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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                           
|-- |  | ------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the Fiscal Year ended December 31,
	2001                                              
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
	OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

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, California                       |  | 94587                                
|(Address of principal executive
	offices)                       |  | (Zip Code)                           

Registrants telephone number, including
area code: (510) 400-0700

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

None


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

Common Stock, no par value


(Title of class)


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

As of March 15, 2002 the Registrant had
38,228,005 shares of Common Stock, no par value, outstanding,
and the aggregate market value of the shares held by
non-affiliates on that date was $46,305,102* based upon the last
sales price of the Registrants Common Stock reported on
the American Stock Exchange.

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

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Definitive Proxy
Statement filed with the Commission pursuant to
Regulation 14A in connection with the 2002 Annual Meeting
are incorporated by reference into Part III of this Report.






|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Excludes 12,359,233 shares of Common Stock held
	by directors, executive officers and shareholders whose
	beneficial ownership exceeds ten percent of the shares
	outstanding on March 15, 2002. Exclusion of shares held by
	any person should not be construed to indicate that such person
	possesses the power, direct or indirect, to direct or cause the
	direction of the management or policies of the Registrant, or
	that such person is controlled by or under common control with
	the Registrant.



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TABLE OF CONTENTS



|              |                                                                                              |                                                                              |  |  |  |  |  | 
|------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I.      
|              | Item 1. Business of Questcor                                                                
|RISK FACTORS 
|              | Item 2. Properties                                                                          
|              | Item 3. Legal Proceedings                                                                   
|              | Item 4. Submission of Matters to a Vote of Security Holders                                 
|PART II.     
|              | Item 5. Market for Registrants Common Equity and Related Shareholder Matters               
|              | Item 6.Selected Consolidated Financial Data                                                 
|              | Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                         
|              | Item 8. Financial Statements and Supplementary Data                                         
|              | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
|PART III.    
|              | Item 10. Directors and Executive Officers of the Registrant                                 
|              | Item 11. Executive Compensation                                                             
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                     
|              | Item 13. Certain Relationships and Related Transactions                                     
|              | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                    
|SIGNATURES   
|              |                                                                                              | CONSOLIDATED BALANCE SHEETS                                                 
|              |                                                                                              | CONSOLIDATED STATEMENTS OF OPERATIONS                                       
|              |                                                                                              | CONSOLIDATED STATEMENT OF PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)
|              |                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                                       
|              |                                                                                              | SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS                               
|EXHIBIT INDEX
|EXHIBIT 4.1  
|EXHIBIT 4.2  
|EXHIBIT 10.6 
|EXHIBIT 10.7 
|EXHIBIT 23.1 



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PART I.




Item 1.     Business
of Questcor

Except for the historical information contained
herein, the following discussion contains forward-looking
statements that involve risks and uncertainties. Questcors
actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this
Item 1 Business of Questcor, including without
limitation Risk Factors, and Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations, as well as those
discussed in any documents incorporated by reference herein or
therein. When used in this annual report, the terms
Questcor, Company, we,
our, ours and us refer to
Questcor Pharmaceuticals, Inc. and its consolidated subsidiaries.

Overview

We are an integrated specialty pharmaceutical
company focused on the development, acquisition, and marketing
of acute care and critical care hospital/ specialty
pharmaceutical and related healthcare products. We currently
market four products through our internal sales force in the
U.S. We expect to launch a fifth product in the U.S. in the
first half of 2002, and we market a sixth product in Italy
through a strategic partner. Our current products target
pediatric neurologists, gastroenterologists, nephrologists,
transplant centers and nuclear medicine centers.

On November 17, 1999, Questcor, formerly
Cypros Pharmaceutical Corporation, completed a merger with
RiboGene, Inc. (RiboGene) and subsequently changed
its name to Questcor Pharmaceuticals, Inc. Under the terms of
the merger agreement, each share of RiboGene common stock was
exchanged for 1.509 shares of our common stock and each
outstanding share of RiboGene Series A preferred stock was
converted into 1.509 shares of our Series A preferred
stock. In conjunction with the November 1999 acquisition of
RiboGene, we changed our fiscal year end from July 31 to
December 31. Since the completion of the merger, we have
focused our resources on:  i) acquiring new products,
ii) increasing the sales of our existing products, and
iii) out-licensing and partnering our research and
development stage products. During 2001, we completed our
transition from operating as essentially two independent
companies to emerge as a specialty pharmaceutical company
focused on the sales and marketing of our branded products.

We currently market four products in the U.S.: HP
Acthar® Gel (Acthar), an injectable drug that
helps patients with infantile spasm, or West Syndrome;
Ethamolin®, an injectable drug used to treat esophageal
varices that have recently bled; and GlofilTM-125 and
Inulin in Sodium Chloride, which are both injectable agents that
assess kidney function by measuring glomerular filtration rate.
Additionally, we earn royalties from our strategic partner,
Crinos Industria Farmacobiologica S.p.A. (Crinos),
on sales in Italy of Pramidin®, an intranasal form of
metoclopramide for the treatment of various gastrointestinal
disorders. We recently acquired the U.S. rights to market
VSL#3TM, a patented probiotic. We intend to market
VSL#3TM as a dietary supplement, to promote normal
gastrointestinal function. We intend to begin sales of
VSL#3TM in the first half of 2002.

Consistent with our efforts to focus on sales and
marketing, we have reduced spending on research and development.
Accordingly, we have entered into several agreements with
pharmaceutical and biotechnology companies to further the
development of certain technology acquired from RiboGene. In
January 2002, we signed a revised Letter of Understanding with
Fabre Kramer Pharmaceuticals (Fabre Kramer), which
anticipates a license agreement whereby Fabre Kramer will manage
and provide funding for the clinical development programs for
HypnostatTM (an intranasal triazolam for insomnia)
and PanistatTM, (an intranasal alprazolam for panic
disorders). Our antifungal drug discovery program has been
partnered with Tularik, Inc., of South San Francisco, CA; 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.

During 2001, we sold an aggregate of 11,666,160
shares of common stock and a warrant to purchase an additional
1,800,000 shares of common stock for $7.8 million to
Sigma-Tau Finance Holding S.A. and certain

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affiliates of Sigma-Tau (Sigma-Tau).
On December 11, 2001, we received $1.26 million,
$960,000 for the purchase of 640,000 shares of common stock at
$1.50 per share, and $300,000 for the purchase of the
above-mentioned warrant to purchase an additional 1,800,000
shares of common stock from the principal stockholders of
Sigma-Tau. We issued the common stock for the December
transaction in February 2002. Additionally, we entered into an
agreement with Sigma-Tau and its affiliates to limit
Sigma-Taus purchases of our common stock on the open
market to 2,000,000 shares through July 2003. Based on the
purchases Sigma-Tau has made directly from us and information
provided to the Securities and Exchange Commission (the
SEC), Sigma-Tau and their affiliates own
approximately 30% of our outstanding voting stock as of
December 31, 2001. Assuming Sigma-Tau exercises its warrant
in full, they would own approximately 34% (including the 640,000
shares of common stock issued in February 2002) of our
outstanding common stock as of December 31, 2001.


On March 15, 2002, in two separate
transactions, we issued $4.0 million of 8% convertible
debentures to an institutional investor and Sigma-Tau. We will
pay interest on the debentures at a rate of 8% per annum on a
quarterly basis. The debentures are convertible into shares of
our common stock at a fixed conversion price of $1.58 per share
(subject to adjustment for stock splits and reclassifications).
At the end of the term of the debenture, under certain
circumstances, we have the option to repay the principal in
stock and, under certain circumstances, we can also redeem the
debenture for cash prior to maturity. The debentures mature on
March 15, 2005. In conjunction with this transaction, we
issued warrants to both the institutional investor and Sigma-Tau
to acquire an aggregate of 1,518,988 shares of common stock at
an exercise price of $1.70 per share. Both warrants expire on
March 15, 2006. Assuming the conversion and exercise of the
above-mentioned debenture and warrant by Sigma-Tau and assuming
the exercise of all other outstanding warrants held by
Sigma-Tau, Sigma-Tau would own approximately 38% of our
outstanding common stock as of March 15, 2002.

As of December 31, 2001, we had
$10.2 million of cash on hand. On January 18, 2002, we
paid our outstanding $5 million note and reduced our cash
balance accordingly. Based on our internal forecasts and
projections, we believe that our cash on hand at
December 31, 2001, together with the $4.0 million of
cash raised through the issuance of the above-mentioned
convertible debentures and the cash to be generated through the
expected sale of our products, will be sufficient to fund
operations through December 31, 2002.

We have rights to the following registered
trademarks: HP Acthar® Gel and Ethamolin®. We also
have the following unregistered trademarks:
GlofilTM-125, MigrastatTM,
EmitasolTM, HypnostatTM,
PanistatTM, CeresineTM,
CordoxTM, DermafloTM, NeofloTM,
and SildafloTM. VSL#3TM is owned by VSL
Pharmaceuticals, Inc. Pramidin® is owned by Crinos
Industria Farmacobiologica SpA. Each other trademark, trade name
or service mark appearing in this document belongs to its
respective holder.

Strategy

Our overall objective is to acquire and market
acute care and critical care hospital/specialty pharmaceutical
and related healthcare products. Our strategy includes acquiring
marketed or near-to-market products that complement existing
products and, where appropriate, forming corporate alliances to
facilitate and fund the clinical development of our drug
candidates.

Our operating objectives include:
(1) building a strong hospital/ specialty market-oriented
sales, marketing and distribution capability to increase and
support sales of our products currently being marketed as well
as new complementary products which we may acquire in the
future; (2) acquiring marketed products to leverage our
existing sales, marketing and distribution infrastructure; and
(3) building a sustainable cash flow by reducing our
overall cash consumption or burn rate. Consistent
with our strategy, we acquired Acthar from Aventis
Pharmaceuticals Inc. (Aventis), in July 2001. We
began commercial shipment of Questcor-labeled Acthar to drug
wholesalers in September 2001. For the year ended
December 31, 2001, we had $2.1 million in revenues
from Acthar. We also acquired the rights to market VSL#3, a
patented probiotic, from VSL Pharmaceuticals, Inc.
(VSL), in December 2001. VSL is owned in part by the
principal shareholders of Sigma-Tau. We expect to launch VSL#3
in the first half of 2002.

