and outstanding shares of Series B Preferred Stock. Such waiver was
granted through the earlier of (i) December 31, 2003 and (ii) the date on which
(A) the Companys assets (exclusive of goodwill, capitalized research, and
development expenses and deferred charges) equal less than 125% of its
liabilities (not including deferred taxes, deferred income and other deferred
credits) or (B) the Companys current assets equal less than 80% of its current
liabilities. Additionally, the holders of Series B Preferred Stock waived their
right to receive an additional aggregate six percent dividend in the event that
the Acquisition resulted in the Company being unable to maintain Net Cash, Cash
Equivalents and Eligible Investment Balances (as defined in the Certificate of
Determination) in an amount equal to $5 million. Such waiver was granted
through the earlier of (i) December 31, 2003 and (ii) the date on which the
Company fails to maintain Net Cash, Cash Equivalents and Eligible Investment
Balances in an amount equal to at least $2.5 million. The holders of Series B
Preferred Stock also agreed that: (i) the Acquisition would not constitute a
breach of the covenant in the Certificate of Determination requiring the
Company to use its best efforts to maintain compliance with Sections 500 and
501 of the California Corporations Code to be able to pay dividends on and to
redeem all of the issued and outstanding shares of Series B Preferred Stock;

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and (ii) the incurrence by the Company of contingent obligations to pay
additional amounts to Nastech of $5,183,333 and the granting of a security
interest in the acquired Nascobal product would not constitute a breach of the
covenants in the Certificate of Determination restricting the Companys ability
to incur indebtedness and create liens. In consideration of such agreements,
the Company agreed to adjust the exercise price of warrants to purchase
3,399,911 shares of Common Stock previously issued by the Company to the
holders of Series B Preferred Stock from $1.0824 per share to $0.9412 per
share.

As a result of the decrease to the exercise price of the warrants, the
Company revalued the warrants issued to the Series B Preferred Stockholders,
resulting in an incremental value of $93,000 which decreased the carrying value
of the preferred stock. The warrants were valued using the Black-Scholes method
with the following assumptions: a risk free interest rate of 1.4%; an
expiration date of January 15, 2007; volatility of 70% and a dividend yield of
0%. In connection with the revaluation, the Company recorded $93,000 related to
the beneficial conversion feature on the Series B Preferred Stock as an
additional deemed dividend, which increased the carrying value of the Series B
Preferred Stock. The deemed dividend increased the net loss applicable to
common stockholders in the calculation of basic and diluted net loss per common
share applicable to common stockholders.

14. RELATED PARTY TRANSACTIONS

In December 2001, the Company entered into a promotion agreement with VSL
Pharmaceuticals Inc. (VSL), a private company owned in part by the major
shareholders of Sigma Tau. Sigma Tau beneficially owned approximately 34% of
the Companys outstanding stock as of September 30, 2003. In June 2002, the
Company signed an amendment to the promotion agreement. Under these agreements,
the Company has agreed to purchase VSL#3 from VSL at a stated price, and has
also agreed to promote, sell, warehouse and distribute the VSL#3 product direct
to customers at its cost and expense, subject to certain expense
reimbursements. Revenues from sales of VSL#3 are recognized when product is
shipped to the customer. The Company does not accept returns of VSL#3. VSL#3
revenue for the quarter ending September 30, 2003 was $256,000 and is included
in Net Product Sales. Included in Accounts Payable is $104,000 for amounts owed
to VSL at September 30, 2003. An access fee to VSL is calculated quarterly,
which varies based upon sales and costs incurred by the Company subject to
reimbursement under certain circumstances. For the quarter ended September 30,
2003, the amount of the access fee was $36,000 and is included in Selling,
General and Administrative expense in the accompanying Consolidated Statement
of Operations. During the quarter ended September 30, 2003 the Company paid
$91,000 to VSL for the purchase of VSL#3 product and access fees.

In January 2002, the Company entered into a royalty agreement with
Glenridge Pharmaceuticals LLC (Glenridge). Kenneth R. Greathouse, the
Companys former Vice President of Commercial Operations, is a part owner of
Glenridge. This agreement calls for the payment of royalties on a quarterly
basis on the net sales of Acthar®. The Company paid Glenridge $77,000 and
$106,000 in the quarters ended September 30, 2003 and 2002, and $228,000 and
$353,000 for the nine months ended September 30, 2003 and 2002, respectively,
related to royalties on Acthar® sales. The Company has accrued $70,000 for
royalties earned in the quarter ended September 30, 2003, which is included in
Other Accrued Liabilities on the accompanying Consolidated Balance Sheet.

15. COMPREHENSIVE LOSS

Comprehensive loss is comprised of net loss and the change in unrealized
holding gains and losses on available-for-sale securities.

|                                                                     |  |                    |      |                   |  |      |      |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------- |  | ------------------ | ---- | ----------------- |  | ---- | ---- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                     |  | Three Months Ended |      | Nine Months Ended
|                                                                     |  | September 30,      |      | September 30,    
|                                                                     |  |                    |      |                  
|                                                                     |  | 2003               |      | 2002              |  | 2003 |      | 2002
|                                                                     |  |                    |      |                   |  |      |      |     
|Net loss                                                             |  | $                  | (576 | )                 |  | $    | (995 | )    |  | $ | (4,115 | ) |  | $ | (2,430 | )
|Change in unrealized gains (losses)
on available-for-sale securities |  |                    |     |                   |  |      | 15   |      |  |   | 42     |   |  |   | 115    |  
|                                                                     |  |                    |      |                   |  |      |      |      |  |   |        |   |  |   |        |  
|Comprehensive loss                                                   |  | $                  | (576 | )                 |  | $    | (980 | )    |  | $ | (4,073 | ) |  | $ | (2,315 | )
|                                                                     |  |                    |      |                   |  |      |      |      |  |   |        |   |  |   |        |  