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| |                                                                              
| | -----------------------------------------------------------------------------
| | Acquisition of Approved Pharmaceutical
	Products for Promotion by Sales Force

We have built a sales, marketing, and
distribution capability that is adequate to support and increase
our sales of currently marketed products. We are looking to
acquire additional hospital/ specialty based products currently
on the market, that are available to be licensed or purchased.
Products to be considered for acquisition would have to be
complementary to our existing products, synergistic with
promotional efforts currently being undertaken by our sales
force, and contribute to our gross margins. There is no
assurance we will be able to acquire such products or that, if
acquired, they will be profitable. As of December 31, 2001,
we had a group of 20 sales and marketing professionals to
sell and promote our products in the hospital/specialty market.



| |                                              
| | ---------------------------------------------
| | Strategic Alliances and Corporate
	Partnering

An important part of our strategy includes the
development of strategic alliances for out-licensing our
currently marketed products to other world markets and the
corporate partnering of our drug candidates in various stages of
clinical development. Through agreements with other companies,
we have acquired five marketed products: Acthar, Ethamolin,
Glofil-125, Inulin and VSL#3.

To expand the sales of Emitasol (marketed as
Pramidin in Italy) worldwide, we have entered into marketing and
distribution agreements with the following:

|                                      |  |                    |  |                                                                                                                                                  
|------------------------------------- |  | ------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|Company                               |  | Headquarters       |  | Territory                                                                                                                                        
|                                      |  |                    |  |                                                                                                                                                  
|Crinos Industria Farmacobiologica SpA |  | Como, Italy        |  | Italy                                                                                                                                            
|CSC Pharmaceuticals Handels GmbH      |  | Vienna, Austria    |  | Austria, Poland, the Czech Republic, Bulgaria,
	Russia, Hungary, the Slovak Republic, Romania, and the remaining
	Community of Independent States
|Ahn-Gook Pharmaceuticals              |  | Seoul, South Korea |  | South Korea                                                                                                                                      
|Laboratorios Silesia S.A.             |  | Santiago, Chile    |  | Chile                                                                                                                                            

We have received some upfront payments and, in
certain cases, may receive milestone payments if our partners
receive approval to market products in their territories. To
date, Pramidin is only marketed in Italy. We receive royalties
on sales of Pramidin by Crinos Industria Farmacobiologica SpA
(Crinos). Royalty revenue has not been significant
and we do not believe royalty revenue will increase in the
future. CSC Pharmaceuticals Handels GmbH (CSC), has
received approval to market Pramidin in Poland and the Czech
Republic, but it has not begun to market the product. When and
if CSC decides to begin selling Pramidin in these territories,
we do not believe the royalty revenue will be significant.

Consistent with our objective of de-emphasizing
our research and development stage projects, we have entered
into various agreements to out-license certain anti-infective
drug discovery programs as follows:

|                                    |  |                         |  |                             
|----------------------------------- |  | ----------------------- |  | ----------------------------
|Company                             |  | Headquarters            |  | Project                     
|                                    |  |                         |  |                             
|Dainippon Pharmaceuticals Co., Ltd. |  | Osaka, Japan            |  | Antibacterial Drug Discovery
|Tularik, Inc.                       |  | South San Francisco, CA |  | Antifungal Drug Discovery   
|Rigel Pharmaceuticals, Inc.         |  | South San Francisco, CA |  | Antiviral Drug Discovery    

We received some upfront payments for these
programs and will receive milestone and royalty payments if the
compounds covered by these agreements advance through clinical
development and eventually into sales. Although we retain some
information rights to these programs, we do not control their
progress. We have discontinued research and development on all
remaining anti-infective programs. We retain certain patents and
other intellectual property on these and other drug discovery
programs. We are required to pay certain legal fees and patent
expenses in order to maintain ownership of this intellectual
property. Legal fees and patent expenses may be significant and
there can be no assurance that we will ever recognize any value
from these expenditures. We may seek to out-license some or all
of our intellectual property in this area or a

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selection of compounds for development and
resultant potential milestones. Additionally, royalty payments
from these agreements may not be received for several years, if
ever. There can be no assurance that compounds covered by these
agreements will ever advance through to commercialization or
that we will ever receive any future payments under these
agreements.


We intend to out-license to appropriate partners
in certain geographic areas the marketing and distribution
rights to Emitasol (intranasal metoclopramide) for the treatment
of gastrointestinal disorders including delayed onset emesis. In
July 2001, the exclusive option to develop and market Emitasol
in North America, held by Shire Pharmaceuticals Group plc, had
expired. We intend to seek a corporate partner to continue the
development of Emitasol in North America. Until such corporate
partner is found, we do not expect to incur any significant
expense related to the development of Emitasol in North America
except legal fees, patent expenses and minimum royalty payments.
We currently have four licensing agreements for the marketing of
Emitasol in the following territories: Italy, Austria, Poland,
Czech Republic, Russia, Hungary, Slovak Republic, South Korea
and Chile. It is our goal to enter into more licensing
agreements in the future in other countries.

Marketed Pharmaceutical and Related Healthcare
Products

Our marketed products as of December 31,
2001 include: Acthar, which was acquired in July 2001,
Ethamolin, which was acquired in November 1996, and Glofil-125
and Inulin, which were acquired in August 1995. We intend to
begin marketing VSL#3 during the first half of 2002.

Acthar.In July
2001, we signed an agreement with Aventis to acquire the
worldwide rights to Acthar. Acthar is a corticotropin product
that had previously been made available to patients as part of a
special program administered by the National Organization for
Rare Disorders (NORD), to treat seriously ill
children with a seizure complex, referred to as infantile spasm,
or West Syndrome, a potentially fatal disorder, and patients
with multiple sclerosis who experience severe and painful
episodes of flare.

Due to limited production of Acthar and the
resulting limited availability of the product over the past few
years, distribution had been tightly controlled by Aventis
through the NORD limited access program. Under this program
approximately 10,000 vials of Acthar were made available to
patients in 2001. Following the acquisition of Acthar in July
2001, we began shipping the product to drug wholesalers at the
end of the third quarter. We are able to support general market
distribution since Acthar is now back in full production. As
part of our agreement, Aventis has agreed to manufacture and
supply Acthar through July 2002 at a fixed price per vial. A
formal manufacturing agreement has not yet been executed.
Failure to complete this manufacturing agreement may adversely
affect our ability to obtain an adequate supply of Acthar, which
in turn would impact future revenues. We are in the process of
securing a new manufacturer for the production of the active
pharmaceutical ingredient (the API) in Acthar and
also the production of the finished product. We have identified
several potential third party contract manufacturers for the API
and finished product. We believe that existing supplies of the
API, coupled with our existing relationship with Aventis, should
ensure adequate supply of Acthar through 2002 based on our
internal sales forecast. However, there can be no assurance that
the existing inventory of the API will be sufficient to meet our
demand beyond 2002, or that we will be able to enter into
agreements with third party manufacturers to supply Acthar, or
if these agreements are entered into that the third party
manufacturers will be able to supply Acthar. Additionally, under
our current arrangement, Aventis has agreed to supply Acthar at
a fixed price per vial through July 2002. There can be no
assurance, even if we are able to secure an adequate supply of
the API and enter into an agreement for the production of the
finished product, that the cost of the API and the finished
product will not increase substantially.

Based on information received by us from NORD and
the previous distributor of Acthar, we estimate that
approximately 1,600 patients annually were allowed access to
Acthar over the past four years of the Aventis limited access
program. We believe, through internal forecasts, that the
re-introduction of Acthar into normal distribution channels
could open access to more patients suffering from various
autoimmune disorders who may be helped by Acthar. Through NORD,
we maintain a program to provide vials of Acthar free of

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charge to patients who cannot otherwise afford
the drug. During the fourth quarter of 2001, we estimate
approximately 100 patients were referred to the free access
program.


Ethamolin.End stage
liver disease, also known as hepatic cirrhosis, results in
approximately 26,000 deaths annually. Hepatic cirrhosis promotes
the formation of esophageal varices through development of
portal hypertension. When portal venous blood pressure rises,
the varicosities that develop may cause life threatening upper
gastrointestinal hemorrhage and are associated with a high
mortality rate. At least 33,000 patients in the U.S. have either
actively bleeding esophageal varices or esophageal varices that
are at imminent risk of bleeding.

Early and effective treatment of esophageal
varices to achieve hemostasis is essential to a favorable
outcome in a bleeding patient. The most common pharmaceutical
treatment protocol involves the injection of a sclerosing agent
into the varix, achieving clot formation and obliteration of the
varix. This form of hemostasis is called sclerotherapy and
usually requires multiple treatment sessions. Ethamolin is the
only sclerotherapy agent approved by the Food and Drug
Administration (FDA) for the treatment of esophageal
varices that have recently bled. There is strong competition
from band ligation, a form of surgery, but we believe that
Ethamolin is the only sclerosant that is actively promoted at
this time. We estimate Ethamolin to have 18% (on a mL basis), of
the total sclerosant market share, at this time.

Glofil-125 and Inulin.Kidney disease afflicts more than
8.3 million persons in the U.S. and is increasing primarily
due to an increase in diabetes mellitus, hypertension and
glomerulonephritis cases. Kidney disease results in over
$15 billion annually in healthcare costs in the U.S. The
market includes 700,000 persons with severe kidney diseases,
13,500 persons receiving kidney transplants annually, and an
additional 50,000 persons awaiting kidney transplants. The
measurement of kidney function, glomerular filtration rate or
(GFR) is critical to the understanding of the
disease state and its appropriate therapeutic intervention. GFR
has historically been estimated by the measurement of endogenous
serum creatinine and by creatinine clearance. These diagnostic
assays may overestimate kidney function by as much as 100% in
some patients. We believe that the use of renal filtration
markers, such as Glofil-125 or Inulin, offer a more accurate and
direct means of determining GFR, and thereby result in better
clinical decision making.

Glofil-125 and Inulin are FDA-approved products
for the measurement of GFR. Nephrology, transplant, oncology and
nuclear medicine departments at major medical centers are the
primary users of these products. Glofil-125 is an injectable
radioactive diagnostic agent, which provides rapid information
on GFR with great accuracy. Inulin is a non-radioactive
injectable diagnostic agent, which provides a measure of GFR.

We believe that there is an opportunity for
increased utilization of Glofil-125. Present diagnostic
procedures for measuring kidney function include serum
creatinine and creatinine clearance tests. These two tests are
the most commonly performed methods of measuring kidney function
because of their low cost; however, both methods may
significantly overestimate kidney function in the estimated
700,000 patients with severe renal disease. The utility of
Glofil-125 has been established in published clinical studies as
being a more direct, accurate measure of kidney function,
yielding much more reliable results than serum creatinine or
creatinine clearance tests. This improved accuracy can be
essential in monitoring disease progression, and implementing
appropriate interventions and assessing the degree of success of
kidney grafts post transplant. We believe that as new
interventional therapies emerge, such as the use of ACE
inhibitors to slow down disease progression and the Modification
of Diet in Renal Disease (MDRD), for the treatment
of early stage renal disease, the use of Glofil-125 will take on
much greater importance; however, at this point, most early
stage patients are not felt to require this degree of accuracy
in the determination of renal function.

Glofil-125 has also been used in clinical trials
administered by the National Institutes of Health
(NIH). Use of Glofil-125 in clinical trials can
provide the trial administrators an accurate measure of kidney
function and show the effects of the drug being studied on
normal kidney function. Glofil-125 has been included in several
recent clinical trials administered by the NIH. One of these
trials ended in the third quarter of 2001. We plan to promote
the use of Glofil-125 to the NIH and to large pharmaceutical
companies for use in clinical trials as a means of detecting
kidney toxicity and measuring overall kidney function. Although
we believe that Glofil-125 may be used in clinical trials in the
future, there can be no assurance that

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Glofil-125 will be included in any clinical
protocol or, if it is included, that we will receive significant
revenues from the future sales of Glofil-125.


The biggest impediment to the growth in the sales
of Glofil-125 is the lack of availability of the test to
practicing clinicians. Routine testing with Glofil-125 requires
dedicated laboratory facilities and trained technicians. Our
promotional efforts are focused on establishing testing sites in
all major market areas in the U.S. We are not aware of any new
diagnostic agents that would pose a competitive threat to
Glofil-125.

Inulin, which is also sold by us, is an
alternative agent for GFR measurement. However, the preparation
and use of Inulin is time consuming and it does not provide the
practical advantages of Glofil-125. The use of and demand for
Inulin is relatively limited. We do not expect revenues from the
sale of Inulin to increase in the future.

VSL#3.We have
acquired the U.S. marketing rights for VSL#3, a patented
probiotic preparation of eight live freeze-dried lactic acid
bacterial species. Probiotics are living organisms in foods and
dietary supplements, which, upon ingestion in certain numbers,
improve the health of the host beyond their inherent basic
nutrition. We intend to market VSL#3 in the first half of 2002,
as a dietary supplement to promote normal GI function.

VSL#3 is also being studied for use as a
biological product to treat a number of Inflammatory Bowel
Diseases (IBDs). IBD is one of the most common
chronic gastrointestinal illnesses and consists mainly of two
conditions  ulcerative colitis and Crohns
disease. It is estimated that almost one million Americans have
IBD, with roughly 50% due to ulcerative colitis and 50% due to
Crohns disease. About 25-40 % of ulcerative colitis
patients eventually must have their colon removed because of
massive bleeding, severe illness, rupture of the colon, or risk
of cancer. A number of surgeries may be performed for ulcerative
colitis. One such procedure, which is becoming increasingly
common for ulcerative colitis, is ileal pouch anal anastomosis
(IPAA) surgery. This operation allows the patient to
have relatively normal bowel movements because it preserves part
of the rectum. The major long-term complication that occurs as a
result of this surgery is pouchitis. Pouchitis is the
non-specific inflammation of the ileal reservoir that appears to
be associated with bacterial overgrowth and dysbiosis. Studies
have found that probiotics are effective in preventing flare-ups
of chronic pouchitis.

In a specific study regarding chronic pouchitis,
conducted by Gionchetti, et al, and discussed in the U.S.
peer-reviewed clinical Journal of Gastroenterology and
Hepatology, 15:489-493 (2000), VSL#3 has been effective in
preventing chronic pouchitis. In this study, the efficacy of
VSL#3 was compared with a placebo in 40 patients who had
undergone the IPAA surgical procedure and had achieved clinical
and endoscopic remission from chronic pouchitis after antibiotic
treatment. Of the 20 patients who received the placebo, all
had a relapse of pouchitis during the nine-month study period.
Of the patients that received VSL#3, 85% were still in remission
at nine months post-treatment. No side effects were observed
from the treatment with VSL#3.

VSL#3 has received Orphan Drug designation from
the Office of Orphan Products Development at FDA for two
indications: (1) the treatment of active chronic pouchitis,
and (2) the prevention of disease relapse in patients with
chronic pouchitis. Orphan Drug designation applies to diseases
and disease states with a prevalence of less than 200,000
patients in the U.S. Orphan Drug designation confers certain
protection such as market exclusivity for seven years once the
product has been approved. For VSL and us to take advantage of
this designation, VSL#3 would have to be approved as a new
biological product by the FDA. The process to file for approval
would require additional clinical trial work as well as a
significant amount of manufacturing validation. This could take
years and may cost several hundred thousands of dollars to
complete. We do not control the clinical development strategy
for VSL#3. There can be no assurance that VSL#3 will be studied
in additional clinical trials or that it will ever enjoy the
benefits of this Orphan Drug designation.

We believe the emerging role for probiotics in
the management of patients with IBD offers an attractive market
opportunity for VSL#3 while at the same time effectively
complements the current promotion of Ethamolin to this same
group of gastroenterologists.

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Discontinued Product Line



| |       
| | ------
| | Neoflo

In November 1997, we acquired the Dermaflo
technology, a patented topical drug delivery system, from
Enquay, Inc. for a combination of cash and royalties on net
sales. The technology is a polymer matrix system that can store
a variety of different drugs and release them at a desired rate
over an extended period of time so that optimal clinical
response is obtained. Included in the assets acquired were the
products Neoflo, a triple antibiotic over-the-counter wound care
product, and Sildaflo, a potential prescription burn care
product, and required manufacturing equipment.

We had a multi-year agreement with NutraMax
Products, Inc. (NutraMax), a leading supplier of
first aid and wound care products, under which we were supplying
Neoflo, a proprietary triple antibiotic product using the
Dermaflo technology, to NutraMax for conversion and sale in the
form of adhesive strips and patches. NutraMax had the exclusive
right to sell the finished products to the retail and industrial
first aid markets. Further, the agreement called for us and
NutraMax to jointly develop several new products using the
Dermaflo technology and to share the development expense and
profits from future sales. We began shipping the product to
NutraMax in March 1999. In May 2000, NutraMax filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code. The
NutraMax bankruptcy filing had a negative impact on our sales
and cash flow during calendar year 2000 and first quarter of
2001. Approximately $190,000 of our sales to NutraMax was
included in the unsecured creditors class and was subject to a
reduced payment. Of this amount, only $19,000 was recovered. In
February 2001, NutraMaxs plan of reorganization was
approved by the Bankruptcy Court. When NutraMax emerged from
Chapter 11, NutraMax further reduced its forecast for
adhesive strips to be supplied. On April 2, 2001, NutraMax
filed a motion with the U.S. Bankruptcy Court to reject our
supply agreement effective on that date. The NutraMax product
was manufactured in our facility in Lees Summit, Missouri.
Since the Dermaflo business is not strategically important to us
and since the investment needed to build the business into a
profitable venture is substantial, in May 2001 we ceased our
manufacturing operations at Lees Summit after completion
of the remaining orders for NutraMax.

In May 2001, we closed our Lees Summit
facilities and discontinued any work using the Dermaflo
technology. During the remainder of 2001, we had been in
discussion with Franklin Pharmaceuticals Inc.
(Franklin), an entity owned by a former employee who
ran the Lees Summit facility. We had an agreement in
principle with Franklin to acquire the rights to the Dermaflo
technology and to sublease the Lees Summit facility and
the equipment necessary to manufacture products using the
Dermaflo technology. In November 2001, in order to avoid the
payment of minimum royalties owed to Enquay under the original
license agreement, Questcor and Enquay assigned all Dermaflo
drug technology to Franklin. Through the end of 2001, we
continued to negotiate with Franklin as to the sublease of the
facility and the rental of the manufacturing equipment. Since
Franklin was unable to secure adequate financing to fund its
operations, we did not enter into the sublease and the equipment
rental agreement. In December 2001, we determined that the
probability of recognizing any future value for the Lees
Summit facility, the related leasehold improvements, and the
manufacturing equipment was minimal. Accordingly, we recorded a
charge of $677,000 as a loss on the discontinued product line
consisting of a write-off of the remaining net book value of
leasehold improvements, a write-down of the manufacturing
equipment to its estimated fair market value and the total
estimated remaining lease payments remaining on the Lees
Summit facility.

We continue to discuss the possibility of
subleasing the facility and rental of the manufacturing
equipment with interested parties. In February 2002, Enquay
notified Franklin that it was terminating the Dermaflo license
assigned by us in November 2001 unless Franklin was able to
obtain adequate funding. To date, we cannot determine if
Franklin has obtained adequate funding or if they still have any
rights to the Dermaflo technology under the assigned license. It
is our intention to try and sublease the Lees Summit
facility and to sell the manufacturing equipment located in that
facility. The market for specialized clean room space in
Lees Summit is nearly non-existent and it is highly
unlikely that we will be successful in entering into a sublease
in the near future or ever. Accordingly, it appears we will
continue to pay the monthly rent on this facility through
December 2004. Although certain equipment contained in the
Lees Summit facility had recently undergone extensive
refurbishment, the equipment is highly specialized and must be
recalibrated and

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revalidated if it is moved. We have made the
equipment available for sale but it is highly unlikely that we
will be able to sell this equipment in the near future, if ever.
With the exception of the monthly rental and related facilities
charges, we do not anticipate any additional significant cash
outlay as a result of our decision to discontinue this product
line.


Drug Development

Our development programs include the intranasal
drugs Emitasol, Hypnostat, and Panistat and the cytoprotective
compound Ceresine (dichloroacetate or DCA).



| |                 
| | ----------------
| | Intranasal Drugs



| |         
| | --------
| | Emitasol

Through our merger with RiboGene, Inc., we
acquired Emitasol, an intranasal form of metoclopramide.
Metoclopramide is an approved antiemetic and is available in
both oral and intravenous forms to treat diabetic gastroparesis
and to prevent acute chemotherapy-induced emesis. We, through
future strategic partners, may choose to investigate Emitasol
for the treatment of diabetic gastroparesis and delayed onset
emesis (nausea and vomiting) associated with cancer chemotherapy.