16. SHAREHOLDER RIGHTS PLAN

On February 11, 2003 the Board of Directors of the Company adopted a
Shareholder Rights Plan. In connection with the Rights Plan, the Board of
Directors declared a dividend of one preferred share purchase right (the
Rights) for each outstanding share of common stock, no par value per share
(the Common Shares), of the Company outstanding at the close of business on
February 21, 2003 (the Record Date). Each Right will entitle the registered
holder thereof, after the Rights become exercisable and until February 10, 2013
(or the earlier redemption, exchange or termination of the Rights), to purchase
from the Company one one-hundredth (1/100th) of a share of Series C Junior
Participating Preferred Stock, no par value per share (the Preferred Shares),
at a price of $10 per one one-hundredth (1/100th) of a Preferred Share, subject
to certain anti-dilution adjustments (the Purchase Price). Until the earlier
to occur of (i) ten (10) days following a public announcement that a person or
group of affiliated or associated persons has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the Common Shares (an
Acquiring Person) or (ii) ten (10) business days (or such later date as may
be determined by action of the Board of Directors prior to such time as any
person or

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group of affiliated persons becomes an Acquiring Person) following the
commencement or announcement of an intention to make a tender offer or exchange
offer the consummation of which would result in the beneficial ownership by a
person or group of 15% or more of the Common Shares (the earlier of (i) and
(ii) being called the Distribution Date), the Rights will be evidenced, with
respect to any of the Common Share certificates outstanding as of the Record
Date, by such Common Share certificate. An Acquiring Person does not include
any Existing Holder (defined as Sigma-Tau Finanziaria S.p.A., together with all
of its Affiliates and Associates, including, without limitation Defiante
Farmaceutica L.D.A., Sigma-Tau International S.A., Paolo Cavazza and Claudio
Cavazza,), unless and until such time as such Existing Holder shall become the
beneficial owner of one or more additional Common Shares of the Company (other
than pursuant to a dividend or distribution paid or made by the Company on
the outstanding Common Shares in Common Shares or pursuant to a split or
subdivision of the outstanding Common Shares), unless, upon
becoming the beneficial owner of such additional Common Shares, such Existing
Holder is not then the beneficial owner of 15% or more of the Common Shares
then outstanding.

In the event that a Person becomes an Acquiring Person or if the Company
were the surviving corporation in a merger with an Acquiring Person or any
affiliate or associate of an Acquiring Person and the Common Shares were not
changed or exchanged, each holder of a Right, other than Rights that are or
were acquired or beneficially owned by the Acquiring persons (which Rights will
thereafter be void), will thereafter have the right to receive upon exercise
that number of Common Shares having a market value of two times the then
current Purchase Price of one Right. In the event that, after a person has
become an Acquiring Person, the Company were acquired in a merger or other
business combination transaction or more than 50% of its assets or earning
power were sold, proper provision shall be made so that each holder of a Right
shall thereafter have the right to receive, upon the exercise thereof at the
then current Purchase Price of the Right, that number of shares of common stock
of the acquiring company which at the time of such transaction would have a
market value of two times the then current purchase price of one Right.

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Independent Accountants Review Report

The Board of Directors
Questcor Pharmaceuticals, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of
Questcor Pharmaceuticals, Inc. as of September 30, 2003, and the related
condensed consolidated statements of operations for the three and nine month
periods ended September 30, 2003 and 2002, and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 2003
and 2002. These financial statements are the responsibility of the Companys
management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.

Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with accounting principles
generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Questcor
Pharmaceuticals, Inc. as of December 31, 2002, and the related consolidated
statements of operations, preferred stock and stockholders equity (deficit),
and cash flows for the year then ended and in our report dated February 11,
2003, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2002 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.



| | /s/ ERNST & YOUNG LLP
| | ---------------------

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

Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties, including statements regarding the period of time during which
our existing capital resources and income from various sources will be adequate
to satisfy our capital requirements. Our actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section,
as well as those discussed in our annual report on form 10-K for the fiscal
year ended December 31, 2002, including Item 1 Business of Questcor, and
including without limitation Risk Factors, as well as factors discussed in
any documents incorporated by reference herein or therein. Whenever used in
this Quarterly Report, the terms Questcor, Company, we, our, ours,
and us refer to Questcor Pharmaceuticals, Inc. and its consolidated
subsidiaries.

Overview

We are a specialty pharmaceutical company that acquires, develops, markets
and sells brand name prescription drugs through a U.S. direct sales force and
overseas distributors. We focus on the treatment of conditions, including central nervous system (CNS) diseases and
gastroenterological disorders which are served by a concentrated
group of physicians, such as neurologists and gastroenterologists. Our strategy is to acquire pharmaceutical
products that we believe have sales growth potential, are
promotionally responsive to a focused, targeted sales and marketing
effort and complement our existing products. In addition, through corporate
collaborations, we intend to develop new patented intranasal formulations of
previously FDA approved drugs. We currently market five products in the U.S.:
HP Acthar® Gel (Acthar), an injectable drug that is approved for the
treatment of certain CNS disorders with an inflammatory component including the
treatment of flares associated with multiple sclerosis (MS) and is also
commonly used in treating patients with infantile spasm;
Nascobal®, the only prescription nasal gel
used for the treatment of various Vitamin B-12 deficiencies; Ethamolin®, an
injectable drug used to treat enlarged weakened blood vessels at the entrance
to the stomach that have recently bled, known as esophageal varices;
Glofil®-125 which is an injectable agent that assesses how well the kidney is
working by measuring glomerular filtration rate, or kidney function; and
VSL#3, a patented probiotic marketed as a dietary supplement to promote normal
gastrointestinal (GI) function. Probiotics are living organisms in food and
dietary supplements, which, upon ingestion in certain numbers, improve the
health of the host beyond their inherent basic nutrition. Due to
minimal demand and increasing production costs, we discontinued
marketing and selling Inulin in Sodium Chloride on September 30, 2003. On June
17, 2003, we acquired Nascobal®, a nasal gel formulation of Cyanocobalamin USP
(Vitamin B-12), from Nastech Pharmaceutical Company, Inc. (Nastech). We began
distributing Nascobal in July 2003. We are marketing Nascobal for patients with
severe deficiencies of Vitamin B-12 associated with MS and Crohns Disease as these
patients are at high risk of developing severe deficiencies of Vitamin B-12 due to a
compromised ability to absorb Vitamin B-12 through the gastrointestinal system.

Consistent with our efforts to focus on sales and marketing, our spending
on research and development activities is minimal. Expenses incurred for the
manufacturing site transfer and medical and regulatory affairs are classified
as Research and Development Expenses in the accompanying Statement of
Operations. We have entered into several agreements with pharmaceutical and
biotechnology companies to further the development of certain technology
acquired from RiboGene. In June 2002, we signed a definitive License Agreement
with Fabre Kramer Pharmaceuticals, Inc. (Fabre Kramer) for the exclusive
worldwide development and commercialization of Hypnostat (intranasal triazolam
for insomnia) and Panistat (intranasal alprazolam for panic disorders). Under
the License Agreement, Fabre Kramer assumed the primary responsibility for the
development of Hypnostat and Panistat. Our antiviral drug discovery program has
been partnered with Rigel Pharmaceuticals, Inc. of South San Francisco, CA. and
our antibacterial program has been partnered with Dainippon Pharmaceuticals
Co., Ltd. of Osaka, Japan.

We have sustained an accumulated deficit of $83.0 million from inception
through September 30, 2003. At September 30, 2003, we had $4.8 million in cash,
cash equivalents and short-term investments. Results of operations may vary
significantly from quarter to quarter depending on, among other factors, the
results of our sales efforts, timing of expiration of our products and the
resulting shipment of replacement product under our exchange policy, customers
adherence to our sales and exchange policies, completion of the Acthar site
transfer, the amount of inventory existing at the wholesale level, the
availability of finished goods from our sole-source manufacturers, the timing
of certain expenses, the acquisition of marketed products, the establishment of
strategic alliances and corporate partnering arrangements and the receipt of
milestone payments.

Critical Accounting Policies

Our management discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. 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 disclosures. On an
on-going basis, we evaluate our estimates, including those related to product
returns, sales allowances, bad debts, inventories, investments and intangible
assets. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances, the results
of which form the

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basis for making judgments about 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.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

Sales Allowances and Product Returns and Rebates

We have estimated allowances for product returns, government chargebacks,
Medicaid rebates and cash discounts for prompt payment. We estimate our
allowances by utilizing historical information for existing products and data
obtained from external sources. For new products, we estimate our allowances
for product returns and rebates on specific terms for product returns and
rebates and our experience with similar products. Effective August 12, 2002, we
changed our return goods policy such that we no longer issue credit memorandums
for returns, rather all returns are exchanged for replacement product. The
estimated costs for such exchanges, which include actual product costs and
related shipping charges, are included in Cost of Product Sales. In estimating
returns, we analyze (i) historical returns and sales patterns, (ii) current
inventory on hand at wholesalers and in the distribution channel and the
remaining shelf life of that inventory (ranging from 45 days to 3 years), and
(iii) changes in demand. We continually assess our historical experience
including customers compliance with return goods policy, and we adjust our
allowances as appropriate. In estimating Medicaid rebates, we match the actual
rebates to the actual sale on a product-by-product basis to arrive at an actual
rebate percentage. This actual percentage is used to estimate a rebate
percentage which is applied to current period sales to arrive at the rebate
expense for the period. In particular, we consider allowable prices by
Medicaid. If actual product returns, government chargebacks, Medicaid rebates
and cash discounts are greater than our estimates, additional allowances may be
required.

Inventories

We maintain inventory reserves primarily for obsolescence (due to the
expiration of shelf life). In estimating inventory obsolescence reserves, we
analyze on a product-by-product basis (i) the shelf life and the expiration
date, and (ii) our sales forecasts. Judgment is required in determining whether
the forecasted sales information is sufficiently reliable to enable us to
estimate inventory obsolescence.

Intangible Assets

We have intangible assets related to goodwill and other acquired
intangibles. The determination of related estimated useful lives and whether or
not these assets are impaired involves significant judgment. Changes in
strategy and/or market conditions could significantly impact these judgments
and require adjustments to recorded asset balances. We review intangible
assets, as well as other long-lived assets, for impairment whenever events or
circumstances indicate that the carrying amount may not be fully recoverable.

Results of Operations

Three months ended September 30, 2003 compared to the three months ended
September 30, 2002:

Total revenues for the quarter ended September 30, 2003 increased
$119,000, or 3%, to $3,967,000 from total revenues of $3,848,000 for the
quarter ended September 30, 2002.

For the quarter ended September 30, 2003, net product sales increased
$171,000, or 5%, to $3,943,000 from $3,772,000 for the quarter ended September
30, 2002. We commenced sales of Nascobal in July 2003, which contributed to the
increase in third quarter net product sales. The net product sales for the
third quarter of 2002 included the impact of advance buying by customers upon
notification of our price increase for Ethamolin and Acthar that went
into effect June 24, 2002. From the date of the notification of the price
increase through the effective date of the price increase, we received
$3,231,000 of Acthar and Ethamolin orders of which $2,454,000 were filled in
July 2002.