Emitasol is currently being developed and
marketed in certain countries throughout the world through
corporate partners. It is on the market in Italy as Pramidin,
and is licensed to and distributed by Crinos in Italy for the
treatment of a variety of gastrointestinal disorders and emesis.
For the year ended December 31, 2001, Crinos distributed
approximately 29,000 units of Pramidin in Italy. We entered into
a marketing agreement in December 2000 with Ahn-Gook
Pharmaceuticals (Ahn-Gook), for intranasal
metoclopramide, to be marketed under the trade name Emitasol, in
Korea. Ahn-Gook also signed an agreement with Crinos to obtain
the intranasal metoclopramide finished product. This product is
sold as Pramidin in Italy. Emitasol has been filed for approval
in Korea, and if approved, will be distributed by Ahn-Gook in
Korea for the treatment of gastrointestinal disorders and
emesis. In the U.S., Emitasol is proposed as a method to control
diabetic gastroparesis and to prevent delayed onset emesis
associated with cancer chemotherapy. Currently, there are no
drugs specifically approved to treat delayed onset emesis. We
believe that Emitasol, when given intranasally, may be effective
in preventing delayed onset emesis. Advantages may include ease
of administration, an increased level of efficacy as compared to
alternatives, and cost effectiveness.

Diabetic
gastroparesis.Questcor, together with
its former North American collaborative partner Shire
Pharmaceuticals Group plc (Shire), (see
Strategic Alliances and Collaborations), concluded a
U.S. Phase II clinical trial in diabetic gastroparesis in
the fourth quarter of 2000. For some diabetics, proper digestion
may be difficult. Variable blood glucose levels may lead to a
condition known as gastroparesis or stomach paralysis.
Gastroparesis can result in general loss of appetite, nausea and
vomiting, and in some cases severe dehydration. Many
prescription medications are used to treat gastroparesis,
including bethanchol and erythromycin. Each of these
prescription drugs has limited effectiveness and contain side
effects. Metoclopramide is approved for treating gastroparesis.
We believe that the intranasal form of metoclopramide may
provide diabetics who have gastroparesis with an easier route of
administration, resulting in better patient compliance. In
October 2000, we announced the results of the Phase II study of
Emitasol (metoclopramide nasal spray) in the treatment of
diabetic gastroparesis. The study showed that both Emitasol
(metoclopramide nasal spray) and oral metoclopramide were
bioavailable when administered to diabetic gastroparesis
patients. The trial also suggested that Emitasol (metoclopramide
nasal spray) treatment may enhance the clinical response versus
oral metoclopramide. In July 2001, Shires exclusive option
to develop and market Emitasol in North America expired and all
rights were returned to us. We currently intend to seek a
corporate partner for the development of Emitasol in the U.S.
and in other countries around the world.

Delayed onset
emesis.According to the American
Cancer Society, about 1.3 million new patients are
diagnosed with cancer in the U.S. each year, many of whom are
treated with chemotherapy. Nausea and vomiting (emesis) are
common side effects of cancer chemotherapy. Chemotherapy-induced
emesis is considered to occur in two phases: acute (within
24 hours of the initiation of chemotherapy) and delayed (on
the second and subsequent days). Several drugs have been
approved by the FDA for preventing nausea and

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vomiting associated with emetogenic chemotherapy,
including injectable forms of ondansetron, granisetron and
metoclopramide. Ondansetron and granisetron are representatives
of a newer class of drugs called serotonin antagonists or
setrons, and are considered highly effective in controlling
acute chemotherapy-induced emesis. There are conflicting
reports, however, about the efficacy of serotonin antagonists in
controlling delayed onset emesis. There are, in fact, no
FDA-approved treatments specifically for delayed onset emesis.
Increasing numbers of these patients are being treated as
outpatients and experience delayed onset emesis when they are no
longer under the immediate care of a medical professional. Any
medication for such emetic episodes should therefore be suitable
for self-administration by the patient. Injectable medications
are unlikely to be suitable in this context. It appears that
current practice is to provide patients initially with oral
antiemetics in tablet form. Tablets are not, however,
particularly suitable for patients who are nauseated and may
vomit.


Prior clinical trials for Emitasol have
demonstrated that metoclopramide is absorbed and effective when
given intranasally. Phase I trials indicated that the overall
amount of metoclopramide which reaches the plasma is very
similar whether the drug is given intranasally, intravenously or
orally. Given the similarity in uptake of the three dosage
forms, similarity might also be expected in their clinical
performance. For acute emesis, the expected similarity in
performance has been demonstrated for the intranasal and
intravenous dosage forms. In a prior Phase III study,
Emitasol provided protection against acute emesis comparable to
that previously reported for intravenous metoclopramide. We
therefore anticipate that intranasal metoclopramide may be
effective for controlling delayed onset emesis, an activity
suggested for oral metoclopramide in the clinical literature.

Regardless of which indication is selected for
Emitasol, substantial additional development, clinical testing
(potentially including one or more Phase III trials) and
investment will be required prior to seeking regulatory approval
for commercialization of this product in the U.S. There can be
no assurance that a Phase III clinical trial of Emitasol
will demonstrate the safety and efficacy of the product to the
extent necessary to obtain regulatory approvals for the
indications being studied, or at all. The failure to demonstrate
adequately the safety and efficacy of Emitasol could delay or
prevent regulatory approval of the product.



| |          
| | ---------
| | Hypnostat

Through our merger with RiboGene, we acquired
Hypnostat, an intranasal form of triazolam. Oral triazolam is
approved for short-term treatment of insomnia. In June 2001, we
signed a Letter of Understanding with Fabre Kramer of Houston,
TX, to jointly pursue the worldwide development and
commercialization of Hypnostat (intranasal triazolam) for
insomnia and Panistat (intranasal alprazolam) for panic
disorders, two of our product candidates. Under this agreement,
we were reimbursed $32,000 in 2001 for consultants, employees,
materials and supplies expenses related to this project. This
original agreement was replaced with a new Letter of
Understanding, dated January 2002, which anticipates entering
into a License Agreement with the development to be funded by
Fabre Kramer. We, together with our partner, are developing
Hypnostat for the short-term treatment of insomnia. We believe
that Hypnostat, when given intranasally, may be effective in
treating insomnia. Advantages may include ease of
administration, an increased level of efficacy as compared to
alternatives, cost effectiveness, and possibly reduced side
effects.

The potential advantages of Hypnostat are
significant in light of the fact that thirty to forty million
Americans suffer from serious sleep disorders which are often
untreated or inadequately treated. Continued sleep impairment
may cause severe health effects. Oral triazolam (Halcion®)
has been one of the most successful and most prescribed
sleep-inducing agents in the world, with over 11 billion
prescriptions filled. Oral triazolam is considered safer in
terms of overdose, drug interactions, and addictive potential
compared to barbiturates. In addition, oral triazolam produces
less morning grogginess, as compared to other benzodiazepines,
due to a short plasma half-life. Oral triazolam and other
benzodiazepines are recommended for short-term use in
conservative doses. Zolpidem (Ambien®) and zaleplon
(Sonata®) are newer hypnosedative agents that are
chemically unrelated to benzodiazepines. However, both zolpidem
and zaleplon have similar pharmacokinetic and pharmacodynamic
effects and do not differ with respect to efficacy,
tolerability, residual effects, memory impairment, rebound
insomnia, or abuse potential compared to oral triazolam. Over
the counter medications containing diphenhydramine (such as
Benadryl® and Sominex®) have been shown to

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increase the risk of symptoms of delirium
including disorganized speech, poor attention level, and altered
consciousness in the elderly. Other over the counter medications
such as valerian and melatonin may be useful in alleviating mild
short-term insomnia, but further clinical trials are required to
fully evaluate efficacy and safety.


Prior clinical trials for Hypnostat support that
triazolam is absorbed and effective when given intranasally.
Phase I trials indicated that the overall amount of triazolam
which reaches the plasma is very similar whether the drug is
given intranasally or orally. Given the similarity in uptake of
the two dosage forms, similarity might also be expected in their
clinical performance. The expected similarity in performance is
supported for the intranasal dosage form. In a prior
Phase II pilot study, Hypnostat at 0.125 mg was
superior to oral triazolam at 0.250 mg for time to sleep
onset (p=0.008), effective sleep time (p=0.008), and stage two
sleep time (p<0.05) and was equivalent to oral triazolam at
0.250 mg for quality of sleep. We therefore anticipate that
intranasal triazolam may be effective for treating insomnia. The
drug is in Phase II stage of development.



| |         
| | --------
| | Panistat

Through our merger with RiboGene, we acquired
Panistat, an intranasal form of alprazolam. Oral alprazolam is
approved for the management of panic disorder or the short-term
relief of anxiety symptoms. Questcor and Fabre Kramer intend to
develop Panistat for the management of panic disorder or the
short-term relief of anxiety symptoms. We believe that Panistat,
when given intranasally, may be effective in treating panic
disorders. Advantages may include ease of administration, an
increased level of efficacy as compared to alternatives, and
cost effectiveness.

The potential advantages of Panistat are
significant in light of the fact that anxiety disorders are the
most common mental disorder in the U.S., affecting approximately
19 million people. According to the National Institute of
Mental Health, approximately 25% of those affected seek
treatment. Generalized anxiety disorder is characterized by
constant uncontrollable worry. Panic disorder is characterized
by acute, spontaneous, and repeated anxiety attacks which
involve an intense, terrifying, and unfocused fear in the
absence of any external threat. Panic attacks typically last for
approximately 20 to 30 minutes and may cause racing heartbeat,
chest pains, difficulty breathing, choking sensations,
dizziness, and numbness. Panic attacks can occur as often as
several times per week or several times per day. Approximately
2.4 million people in the U.S. suffer from panic disorder,
which often progresses into chronic anxiety and agoraphobia.