During the quarter ended September 30, 2003, we replaced vials of Acthar
at no cost for certain of the returned product of Acthar batches that expired
in November 2002 and May 2003. Subsequent to September 30, 2003, we will
continue to replace Acthar returned from expired lots. We will do so again for
the Acthar lot that expires in January 2004. We believe the shipment of
replacement product may have displaced sales of Acthar in the quarter ended
September 30, 2003, and the replacement of product subsequent to September 30,
2003 for product that expired in May 2003 and expiring in January 2004 and future expiring product
may displace future quarter sales. The full extent of this displacement is not
ascertainable at this time, however, as of September 30, 2003, customers have
requested the replacement of expired Acthar with a sales value of greater than
$850,000. We intend to replace this expired product in the fourth quarter of
2003. These replacements will likely displace sales in future
periods. The costs related to replacement products are reserved for
and are included as a component of Cost of Product Sales.

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For the quarter ended September 30, 2003, net product sales of Ethamolin
declined substantially. This is partially due to the prior years results
including the advanced buying upon notification of the price increase for
Ethamolin that went into effect June 24, 2002 as described above. In addition,
we reviewed the external demand data over the last two years and noted that
the demand for Ethamolin is declining. We believe this decline is partially a
result of procedures and devices being used to treat bleeding esophageal
varices rather than the use of sclerosing agents. Also in the current period,
we noted one of our major customers purchased large quantities of Ethamolin. We
believe, through review of external data, that the amount purchased by this
major customer was in excess of historical demand and represents over nine
months of inventory at their reported demand. To the extent that inventory held
by our wholesalers exceeds ultimate demand, we believe that this will adversely
impact our future net product sales.

Grant and royalty revenue decreased by $2,000, or 8%, to $24,000 for the
quarter ended September 30, 2003 from $26,000 for the quarter ended September
30, 2002. This decrease was primarily a result of lower reimbursement under our
Small Business Innovation Research (SBIR) grant due to less activity taking
place with the GERI compound research projects in the quarter ended September
30, 2003, as compared to the quarter ended September 30, 2002. The GERI grant
was terminated on July 31, 2003.

For the quarter ended September 30, 2003 we did not recognize any services
revenue. We recognized $50,000 of services revenue from a related party for
the quarter ended September 30, 2002. This amount reflects revenues recorded
through September 30, 2002, resulting from a $200,000 payment made to us by VSL
for certain promotional activities we undertook to support the launch of VSL#3
in the quarter ended June 30, 2002. The balance was recognized as revenue
ratably through December 2002, at which time it was fully recognized.

Cost of product sales decreased $85,000, or 10%, to $796,000 for the
quarter ended September 30, 2003 from $881,000 for the quarter ended September
30, 2002. This decrease is due primarily to a change in our product mix. In
addition, the quarter ended September 30, 2002 included an increase in our
excess inventory allowance. We expect per unit material costs to increase in
the future due to higher contract manufacturing costs. Cost of product sales as
a percentage of net product sales improved to 20% for the quarter ended
September 30, 2003 as compared to 23% for the quarter ended September 30, 2002.
In April 2003, we decided to outsource certain functions previously performed
in our Carlsbad, California distribution center, including, but not limited to,
warehousing, shipping and quality control studies. We expect cost of product
sales to increase as a result of our outsourcing of these functions. We have
entered into agreements with various vendors to distribute Acthar, Nascobal,
Ethamolin, Glofil and Inulin, and we distribute VSL#3 from our Union City
facility. We discontinued marketing and selling Inulin in Sodium Chloride on
September 30, 2003.

Selling, general and administrative expenses for the quarter ended
September 30, 2003 decreased $262,000 or 9% to $2,630,000 from $2,892,000 for
the quarter ended September 30, 2002. The decrease is primarily due to less
marketing, investor relations consulting and compensation costs incurred in the
quarter ended September 30, 2003 as compared to the quarter ended September 30,
2002. Also contributing to the decrease was an overall reduction of spending in
our general and administrative functions.

Research and development expenses for the quarter ended September 30, 2003
increased $8,000, or 1%, to $590,000, from $582,000 for the quarter ended
September 30, 2002. The costs included in research and development relate
primarily to our manufacturing site transfers and medical and regulatory
affairs compliance activities. In the quarter ended September 30, 2003, we
ceased use of our Carlsbad facility and accordingly recorded a charge related
to the remaining lease payments. The increase is primarily due to the
cease-use charge relating to the Carlsbad facility, offset in part by a
reduction in royalty and compensation expense as compared to the quarter ended
September 30, 2002. Although minimal site transfer costs were incurred in the
quarter ended September 30, 2003, the costs related to the Acthar site transfer
may fluctuate in the future depending on the timing of work performed and the costs related
to such activities.

Depreciation and amortization expense increased by $179,000, or 68%, to
$441,000 for the quarter ended September 30, 2003, from $262,000 for the
quarter ended September 30, 2002. This increase was due primarily to the
amortization of the purchased technology related to the Nascobal product
acquisition (for $14.2 million), which will be amortized over 15 years. The
prior purchased technologys net remaining balance of $39,000 will be fully
amortized in 2003.

Non-cash amortization of deemed discount on convertible debentures for the
quarter ended September 30, 2003 was $130,000, consistent with the quarter
ended September 30, 2002. The convertible debentures were issued March 15,
2002.

Interest expense, net increased by $7,000, or 64%, to $18,000 for the
quarter ended September 30, 2003 from $11,000 for the quarter ended September
30, 2002 primarily due to lower interest income due to lower cash balances
during the quarter and lower interest rates compared to the same period in
2002.

Other income increased by $156,000 to $5,000 for the quarter ended
September 30, 2003, from $151,000 of other expense, net for the quarter ended
September 30, 2002. For the quarter ended September 30, 2002, we recorded an
other-than-temporary loss of

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$186,000 on our investment in Rigel Pharmaceuticals equity securities. We liquidated our entire equity position in Rigel in the second
quarter of 2003.

Rental income, net was consistent for the quarter ended September 30, 2003
as compared to the quarter ended September 30, 2002.

Preferred Stock dividends of $200,000 represent the 8% cash dividends
payable to the Series B Preferred Stock holders. These dividends are required
to be paid in cash quarterly. The Series B Preferred Stock was issued in
January of 2003.

Nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002:

For the nine months ended September 30, 2003, net product sales decreased
$1,700,000, or 16%, to $9,185,000 from $10,885,000 for the nine months ended
September 30, 2002. The net product sales for the nine months ended September
30, 2002 included the impact of advance buying upon notification of the price
increase for Ethamolin and Acthar that went into effect June 24, 2002. From the
date of the notification of the price increase through the effective date of
the price increase, we received $3,231,000 of Acthar and Ethamolin orders of
which $2,454,000 were filled in July 2002. In addition, during the nine months
ended September 30, 2002, we shipped backorders outstanding at December 31,
2001 amounting to $334,000 for Acthar and $408,000 for Ethamolin. We believe
that a portion of the decrease in net product sales for the nine months ended
September 30, 2003 is attributable to these purchases made as a result of the
notification of the price increase and from the shipment of the backorders.
This decline in net product sales was partially offset by an increase in the
list price of Acthar and Ethamolin in April 2003 and the initiation of Nascobal
sales in July 2003. The remaining decrease in net product sales can be
partially attributed to our decision to not ship short-dated product during the
first quarter of 2003 and may also be attributed to the replacement of
previously expired product at no cost to the customer in accordance with our
exchange policy.

In the first quarter of 2003, due to the relatively short dating of Acthar
in our inventories and at the wholesale level, we briefly limited Acthar
shipments to critical care and emergency situations. After we obtained approval
in November 2002 to extend the expiration date on Acthar to 18 months from 12
months, we resumed shipments of Acthar with a January 2004 expiration date when
the extended dated material was released late in the first quarter of 2003.
During the nine months ended September 30, 2003, we replaced vials of Acthar at
no cost for certain of the returned Acthar lots that expired in November 2002
and May 2003. Subsequent to September 30, 2003, we will continue to replace
Acthar returned from the November 2002 and May 2003 expired lots. We will do
so again for the Acthar lot that expires in January 2004. We believe the
shipment of replacement product may have displaced sales in the nine months
ended September 30, 2003, and the replacement of product that
expired in May 2003 and expiring in January 2004 and future expiring product may displace future quarter sales. The
full extent of this displacement is not ascertainable at this time; however, as
of September 30, 2003, customers have requested the replacement of expired
Acthar with a sales value of greater than $850,000. We intend to replace this
expired product in the fourth quarter of 2003. These replacements will likely
displace sales in future periods.

For the nine months ended September 30, 2003, net product sales of
Ethamolin declined substantially. This is partially due to the prior
years'
results including the advanced buying upon notification of the price increase
for Ethamolin that went into effect June 24, 2002 as describe above. In
addition, we reviewed the external demand data over the last two years and
noted that the demand for Ethamolin is declining. We believe this decline is
partially a result of devices being used to treat bleeding esophageal varices
rather than the use of sclerosing agents. Also in the current period, we noted
one of our major customers purchased large quantities of Ethamolin. We believe,
through review of external data, that the amount purchased by this major
customer was in excess of historical demand and represents over nine months
inventory at their reported demand. To the extent that inventory held by our
wholesalers exceeds ultimate demand, we believe that this will adversely impact
our future net product sales.

Grant and royalty revenue for the nine months ended September 30, 2003
decreased $100,000, or 63%, to $58,000 from $158,000 for the nine months ended
September 30, 2002. This decrease was a result of lower reimbursement under the
SBIR grant due to less activity taking place with the GERI compound research
project in the nine months ended September 30, 2003 as compared to the nine
months ended September 30, 2002. The GERI grant was terminated on July 31,
2003. The royalty revenue represents sales of Pramidin® in Italy, under a
license agreement we had with sirton Pharmaceuticals, S.p.A. that expired in
accordance with its terms in September 2002.

In both the nine months ended September 30, 2003 and 2002, we recognized
$250,000 in technology revenue related to the License Agreement with
Fabre-Kramer. Additionally, we had services revenue from a related party of
$150,000 for the nine months ended September 30, 2002. This amount reflects
revenues resulting from the $200,000 payment made by VSL for certain
promotional activities we undertook to support the launch of VSL#3. The balance
was recognized as revenue ratably through December 2002 at which time it was
fully recognized.

Cost of product sales for the nine months ended September 30, 2003
increased $377,000, or 17%, to $2,620,000 from $2,243,000 for the nine months
ended September 30, 2002. The increase is due to increases in our excess
inventory allowance, increases in per unit material costs and increases in
costs related to the replacement of expired product. We expect per unit
material costs to increase in

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the future due to higher contract manufacturing costs. Cost of product
sales as a percentage of net product sales increased to 29% for the nine months
ended September 30, 2003 from 21% for the nine months ended September 30, 2002.
In April 2003, we decided to outsource certain functions previously performed
in our Carlsbad, California distribution center, including, but not limited to,
warehousing, shipping and quality control studies. We expect cost of product
sales to increase as a result of our outsourcing of these functions. We have
entered into agreements with various vendors to distribute Acthar, Nascobal,
Ethamolin, Glofil and Inulin, and we distribute VSL#3 from our Union City
facility. We discontinued marketing and selling Inulin in Sodium Chloride on
September 30, 2003.