Early treatment can help keep a panic disorder
from progressing. Benzodiazepines, including oral alprazolam
(Xanax®), have proven to be safe and effective for treating
panic disorder for over 20 years. Benzodiazepines block
panic attacks during the first or second day of treatment.
Surprisingly low rates of abuse of this and other medicines are
reported in persons with panic disorder. Many antidepressants,
including doxepin (Sinequan®), sertraline (Zoloft®),
fluoxetine (Prozac®), imipramine (Tofranil®), and
paroxetine hydrochloride (Paxil®), are useful in treating
panic attacks without causing physical dependence. However,
successful treatment requires full strength dosage and usually
takes four to eight weeks for therapeutic effects to be
observed. In addition, antidepressants cause panic attacks to
initially increase in approximately half of panic disorder
sufferers. As a rule, the less expensive antidepressants have
more side effects than the newer, more expensive, ones.
Phenelzine sulfate (Nardil®) is effective for panic
disorder, but is complicated to use. Although phenelzine sulfate
is safe when used by an experienced physician, it is typically
reserved for cases where simpler medications have failed or
cannot be used. Unsafe elevations of blood pressure for several
hours can occur if one does not adhere to diet and medication
restrictions. Cognitive-behavioral therapy
(CBT) teaches the patient to anticipate and
prepare for situations and bodily sensations that may trigger
panic attacks. CBT generally requires at least eight to twelve
weeks for the patient to learn the skills and put them into
practice. CBT requires a motivated patient and a specially
trained therapist. Clinical experience suggests that for many
patients with panic disorder, a combination of CBT and
medication may be the best treatment. Other treatment options
include relaxation, breathing techniques, hypnotherapy, and
psychotherapy.

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| |                     
| | --------------------
| | Cytoprotective Drugs

Cytoprotective drugs for acute care settings that
treat ischemic injury are not currently available and the market
opportunities for us may be significant, potentially totaling
several million cases annually in the U.S. We believe that our
drugs, if approved, may reduce the number of fatalities
associated with ischemia-related and inherited metabolic
disorders and also reduce the high cost of rehabilitation and
ongoing care in the U.S. of these patients.

Our cytoprotective drugs are administered
intravenously, which allows for rapid delivery to the ischemic
tissue, or orally, which facilitates chronic administration. In
order to ensure early interventions, our cytoprotective drugs
are intended to be standard components in hospital emergency
rooms, operating theater suites, endoscopy suites and radiology
suites. Chemically demonstrated lack of toxicity should suit
them for this purpose, but such a demonstration is dependent on
ongoing and future clinical trials, which may not be successful.



| |         
| | --------
| | Ceresine

Ceresine is a small non-peptide molecule, which
acts on glycolysis at the level of the mitochondria. Ceresine is
a form of sodium dichloroacetate, or (DCA.) We have
licensed or obtained two issued U.S. patents covering the
use of Ceresine in cerebral ischemia and received orphan drug
designation for Ceresine for this indication. We believe that
Ceresine stimulates a specific enzyme which is present in the
membrane of the mitochondria that removes a precursor of lactic
acid, known as pyruvic acid, from the cytoplasm of the cell by
transporting it into the mitochondria and converting it to
acetyl coA. This results in a reduction of lactic acid in the
cell. Increased post-ischemia accumulation of lactic acid is a
major causal factor in the cessation of glycolysis, the
resultant decrease in cellular ATP levels and eventual cell
death. Numerous studies have shown that Ceresine reduces
post-ischemia lactic acid levels in humans subjected to various
traumatic events, which would otherwise have resulted in
increased lactic acid or lactic acidosis.

Ceresine has been employed by clinical
investigators in patients on an experimental basis for the
intravenous and oral treatment of lactic acidosis. Published
clinical studies and our own Phase I data have established that
Ceresine reduces serum lactic acid and exhibited no serious side
effects at the dose levels studied. Ceresine has also been shown
in human studies to cross the blood-brain barrier and to reduce
cerebrospinal fluid lactic acid levels in congenital lactic
acidosis patients.

Approximately 100 patients participated in the
Phase I and two Phase II trials of Ceresine under our
Investigational New Drug application or (IND) and
the drug was well tolerated. Our Phase II clinical trial data on
Ceresine in closed head injury patients showed that the drug
crosses the blood-brain barrier at high levels and very quickly
after crossing reduces lactate levels substantially. This effect
lasted for at least 12 hours. Serum lactate levels were
also reduced substantially in the drug-treated group. In July
1998, the FDA granted expedited development status to Ceresine
in head injury under Subpart E of the FDA regulations. We are
not currently pursuing clinical development of Ceresine in head
injury and have no plans to pursue this indication in the future.

Congenital Lactic Acidosis (CLA) is a
heterogeneous group of disorders characterized by mitochondrial
dysfunction. Mitochondria are sub cellular organelles
responsible for production of energy necessary for cellular
function and survival. When mitochondria do not function
normally there are inadequate stores of energy
(ATP) produced and the accumulation of poisonous metabolic
intermediates such as lactate. Clinically, disorders of
mitochondrial dysfunction may affect cells of the nervous system
(retardation, seizures, strokes, migraines, psychiatric
disturbances, weakness, poor gastrointestinal function), muscles
(weakness, cramping, pain), kidneys (electrolyte abnormalities),
heart (cardiomyopathy, heart block), liver (hypoglycemia,
hepatic failure), eyes (blindness), ears (deafness) and
other organs (failure to grow normally). When the mitochondrial
problem is severe, the condition is lethal. In other less
extreme instances, there may not be any clinical symptoms. There
are over 20,000 patients in the U.S. suffering from some type of
mitochondrial disease. Diagnosis of the disorder may be made on
physical examination, medical history review, and in some cases
special laboratory tests. These laboratory tests may include
identification of the gene responsible for the mitochondrial
dysfunction. Muscle biopsy is often performed to identify the
mitochondrial disorder; however,

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the test is not always diagnostic. There is
currently no effective approved therapy for CLA. Temporizing
measures such as dietary therapy include avoidance of fasting
and use of increased dietary fat. Vitamins have been given
without proven benefit. Avoidance of stress and sleep
deprivation have also been advocated.


DCA has been administered orally to individuals
with CLA with anecdotal reports of benefit. Some side effects
have been observed with chronic dosing, including peripheral
neuropathies that required drug interruptions or dose reductions
although individuals nearly always were able to continue on
treatment. The treatment of CLA with Ceresine has also been
granted orphan drug status by the FDA. This confers seven years
of marketing exclusivity to the first licensed agent as well as
certain tax advantages. An additional six months of exclusivity
may be granted upon licensure or at some time prior to the
expiration of all existing marketing exclusivity or patent
protection if adequate studies have been conducted in pediatric
subjects.

To accelerate any potential NDA filing,
collaborations have been discussed with two academic sites
actively investigating DCA in individuals with CLA. Upon
finalization of these two relationships, databases would become
available to us. These databases could be used as part of the
clinical information necessary for NDA filing with regulatory
authorities. If a clinical benefit is demonstrated, regulatory
authorities could act favorably on the application. We currently
have no rights to the data generated by the academic
institutions that studied various formulations of DCA in
patients with CLA. We have been in discussion with these groups
about a potential agreement to gain access to the data. The
trials are complete and the data are being analyzed. The final
data analysis will take several months to complete. After data
analysis is complete, if the results are extremely positive and
if the combined results are sufficient to allow us to file for
an accelerated review with the FDA for approval, we may seek to
finalize these agreements to gain access to the data. There can
be no assurance, however, that the clinical results would be
positive, that we could successfully complete agreements to gain
access to the data or that the FDA would approve the product for
use. In addition, the studies have been conducted with different
formulations of DCA. There is no assurance the FDA would not
require substantial additional testing of Ceresine, or the
re-formulation of DCA used to complete the trials in order to
grant approval.



| |                                                
| | -----------------------------------------------
| | Glial Excitotoxin Release Inhibitors
	(GERIs)

The GERIs series of neuroprotective compounds may
prevent ischemic brain damage originating from astrocytes
(astroglial cells). Astrocytes serve important metabolic
functions and are thought to be responsible for the bulk of
brain swelling following stroke or injury. The swelling
constricts blood vessels and worsens the injury 
resulting in ischemia and subsequent cell death. In addition,
upon onset of ischemia, astrocytes release excitotoxins such as
glutamate and aspartate over an extended period of
time  not rapidly, as in the case of
neurons  that result in significant and persistent
damage to neurons. Because astrocyte swelling and excitotoxin
releases are late-stage events in the development of ischemia
following brain injury or stroke, they may be more appropriate
targets for drug intervention than neuron-related events.

In animal models and cell culture experiments,
the GERI compounds exert a powerful neuroprotective effect by
blocking chloride-ion channels, to reduce swelling, and by
inhibiting excitotoxin release, to limit or prevent damage to
neurons. In vitro,excitotoxin release from cultured
astrocytoma cells is fully inhibited at very low concentrations
by many compounds of the GERI series. A greater than 30-fold
decrease in drug concentration required to inhibit excitotoxin
release has been achieved by designing novel derivatives in the
GERI compound family. In animal models of global and focal brain
ischemia, a number of the GERI compounds demonstrated reduction
of the infarct volume by as much as 50% in comparison to
untreated controls. In addition, the toxicity profile of
existing development candidates appears excellent.

The GERI compounds are currently being funded by
a Small Business Innovation Research (SBIR) grant
from the NIH. It is anticipated that reimbursement under this
grant will be completed in April 2002. Although we have had some
preliminary discussions with potential corporate partners
regarding the GERI compounds, there can be no assurance that we
will enter into a collaboration to fund future research on these
compounds. Pending completion of the reimbursement under the
existing SBIR grant, we do not intend to expend any additional
resources on these compounds.

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At this time, we continue to define the chemical,
toxicological and pharmacological effect of a number of GERI
compounds in animal models having utilized $443,000 through
December 31, 2001 of the $749,000 in funding from an NIH
SBIR grant. Funding for this project expires in April 30,
2002. There can be no assurance that we will be successful in
licensing the GERI program or that we will realize license fees
or revenues from such programs.

Discontinued Drug Development

Cordox has been studied in the past for a variety
of indications including its use in several acute ischemic
indications and as a blood preservative. To date, the results of
the clinical studies have not been compelling enough to warrant
further development of Cordox for any indication.

In September 2001, we completed our final review
of the final report from Hoxworth Blood Center in Cincinnati on
the ability of Cordox to improve the biochemical and physical
characteristics of stored human red blood cells. During storage
at 4 degrees centigrade, red cell concentrate incubated with
Cordox did not demonstrate improved levels of ATP or 2,3 DPG
compared to red blood cells stored in currently licensed blood
additive solutions. In addition, experiments with 13C labeled
Cordox failed to show metabolism to lactate in stored red blood
cells. The results indicate that Cordox does not enter red blood
cells and does not reach its intended target. This is a
prerequisite for Cordox to have a beneficial effect on cellular
metabolism. Based on these results, all further work on Cordox
has been discontinued.

We intend to terminate all the agreements
relating to Cordox and Dr. Markov, the individual that we
obtained the Cordox license from. We have also abandoned all our
patents relating to Cordox.

Drug Discovery/ Strategic Alliances and
Collaborations

Subsequent to our merger with RiboGene, we
implemented a strategy to focus on the sales and marketing of
approved pharmaceutical products and late stage drug development
candidates. As a result, we planned to out-license our early
stage drug targets and technology. Thus, we discontinued our
drug discovery programs in the first quarter of 2000 and
anticipate that future in-house drug discovery research expenses
associated with drug discovery will be limited to legal fees,
patent costs and other costs to license such programs.



| |                        
| | -----------------------
| | The Dainippon Agreement

We have an exclusive, worldwide license agreement
with Dainippon to use our antibacterial ppGpp degradase and
peptide deformylase technology for the research, development and
commercialization of pharmaceutical products. We have retained
the right to co-promote, in Europe and the U.S., certain
products resulting from the arrangement. We will be entitled to
receive potential milestone payments upon the achievement of
clinical and regulatory milestones in the amount of
$5.0 million in Japan and $5.0 million in one other major
market. We will receive a potential royalty on net sales that
will range from 5% to 10%, depending on sales volume and
territory.

Dainippon has been conducting research on two
specific bacterial targets, deformylase and ppGpp degradase. To
date, Dainippon has focused most of their efforts on the
deformylase project. Several compounds have been synthesized and
tested in vivo against drug resistant bacteria. Although the
compounds have shown good in vivo activity, Dainippon has not
selected any compounds for pre-clinical studies. There can be no
assurance that Dainippon will ever select any compounds for
preclinical studies or if selected that these compounds will
eventually be approved as drugs. There can also be no assurance
that we will ever receive any milestone payments or royalties
under our agreement with Dainippon.



| |                                     
| | ------------------------------------
| | The Rigel Pharmaceuticals
	Agreement

We have an exclusive agreement with Rigel
Pharmaceuticals, Inc. (Rigel), to use our antiviral
technology. Under the agreement, we have assigned to Rigel
certain antiviral technology, including our Hepatitis C virus
internal ribosome entry site and NS5A drug discovery technology,
for the research, development and commercialization of
pharmaceutical products. We will be entitled to potential future

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milestone payments upon the achievement of
certain clinical and regulatory milestones and royalty payments
on sales. The status of this project is on-going.




| |                      
| | ---------------------
| | The Tularik Agreement

In February 2001, we announced that we had
exclusively licensed certain antifungal drug research technology
to Tularik, Inc. In addition, we have transferred to Tularik
certain biological and chemical reagents to be used in the
discovery and development of novel antifungal agents. In
exchange, we received a cash payment, payment for reimbursement
of patent expenses, and will be entitled to future potential
milestone payments upon the achievement of certain clinical and
regulatory milestones as well as royalty payments on sales.
Tularik has screened numerous compounds through the antifungal
capping assay that it acquired as part of this agreement.
Several of these compounds have been identified as having
activity against C. albicanscapping enzymes. Tularik is
continuing to review these compounds.



| |                                               
| | ----------------------------------------------
| | The Shire Pharmaceuticals Group plc
	Agreement

In July 2001, the option held by Shire
Pharmaceuticals Group to acquire exclusive rights to Emitasol in
North America expired and all rights reverted to us. In December
2001, Shire notified the FDA that it will no longer be our agent
and, as such, will transfer to us all responsibilities
previously conducted by them. This transfer is currently in
progress.



| |                                                          
| | ---------------------------------------------------------
| | The Fabre Kramer Pharmaceuticals Letter of
	Understanding

In June 2001, we signed a Letter of Understanding
with Fabre Kramer of Houston, TX, to jointly pursue the
worldwide development and commercialization of two of our
product candidates, Hypnostat (intranasal triazolam) for
insomnia and Panistat (intranasal alprazolam) for panic
disorders. This was replaced with a new Letter of Understanding,
dated January 2002. This Letter of Understanding anticipates
entering into a License Agreement with the development to be
funded by Fabre Kramer.

Licenses

Crinos Industria Farmacobiologica SpA
(Crinos).In January 1994,
as part of our acquisition of Emitasol and certain other
intranasal products from Hyline Laboratories, Inc., we entered
into a license agreement with Crinos. The agreement grants
Crinos an exclusive license to manufacture and market Emitasol
in Italy. The agreement expires 10 years after the first
commercial sale in Italy subject to automatic renewal for
three-year periods. In October 1996, the agreement was amended
to grant Crinos a non-exclusive worldwide license to manufacture
Emitasol. The amendment provides that we will receive additional
royalties on all supply arrangements between Crinos and any of
our licensees to Emitasol. We may terminate the license
agreement in the event Crinos fails to pay certain minimum
royalties. We also retain the right to all data generated by
Crinos on Emitasol, including clinical and manufacturing
information.

Crinos has received governmental approval to
market Emitasol in Italy and launched this product under the
trade name Pramidin in 1999 for the treatment of
gastrointestinal disorders. Pramidin is marketed in two dosage
forms under the names Pramidin 10 (200 milligrams/mL of active
ingredient) and Pramidin 20 (400 milligrams/mL of active
ingredient). To date, we have received minimal royalties from
the sale of Pramidin in Italy. For the year ended
December 31, 2001 unit sales of Pramidin were approximately
29,000.

CSC Pharmaceuticals Handels GmbH
(CSC).In April 1997,
RiboGene entered into an agreement with CSC. The agreement
grants CSC an exclusive license to market and sell Emitasol in
Austria, Poland, the Czech Republic, Bulgaria, Russia, Hungary,
the Slovak Republic, Romania, and the remaining Community of
Independent States and eight other eastern European countries.
CSC has agreed to pay us a royalty based on net sales within the
countries listed above. The agreement will expire on a
country-by-country basis 10 years after the first
commercial sale in that country. Although we can terminate the
license if CSC did not obtain approval in any country contained
in the agreement by April 16, 1999, we have not done so, since
CSC has filed for regulatory approval in Austria, Russia,
Hungary and the Slovak Republic. In 2001,

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CSC received approval to market Emitasol in
Poland and the Czech Republic. CSC plans to begin marketing in
Poland and the Czech Republic in 2002. CSC has also filed for
approval in several other countries.


Laboratorios Silesia SA.In December 1999, we signed a license
agreement with Laboratorios Silesia SA for marketing intranasal
metoclopramide, to be marketed under the trade name Emitasol, in
Chile. Laboratories Silesia SA also signed an agreement with
Crinos to obtain the intranasal metoclopramide, finished product
under the trade name Pramidin. This product is sold as Pramidin
in Italy. We received a small up-front payment and will receive
royalties on the net sales of Emitasol in the territory.

Ahn-Gook Pharmaceutical Co., Ltd.We entered into a license agreement in
December 2000 with Ahn-Gook for marketing intranasal
metoclopramide, to be marketed under the trade name Emitasol, in
Korea. Ahn-Gook also signed an agreement with Crinos to obtain
the intranasal metoclopramide finished product, under the trade
name Pramidin. This product is sold as Pramidin in Italy. Under
the terms of the agreement, Ahn-Gook will obtain government
approval to market Emitasol. We received an up-front cash
payment of $50,000, and are entitled to a milestone payment of
$150,000 upon approval of the drug for distribution in Korea and
royalties based on actual sales in Korea.

Manufacturing

We do not currently manufacture any of our
acquired products or our products in development. Our commercial
products, Acthar, Ethamolin, Glofil-125, and Inulin are
manufactured for us by approved contract manufacturers.

As part of our agreement with Aventis to acquire
Acthar, Aventis agreed to manufacture the finished goods from
existing inventory of the active pharmaceutical ingredient (the
API) through July 2002. Subsequent to this, Aventis
has agreed in principle as to the terms of the manufacturing
agreement but the agreement has not yet been executed. Aventis
has provided finished product to us under the proposed
agreement. The production of Acthar requires the production of
the API and the production of the finished product. The API is
an extraction from porcine pituitary glands. Although the
extraction process is well known by individuals within Aventis,
the extraction may be difficult to reproduce at a new vendor. As
part of the agreement to acquire Acthar, we obtained a
sufficient supply of the API in order to meet our forecasted
demand through 2002. We are required to find a new third party
manufacturer to produce the API and for the production of the
finished goods. We have identified potential third party
manufacturers that could produce the API and the finished
product but we have not yet entered into an agreement with any
of these manufacturers. In addition, the production of the API
and the finished product are subject to inspection and ultimate
approval by the FDA. The Acthar site transfer process has
numerous risks that could have a materially adverse impact on
our financial results for us this year and in future years. Such
risks include the ability to successfully identify and to enter
into agreements with new independent third party contractors for
the production of the API and the production of finished goods,
or, if we are successful in identifying and entering into such
agreements that the API and finished goods could be produced in
sufficient quantities on a timely basis and at an acceptable
cost, that the production facilities and the processes will be
approved by the FDA and that the API and finished product will
be similar in potency and efficacy as the API currently held by
Aventis. Although we believe we have adequate time and resources
to ensure that the site transfer of Acthar will occur timely and
correctly with minimal impact on future revenues, there can be
no assurance that the site transfer will occur timely and
correctly and that the transfer will not have a materially
adverse impact on the company in the future.

We presently obtain Ethamolin from
Schering-Plough. Currently Schering-Plough manufactures
Ethamolin for us on a purchase order basis. We have had great
difficulty obtaining Ethamolin from Schering-Plough. During the
fourth quarter of 2001, our inability to acquire Ethamolin
caused a backorder situation which resulted in us being unable
to fulfill orders for the product, resulting in lost revenues
for us for the year ended December 31, 2001. We received a
batch of approximately 2,500 10-packs of Ethamolin in January
2002 and were able to ship $408,000 of product that had been
backordered as of December 31, 2001. We have requested that
Schering-Plough manufacture one additional batch of Ethamolin
(2,500 10-packs) which we hope to receive by April 30,
2002. At this time, we are in a backorder situation for
Ethamolin. We have

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identified a new third party manufacturer for
Ethamolin who has agreed to produce Ethamolin for us. However,
the transfer to this new manufacturer will require final
approval from the FDA. The new manufacturer has produced initial
batches of Ethamolin which we expect to commercialize by
April 30, 2002. These initial batches are subject to
quarantine pending the outcome of certain sterility and other
validation tests. Once these initial batches pass these tests
and the production facility has passed the FDA approval, we may
be free to sell these batches. We have discussed a manufacturing
contract with this new manufacturer but have not yet entered
into a final agreement. The site transfer of Ethamolin has many
risks including the failure to receive FDA approval, the failure
to pass the sterility and other validation tests, the failure to
enter into an agreement on acceptable terms, and the new
manufacturers ability to produce an adequate supply of
Ethamolin on a timely basis. We believe we have adequate
resources to complete the transfer of Ethamolin without a
materially adverse impact on us, but if we are unable to
overcome some or all of these risks or any as of yet
unidentified risks, it could have a material adverse impact on
future revenues.