Selling, general and administrative expenses for the nine months ended
September 30, 2003 decreased by $716,000 to $7,950,000, from $8,666,000 for the
nine months ended September 30, 2002. Marketing expense decreased for the nine
months ended September 30, 2003, but was offset by increased salary and other
costs as a result of the full nine months impact of the expansion to our sales
and marketing departments that took place in May 2002. In addition, non-cash
charges for stock-based compensation of $243,000 were recorded in the nine
months ended September 30, 2002. Also contributing to the decrease was an
overall reduction of spending in our general and administrative functions.

Research and development expenses for the nine months ended September 30,
2003 increased by $220,000, or 13%, to $1,912,000 from $1,692,000 for the nine
months ended September 30, 2002. The costs included in research and development
relate primarily to manufacturing site transfers and medical and regulatory
affairs compliance activities. This increase is primarily due to consulting and
outside testing costs incurred related to the Acthar site transfer in the first
nine months of 2003 as compared to the first nine months of 2002. In the nine
months ended September 30, 2003, a third party contract laboratory completed
several tests as part of the Acthar manufacturing site transfer. To date, this
laboratory has been unsuccessful in validating the assay in order to complete
the transfer. If this laboratory is unable to validate this specific assay, we
may be forced to find a new contractor to complete this work, which in turn
could increase our costs substantially. The costs related to the Acthar site
transfer may fluctuate depending on the timing of work performed and the costs
related to such activities. In addition, in the nine months ended September
30, 2003, we ceased use of our Carlsbad facility and accordingly recorded a
charge related to the remaining lease payments which contributed to the
increase.

Depreciation
and amortization expense decreased by $99,000, or 11%, to $822,000
for the nine months ended September 30, 2003, from $921,000 for
the nine months ended September 30, 2002. The decrease was
primarily due to assets becoming fully depreciated and a portion of
purchased technology becoming fully amortized, offset by amortization
of the purchased technology related to the Nascobal acquisition (in
June 2003), which will be amortized over 15 years.

Non-cash amortization of deemed discount on convertible debentures for the
nine months ended September 30, 2003 increased by $86,000, or 28%, to $391,000
from $305,000 for the nine months ended September 30, 2002. The increase was
due to the current period representing a full nine months amortization of
deemed discount related to the convertible debentures. The convertible
debentures were issued March 15, 2002.

Interest expense, net, increased by $35,000 to $32,000 for the nine months
ended September 30, 2003 from net interest income of $3,000 for the nine months
ended September 30, 2002. This was primarily due to the current period
representing a full nine months interest expense on the convertible debentures
issued March 15, 2002. In addition, for the nine months ended September 30,
2003 less interest income was earned due to lower cash balances during the
period and lower interest rates compared to the same period in 2002.

Other expense, net, decreased by $186,000, or 71%, to $75,000 for the nine
months ended September 30, 2003 from $261,000 for the nine months ended
September 30, 2002. The decrease in expense is primarily due to a smaller loss
related to our investment in Rigel Pharmaceuticals equity securities recorded
in the nine months ended September 30, 2003 as compared to the same period for
2002. We liquidated our entire equity position in Rigel in the second quarter
of 2003. As such, for the nine months ended September 30, 2003 we recorded an
other-than-temporary loss of $51,000 and realized losses of $14,000 on the
Rigel equity investment as compared to a $367,000 other-than-temporary loss
recorded on the Rigel equity securities investment for the nine month period
ended September 30, 2002. The other expense for the nine months ended September
30, 2002, was partially offset by other income recognized in the period as a
result of receipt of profits arising from short swing stock trades executed by
one of our 10% shareholders.

Rental income, net was consistent for the nine months ended September 30,
2003 as compared to the nine months ended September 30, 2002.

Non-cash deemed dividend of $1,394,000 at September 30, 2003 is related to
the beneficial conversion feature in connection with the Series B Preferred
Stock and warrants issued in January 2003. A beneficial conversion feature is
present because the effective conversion price of the Preferred Stock was less
than the fair value of the Common Stock on the commitment date. In addition, on
June 13, 2003, we obtained a letter from our Series B Preferred Stock holders
whereby certain covenants were waived. In exchange for such waiver, the
exercise price of the warrant was reduced. The beneficial conversion feature
was revalued using the new exercise price and the increase in value was
recorded as a deemed dividend.

Preferred Stock dividends of $567,000 represent the 8% cash dividends
payable to the Series B Preferred Stock holders. These dividends are required
to be paid in cash quarterly.

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Liquidity and Capital Resources

We have funded our activities to date principally through various
issuances of equity securities. Through September 30, 2003, we have raised
total net proceeds of $60.6 million. We have also funded our activities to date
to a lesser extent through product sales.

At September 30, 2003, we had cash, cash equivalents and short-term
investments of $4,821,000 compared to $7,506,000 at December 31, 2002. At
September 30, 2003, our working capital was $3,703,000 compared to $7,018,000
at December 31, 2002. The decrease in our working capital was principally due
to the $14.3 million acquisition of Nascobal and funds used in operations,
offset by net proceeds received in our $10 million private placement of Series
B Convertible Preferred Stock in January 2003 and our $5 million private
placement of Common Stock and warrants in June 2003.

In connection with our acquisition of Nascobal, we are required to pay an
additional $2.2 million payable to Nastech on or before December 31, 2003. The
$2.2 million payable is included in the Payable Relating to Product
Acquisition on the accompanying Condensed Consolidated Balance Sheet. As part
of the acquisition, we are also acquiring rights to Nascobal nasal spray, an
improved dosage form, for which an NDA is expected to be filed by Nastech with
the FDA before the end of 2003. Subject to the approval of the NDA for the new
Nascobal nasal spray dosage form by the FDA, we will be required to make a $2
million payment for the transfer of the NDA from Nastech to us. Further,
subject to the approval of the NDA for the new Nascobal nasal spray dosage form
and upon issuance of a pending U.S. patent for the new Nascobal nasal spray
dosage form, we will be required to make a second $2 million payment.