Our manufacturer of Glofil-125 was recently
subject to an inspection by the FDA. As a result of this
inspection, our manufacturer received notification that numerous
items required attention in order to comply with FDA
regulations. We were made aware of this situation and have
undergone a review of the potential impact of this inspection on
the manufacture of Glofil-125. Based on the information
available, we believe that the manufacture of Glofil-125 will
not be affected.

In the case of Inulin, we are responsible for
obtaining the bulk drug from a third party and delivering it to
the finished goods manufacturer.

There can be no assurance that any of our bulk or
finished goods contract manufacturers will continue to meet our
requirements for quality, quantity and timeliness or the
FDAs current good manufacturing practice (GMP)
requirements. Also, there can be no assurance that we will be
able to find a substitute bulk manufacturer for Inulin or Acthar
or a substitute finished goods manufacturer for Acthar,
Ethamolin, Glofil-125, Inulin, or for any of our other products,
nor that all GMP requirements will be met, nor that lots will
not have to be recalled with the attendant financial
consequences to us.

In the case of VSL#3, we will obtain the product
from VSL under our agreement. However, we have no experience
with manufacturing VSL#3, and we are relying completely on VSL
to supply us with the product. Due to our lack of experience
with VSL#3 and our reliance on VSL, we can provide no assurances
as to the timely manufacture of this product.

Our limited manufacturing experience and our
dependence upon others for the manufacture of bulk or finished
forms of our products may adversely affect the future profit
margin on the sale of those products and our ability to develop
and deliver products on a timely and competitive basis. We do
not have substitute suppliers for any of our products. In the
event we are unable to manufacture our products, either directly
or indirectly through others, or on commercially acceptable
terms at all, we may not be able to commercialize our products
as planned.

Sales and Marketing

As of December 31, 2001, we have hired,
trained and deployed a total of twenty product specialists and
marketing personnel to support the commercial sales of Acthar,
Ethamolin, Glofil-125 and Inulin. The Product Specialists are
promoting Ethamolin to hospital-based gastroenterologists, who
treat patients with liver disease who develop bleeding
esophageal varices, a potentially life threatening disorder.
Ethamolin is an FDA approved product for the specific indication
of esophageal varices that have recently bled. The promotion of
Glofil-125 targets organ transplant centers and those patients
who are at greatest risk of kidney failure. The promotion of
Acthar to pediatric neurologists began during the third quarter
of 2001 and focused on adequate stocking of wholesalers and
hospitals. We currently distribute all of our products from our
distribution location in Carlsbad, CA.

In the case of VSL#3, we plan to promote the
product to gastroenterologists and directly to consumers. Since
we have no experience with direct consumer marketing, sales and
customer support there can be no assurance we will be successful
in marketing VSL#3.

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Competition

Acthar competes with newer agents, such as
synthetic corticosteroids, immunosupressants, and anti-seizure
medications (in the case of infantile spasms) and other types of
anti-inflammatory products for various autoimmune conditions
that have inflammation as a clinical aspect of the disease.
Acthar is currently used in patients suffering from arthritis,
multiple sclerosis, and infantile spasm.

Several companies offer sclerotherapy agents
products that compete with Ethamolin. Ethamolin is an injectable
drug used to treat patients with bleeding esophageal varices
that have recently bled, to prevent bleeding. Other competitive
agents include ScleromateTM, Rubber Band Ligation
methods such as the Multi-band Superview manufactured by
Boston-Scientific, the Multi-band Six Shooter manufactured by
Wilson-Cook, and the Multi-band Ligator by Bard and
Octreotide® by Novartis. The competition to market
FDA-approved active bleeding esophageal varices therapies is
intense and no assurance can be given that our product will
continue to be commercially successful.

A number of companies offer both clinical
competition as well as research competition to Glofil-125. The
clinical competition includes serum creatinine and creatinine
clearance methods such as Tc-DTPA, which is manufactured by
Mallinckrodt, Inc. as well as Omnipaque®, which is
manufactured by Sanofi, a division of Sanofi-Synthelabo.
Research competition includes Conray®-iothalamate
(nonradiolabeled) meglumine, which is also manufactured by
Mallinckrodt, Inc. and employed through the Mayo Clinic. The
competition to market FDA-approved drugs to measure kidney
function by evaluating GFR, is intense and no assurance can be
given that our product will continue to be commercially
successful.

We have identified CulturelleTM by
ConAgra, Probioticaby Johnson and Johnson, and
LiveBac® by Nutraceutix as competitors to VSL#3.

Several large companies products will
compete with Emitasol in the delayed onset emesis market,
including Zofran® (ondansetron hydrochlordide) by
Glaxo-Wellcome, Kytril® (granisetron hydrochloride) by
SmithKline Beecham and Reglan® (metoclopramide) by
A.H. Robins. These competitive products, however, are
available in oral and intravenous delivery forms only. The
competition to develop FDA-approved drugs for delayed onset
emesis and diabetic gastroparesis is intense and no assurance
can be given that our product candidate will be developed into
commercially successful product.

We are unaware of any competitors at this time to
Ceresine. The competition to market FDA-approved drugs to treat
ischemic disorders is intense and no assurance can be given that
our product candidates will be commercially successful products.

Most of our competitors are larger than us and
have substantially greater financial, marketing and technical
resources. In addition, many of these competitors have
substantially greater experience than we do in developing,
testing and obtaining FDA and other approvals of
pharmaceuticals. Furthermore, if we commence commercial sales of
the pharmaceuticals in our pipeline, we will also be competing
with respect to manufacturing efficiency and marketing
capabilities, areas in which we have limited experience. If any
of the competitors develop new technologies that are superior to
our technologies, our ability for us to expand into the
pharmaceutical markets may be materially and adversely affected.

Competition among products will be based, among
other things, on product efficacy, safety, reliability,
availability, price and patent position. An important factor
will be the timing of market introduction of our or our
competitors products. Accordingly, the relative speed with
which we can develop products, complete the clinical trials and
approval processes and supply commercial quantities of the
products to the market is expected to be an important
competitive factor. Our competitive position will also depend
upon our ability to attract and retain qualified personnel, to
obtain patent protection or otherwise develop proprietary
products or processes and to secure sufficient capital resources
for the often substantial period between technological
conception and commercial sales.

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Government Regulation



| |                                  
| | ---------------------------------
| | Marketed Pharmaceutical
	Products

All pharmaceutical firms, including manufacturers
from whom we purchase products, are subject to regulation by the
FDA. Any restrictions or prohibitions applicable to sales of
products we market could materially and adversely affect our
business.

We market prescription drug products that have
been approved by the FDA. The FDA has the authority to revoke
existing approvals, or to review the status of currently exempt
pharmaceuticals and to require application and approval of
prescription drugs if new information reveals that they are not
safe or effective. The FDA also regulates the promotion,
including advertisement, of prescription drugs.

Drug products must be manufactured, packaged, and
labeled in accordance with their approvals and in conformity
with GMP standards and other requirements. Drug manufacturing
facilities must be registered with and approved by the FDA and
must list with the FDA the drug products they intend to
distribute. The manufacturer is subject to inspections by the
FDA and periodic inspections by other regulatory agencies. The
FDA has extensive enforcement powers over the activities of
pharmaceutical manufacturers, including authority to seize and
prohibit the sale of unapproved or non-complying products, and
to halt manufacturing operations that are not in compliance with
current GMPs. Also, the FDA regulates the distribution of drug
samples. Both the FDA and the Drug Enforcement Agency
(DEA) may impose criminal penalties arising from
non-compliance with applicable regulations.



| |                     
| | --------------------
| | Drugs in Development

Our products in development are subject to
extensive regulation by the U.S. principally under the Federal
Food, Drug and Cosmetic Act (FDCA) and the Public
Health Service Act, and foreign governmental authorities prior
to commercialization. In particular, drugs and biological
products are subject to rigorous preclinical and clinical
testing and other approval requirements by the FDA, state and
local authorities and comparable foreign regulatory authorities.
The process for obtaining the required regulatory approvals from
the FDA and other regulatory authorities takes many years and is
very expensive. There can be no assurance that any product
developed by us will prove to meet all of the applicable
standards to receive marketing approval in the U.S. or abroad.
There can be no assurance that these approvals will be granted
on a timely basis, if at all. Delays and costs in obtaining
these approvals and the subsequent compliance with applicable
federal, state and local statutes and regulations could
materially adversely affect our ability to commercialize our
products and our ability to earn sales revenues.

The research activities required by the FDA
before a drug can be approved for marketing begin with extensive
preclinical animal and laboratory testing. The tests include
laboratory evaluation of product chemistry and animal studies
for the safety and efficacy of the drug. The results of these
studies are submitted to the FDA as part of an IND which is
reviewed by the FDA prior to beginning clinical trials, first in
normal volunteers and then in patients with the disease.

Clinical trials involve the administration of the
investigational new drug to healthy volunteers or to patients,
under the supervision of a qualified physician/ principal
investigator. Clinical trials are conducted in accordance with
governmental statutes, regulations and guidelines and under
protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy
criteria to be evaluated. Each protocol must be submitted to the
FDA as part of the IND. Further, each clinical study must be
evaluated by an independent Institutional Review Board, referred
to as the IRB, at the institution at which the study
will be conducted. The IRB considers, among other things,
ethical factors, the safety of human subjects and the possible
liability of the institution, and approves the informed consent
to be obtained from all subjects and patients in the clinical
trials. We will have to monitor the conduct of clinical
investigators in performing clinical trials and their compliance
with FDA requirements.

Clinical trials are typically conducted in three
sequential phases (Phase I, Phase II and
Phase III), but these phases may overlap. There can be no
assurance that Phase I, Phase II or Phase III
testing will be completed successfully within any specified time
period, if at all, with respect to any of our drugs.

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Furthermore, we or the FDA may suspend clinical
trials at any time if it is felt that the subjects or patients
are being exposed to an unacceptable health risk or that the
investigational product lacks any demonstrable efficacy.