We may have substantial cash outlays for the Acthar site transfer. The
site transfer process is not complete and may require substantial cash outlays
for the work performed, capital expenditures and inventory, prior to the
transfer being complete.

It is currently our customers standard practice to deduct from payments
to us the amount of the sales value of expired product that they have
requested for return (returns receivable). The returns receivable amounted
to $478,000 at September 30, 2003. Customers have indicated that they will
reimburse Questcor for these deductions upon the replacement of units in
accordance with our exchange policy, however, our experience has been the
timing of such reimbursements is slower than the collection of our normal trade
receivables. As of September 30, 2003, replacement units have been shipped
relating to the majority of amounts owing to us and we are seeking
reimbursement from these customers. As long as our customers standard
practice is to deduct amounts related to the return of expired product, a
returns receivable will arise. Should our customers not comply with our
exchange policy, the amounts deducted by them for returns may not be
collectible.

In January 2002, we entered into a revolving accounts receivable line of
credit with Pacific Business Funding, a division of Greater Bay Bancorp. Under
the agreement, we can borrow up to the lesser of 80% of our eligible accounts
receivable balance or $3,000,000. Interest accrues on outstanding advances at
an annual rate equal to prime rate plus four and one-half percent. The term of
the agreement is one year and the note automatically renews annually, unless we
terminate the agreement. There were no borrowings under this line of credit as
of September 30, 2003. The line of credit is secured by a blanket lien on all
of our assets including intellectual property. As of September 30, 2003,
$1,346,000 was available for borrowing under the line of credit.

In January 2003, we completed a private placement of Series B Convertible
Preferred Stock and warrants to purchase common stock to various healthcare
investors. Our gross proceeds from the private placement were $10 million. The
Series B Preferred Stock has an aggregate stated value of $10 million and is
entitled to a quarterly dividend at an initial rate of 8% per year, which rate
will increase to 10% per year on and after January 1, 2006, and to 12% on and
after January 1, 2008. In addition, on the occurrence of designated events the
dividend rate will increase by an additional 6% per year. The Series B
Preferred Stock is entitled to a liquidation preference over our common stock
and Series A Preferred Stock upon a liquidation, dissolution or winding up of
Questcor. The Series B Preferred Stock is convertible at the option of the
holder into our common stock at a conversion price of $0.9412 per share,
subject to certain anti-dilution adjustments. We have the right commencing on
January 1, 2006 (assuming specified conditions are met) to redeem the Series B
Preferred Stock at a price of 110% of stated value, together with all accrued
and unpaid dividends and arrearage interest. In addition, upon the occurrence
of designated Optional Redemption Events, the holders have the right to require
us to redeem the Series B Preferred Stock at 100% of stated value, together
with all accrued and unpaid dividends and accrued interest. The terms of the
Series B Preferred Stock contain a variety of affirmative and restrictive
covenants, including limitations on indebtedness and liens. Each share of
Series B Preferred Stock is generally entitled to a number of votes equal to
0.875 times the number of shares of common stock issuable upon conversion of
such share of Series B Preferred Stock. The purchasers of the Series B
Preferred Stock also received for no additional consideration warrants
exercisable for an aggregate of 3,399,911 shares of our common stock at an
exercise price of $1.0824 per share, subject to certain anti-dilution
adjustments. The warrants expire in January 2007. In June 2003, the exercise
price of the warrants was adjusted to $0.9412 per share.

In June 2003, we entered into agreements with the holders of record of our
Series B Preferred Stock, whereby the holders of Series B Preferred Stock
waived certain covenants and rights to receive additional dividends as provided
in the Certificate of Determination, which may have been triggered as a result
of our acquisition of Nascobal and the use of our cash resources to pay the
purchase price

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(the Acquisition). Specifically, the holders of Series B Preferred Stock
waived their right to receive an additional aggregate six percent dividend in
the event that the Acquisition resulted in our being unable to satisfy the test
set forth in Sections 500 and 501 of the California Corporations Code to allow
for us to redeem all of the issued and outstanding shares of Series B Preferred
Stock. Such waiver was granted through the earlier of (i) December 31, 2003 and
(ii) the date on which (A) our assets (exclusive of goodwill, capitalized
research, and development expenses and deferred charges) equal less than 125%
of our liabilities (not including deferred taxes, deferred income and other
deferred credits) or (B) our current assets equal less than 80% of our current
liabilities. Additionally, the holders of Series B Preferred Stock waived their
right to receive an additional aggregate six percent dividend in the event that
the Acquisition resulted in our being unable to maintain Net Cash, Cash
Equivalents and Eligible Investment Balances (as defined in the Certificate of
Determination) in an amount equal to $5 million. Such waiver was granted
through the earlier of (i) December 31, 2003 and (ii) the date on which we fail
to maintain Net Cash, Cash Equivalents and Eligible Investment Balances in an
amount equal to at least $2.5 million. The holders of Series B Preferred Stock
also agreed that: (i) the Acquisition would not constitute a breach of the
covenant in the Certificate of Determination requiring us to use our best
efforts to maintain compliance with Sections 500 and 501 of the California
Corporations Code to be able to pay dividends on and to redeem all of the
issued and outstanding shares of Series B Preferred Stock; and (ii) the
incurrence by us of contingent obligations to pay additional amounts to Nastech
of $5,183,333 and the granting of a security interest in the acquired Nascobal
product would not constitute a breach of the covenants in the Certificate of
Determination restricting our ability to incur indebtedness and create liens.
In consideration of such agreements, we agreed to adjust the exercise price of
warrants to purchase 3,399,911 shares of our common stock previously issued by
us to the holders of Series B Preferred Stock from $1.0824 per share to $0.9412
per share.

Also in June 2003, we consummated a private placement of our Common Stock
and warrants to purchase Common Stock. We issued 4,979,360 shares of Common
Stock in the private placement at $1.01 per share, which was the volume
weighted average price of the common stock for the five days prior to and
including the close of the private placement. Gross proceeds to us from the
private placement were approximately $5 million. The purchasers of our Common
Stock also received for no additional consideration warrants exercisable for an
aggregate of 2,987,616 shares of Common Stock at an exercise price of $1.26 per
share, which represented a 25% premium to the volume weighted average price of
the Common Stock for the five days prior to and including the close of the
private placement. The warrants expire in June 2008.

In
August 2002, we were notified by the American Stock Exchange
(AMEX) that certain of our financial measures fell below certain
of AMEXs continued listing standards and we had therefore
become subject to possible delisting. On October 15, 2003, AMEX
notified us that it had completed its review of Questcor and
determined that we are now in compliance with AMEXs applicable
continued listing standards.

Our future funding requirements will depend on many factors, including;
the timing and extent of product sales, returns of expired product, any
expansion or acceleration of our development programs; the acquisition and
licensing of products, technologies or compounds, if any; our ability to manage
growth; competing technological and market developments; costs involved in
filing, prosecuting, defending and enforcing patent and intellectual property
claims; the receipt of licensing or milestone fees from current or future
collaborative and license agreements, if established; the timing of regulatory
approvals; the timing and successful completion of the Acthar site transfer;
payment of dividends and compliance to prevent additional dividend events or
optional redemption events, and other factors.

We are
seeking to raise additional funds through public or private equity
financing or from other sources, before the end of 2003 to first, fund
operations and to meet our obligations, second, to seek to comply with
certain covenants and thus avoid the payment of additional
dividends of 6% to the holders of the Series B Convertible Preferred Stock for
which we have a waiver through the end of 2003 as described above, and, third,
if funds remain, acquire additional products and expand our operations. Additionally, we may
seek to raise additional capital whenever conditions in the financial markets
are favorable, even if we do not have an immediate need for additional cash at
that time. There can be no assurance that we will be able to obtain additional
funds on desirable terms or at all.

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RISK FACTORS

The following risk factors supplement the risk factors contained in our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. You should
carefully consider the following risk factors, in addition to the other
information included in this prospectus, before purchasing shares of our common
stock. Each of these risks could adversely affect our business, financial
condition and results of operations, as well as adversely affect the value of
an investment in our common stock.

Our inability to secure additional
funding could lead to a loss of your investment.

We are
seeking to raise additional funds through public or private equity
financing or from other sources, before the end of 2003 to first,
fund operations and to meet our obligations, second, to seek to comply with
certain covenants and thus avoid the payment of additional dividends
of 6% to the holders of the Series B Convertible Preferred Stock
for which we have a waiver through the end of 2003, and, third, if
funds remain, acquire additional products and expand our operations.
Additionally, we may seek to raise additional capital whenever
conditions in the financial markets are favorable, even if we do not
have an immediate need for additional cash at that time. There can be
no assurance that we will be able to obtain additional funds on desirable terms
or at all.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk at September 30, 2003 has not changed
materially from December 31, 2002, and reference is made to the more detailed
disclosures of market risk included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 as filed with the Securities and Exchange
Commission on March 26, 2003.




ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

As required by SEC Rule 13a(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and the Companys Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the quarter covered by this report. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective at the reasonable
assurance level.

There has been no change in our internal controls over financial reporting
during the Companys most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal controls over
financial reporting.




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

Not applicable




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable




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

Not applicable




ITEM 5. OTHER INFORMATION

Not applicable




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a)  |  | Exhibits                                                                                               
|---- |  | -------------------------------------------------------------------------------------------------------
|    
|15.1 |  | Letter regarding Unaudited Financial Information                                                       
|    
|31   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                               
|    
|32   |  | Certification pursuant to Section 906 of the Public Company Accounting Reform and Investor Act of 2002.
|    
|(b)  |  | Reports on Form 8-K                                                                                    

On August 14, 2003, we furnished on Form 8-K, under Item 9, our press
release of our results for the quarter ended June 30, 2003.

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SIGNATURES

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 hereunto duly authorized.

|                        |  |                       |  |                                         
|----------------------- |  | --------------------- |  | ----------------------------------------
|                        |  | PHARMACEUTICALS, INC.
|                        |  |                       |  |                                         
|Date: November 12, 2003 |  | By:                   |  | /s/ CHARLES J. CASAMENTO                
|                        |  |                       |  |                                         
|                        |  | By:                   |  | Charles J. Casamento                    
|                        |  |                       |  | Chairman, President & CEO               
|                        |  |                       |  |                                         
|Date: November 12, 2003 |  |                       |  | /s/ TIMOTHY E. MORRIS                   
|                        |  |                       |  |                                         
|                        |  |                       |  | Timothy E. Morris                       
|                        |  |                       |  | Vice President, Finance & Administration
|                        |  |                       |  | And Chief Financial Officer (Principal  
|                        |  |                       |  | Financial and Accounting Officer)       

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Exhibit Index



|10.30 |  | Letter Agreement dated
September 2, 2003 between the Company and Roy Jerald Beers.                                   
|----- |  | ---------------------------------------------------------------------------------------------------------------------
|     
|10.31 |  | Confidential Separation Agreement
and Release dated
September 30, 2003 between the Company and Kenneth R. Greathouse.
|     
|15.1  |  | Letter regarding Unaudited Financial Information                                                                     
|     
|31    |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                             
|     
|32    |  | Certification pursuant to Section 906 of the Public Company Accounting Reform and Investor Act of 2002.              

25