The results of the pharmaceutical development,
preclinical studies and clinical studies are submitted to the
FDA in the form of a new drug application (NDA) or,
in the case of a biological product, a Biologics License
Application (BLA) for approval of the marketing and
commercial shipment of the product. The testing and approval
process is likely to require substantial time (frequently five
to eight years or more) and expense, and there can be no
assurance that any approval will be granted on a timely basis,
if at all. The FDA may deny an NDA or BLA if applicable
regulatory criteria are not satisfied, require additional
testing or information, or require post-marketing testing and
surveillance to monitor the safety of our drugs. Notwithstanding
the submission of the NDA or BLA and any additional testing data
or information, the FDA may ultimately decide that the
application does not satisfy its regulatory criteria for
approval. Finally, drug and biological product approvals may be
withdrawn if compliance with labeling and current good
manufacturing practices regulatory standards is not maintained
or if unexpected safety or efficacy problems occur following
initial marketing.

Among the conditions for clinical studies and NDA
or BLA approval is the requirement that the prospective
manufacturers quality control and manufacturing procedures
conform to cGMP, which must be followed at all times. In
complying with standards set forth in these regulations,
manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full
technical compliance.

Also, companies that engage in pharmaceutical
development, such as Questcor, are required to pay user fees of
more than $300,000 upon submission of an NDA or BLA. No fee is
required for the submission of an NDA or BLA for an orphan
product and waivers of the user fee are also available under
other circumstances. In addition to regulations enforced by the
FDA, we are subject to regulation under the Occupational Safety
and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery
Act and other present and potential future federal, state or
local regulations. For marketing outside the U.S., we are
subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The
requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to
country.



| |      
| | -----
| | VSL#3

We intend to market VSL#3 as a dietary
supplement. If we pursue FDA approval of VSL#3 as a biological
product, we will be subject to the regulatory hurdles discussed
above.

The manufacturing, distribution, and sale of
dietary supplements and medical foods are subject to regulation
by one or more federal agencies, principally the FDA and the
Federal Trade Commission (the FTC). Our activities
are also regulated by various governmental agencies for the
states and localities in which VSL#3 is manufactured,
distributed, and sold. Among other matters, the FDA and FTC are
concerned with product safety and claims that refer to a
products ability to provide dietary support for
health-related conditions.

The regulation of dietary supplements is
principally governed by the Dietary Supplement Health and
Education Act (DSHEA), which were enacted in 1994,
amending the FDCA. We believe DSHEA is generally favorable to
the dietary supplement industry. DSHEA establishes a statutory
class of dietary supplements, which includes
vitamins, minerals, herbs, amino acids and other dietary
ingredients for human use to supplement the diet. Dietary
ingredients that were not on the market as of October 15,
1994 require the submission by the manufacturer or distributor
to the FDA of evidence of a history of use or other evidence of
safety establishing that the ingredient will reasonably be
expected to be safe. Among other things, DSHEA prevents the
further regulation of dietary ingredients as food
additives and allows the use of statements of nutritional
support on product labels. The FDA has issued proposed and final
regulations in this area and indicates that further guidance and
regulations are forthcoming.

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The FDA has announced its intent to issue GMP
regulations for the dietary supplement industry. The FDA has
published an advance notice of proposed rulemaking, and
publication of proposed regulations is expected soon.

In November 1998, the FTC Bureau of Consumer
Protection announced its new advertising guidelines for the
dietary supplement industry, which it labeled Dietary
Supplements: An Advertising Guide for Industry. These
guidelines reiterate many of the policies the FTC has announced
over the years, including requirements for substantiation of
claims made in advertising about dietary supplements.

The regulation of medical foods is principally
governed by the FDCA and FDA regulations. A product qualifies as
a medical food if it is specially formulated for the feeding of
a patient, is intended for the dietary management of a patient
who has special dietary needs, provides nutritional support for
the management of the unique nutritional needs of the patient,
and is intended to be used under active medical supervision.
Moreover, an ingredient added to a food, including a medical
food, must be approved by an FDA food additive petition unless
it is generally recognized as safe (GRAS) for its
particular intended use.

Patents and Proprietary Rights

Our success may depend in large measure upon our
ability to obtain patent protection for our products, maintain
confidentiality and operate without infringing upon the
proprietary rights of third parties. We have obtained patent
coverage, either directly or through licenses from third
parties, for some of our products. We currently own or have
licensed a total of nineteen issued U.S. and foreign patents
covering Hypnostat, four issued U.S. and foreign patents
covering Emitasol, one issued U.S. patent covering GERI,
and twelve issued U.S. and foreign patents covering our other
technology.

We acquired intellectual property associated with
our intranasal program, including: Emitasol for diabetic
gastroparesis and delayed onset emesis associated with
chemotherapy, Migrastat (intranasal propranolol) for migraine
treatment, and intranasal benzodiazepines such as Hypnostat and
Panistat for various conditions such as anxiety, seizures, panic
attacks and sleep disorders. We have licensed rights to
intranasal metoclopramide in, Italy, Chile, South Korea,
Austria, the Russian Federation, and certain former Eastern
European countries. The Italian licensee, Crinos, received
approval to market intranasal metoclopramide (Pramidin) in
Italy. We are currently earning small royalties on our sales of
Pramidin. There can be no assurance that the foreign licensees
will obtain the necessary regulatory approvals to market
Emitasol, or that, in the event such approvals are obtained,
Emitasol will achieve market acceptance in such countries, or
that we will ever realize royalties on sales of Emitasol in such
countries.

In addition to the patents issued and allowed as
mentioned above, we have also filed several other patent
applications in the U.S. and abroad on our various products and
expect to file additional applications in the future. There can
be no assurance that any of these patent applications will be
approved, except where claims have already been examined and
allowed, or that we will develop additional proprietary products
that are patentable. Nor can there be any assurance that any
patents issued to us or our licensors will provide us with any
competitive advantages or will not be challenged by third
parties or that patents issued to others will not have an
adverse effect on the ability of us to conduct our business.
Furthermore, because patent applications in the U.S. are
maintained in secrecy until issue, and because publication of
discoveries in the scientific and patent literature often lag
behind actual discoveries, we cannot be certain that we were the
first chronologically to make the inventions covered by each of
our pending U.S. patent applications, or we were the first to
file patent applications for such inventions. In the event that
a third party has also filed a U.S. patent application for any
of its inventions, we may have to participate in interference
proceedings declared by the U.S. Patent and Trademark
Office to determine priority of the invention, which could
result in substantial costs to us, even if the eventual outcome
is favorable to us. In addition, there can be no assurance that
our U.S. patents, including those of our licensors, would be
held valid by a court of law of competent jurisdiction. If
patents are issued to other companies that contain competitive
or conflicting claims, which ultimately may be determined to be
valid, there can be no assurance that we would be able to obtain
a license to any of these patents.

Under Title 35 of the United States Code, as
amended by the General Agreement on Tariffs and Trade
implementing the Uruguay Round Agreement Act of 1994, commonly
referred to as GATT, patents that issue

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from patent applications filed prior to
June 8, 1995 will enjoy a 17-year period of enforceability
as measured from the date of patent issue while those that issue
from applications filed on or after June 8, 1995 will enjoy
a 20-year period of enforceability as measured from the date the
patent application was filed or the first claimed priority date,
whichever is earlier. Patents that issue from applications filed
on or after June 8, 1995 may be extended under the term
extension provisions of GATT for a period up to five years to
compensate for any period of enforceability lost due to
interference proceedings, government secrecy orders or appeals
to the Board of Patent Appeals or the Federal Circuit.


Under the Drug Price Competition and Patent Term
Restoration Act of 1984, including amendments implemented under
GATT, the period of enforceability of a first or basic product
patent or use patent covering a drug may be extended for up to
five years to compensate the patent holder for the time required
for FDA regulatory review of the product. This law also
establishes a period of time following FDA approval of certain
drug applications during which the FDA may not accept or approve
applications for similar or identical drugs from other sponsors.
Any extension under the Patent Term Restoration Act and any
extension under GATT are cumulative. There can be no assurance
that we will be able to take advantage of the patent term
extensions or marketing exclusivity provisions of these laws.
While we cannot predict the effect that such changes will have
on our business, the adoption of such changes could have a
material adverse effect on our ability to protect our
proprietary information and sustain the commercial viability of
our products. Furthermore, the possibility of shorter terms of
patent protection, combined with the lengthy FDA review process
and possibility of extensive delays in such process, could
effectively further reduce the term during which a marketed
product could be protected by patents.

We also rely on trade secrets and proprietary
know-how. We have been and will continue to be required to
disclose our trade secrets and proprietary know-how to employees
and consultants, potential corporate partners, collaborators and
contract manufacturers. Although we seek to protect our trade
secrets and proprietary know-how, in part by entering into
confidentiality agreements with such persons, there can be no
assurance that these agreements will not be breached, that we
would have adequate remedies for any breach or that our trade
secrets will not otherwise become known or be independently
discovered by competitors.

Employees

At December 31, 2001, we had 38 full-time
employees (as compared to 46 full-time employees at
December 31, 2000); seven of whom are engaged in, or
directly support, our research and development activities. Of
the employees engaged in research and development activities,
two hold Ph.D. degrees. In the first quarter of 2000, we
discontinued our drug discovery programs and terminated eleven
employees associated with early stage drug discovery.

Our success will depend in large part on our
ability to attract and retain key employees. At
December 31, 2001, we had 20 employees engaged
directly in the marketing and selling of our on-market products.
Our potential growth and expansion into areas and activities
requiring additional expertise, such as business development,
direct to consumer marketing and customer support, contract
manufacturing, medical affairs, clinical development, regulatory
affairs and sales and marketing, are expected to place increased
demands on our management skills and resources. These demands
are expected to require an increase in management,
manufacturing, customer support, regulatory, and sales personnel
and the development of additional expertise by existing
management personnel. Accordingly, recruiting and retaining
management, sales and marketing, customer service and support,
business development, medical affairs and regulatory affairs
personnel in the future will also be critical to the our
success. There can be no assurance that we will be able to
attract and retain skilled and experienced management, and
operational personnel on acceptable terms given the competition
among numerous pharmaceutical and biotechnology companies,
universities and other research institutions for such personnel.
The failure to attract and retain such personnel or to develop
such expertise could have a material adverse effect on our
business, financial condition and results of operations. See
Risk Factors  Dependence on Key Personnel.

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RISK FACTORS

We have a history of operating losses and may
never generate sufficient revenue to achieve
profitability

We have a history of consistent operating losses.
Further substantial operating losses will continue over the next
year and if we are unable to achieve our sales forecast and
maintain expenses in a way that allows us to reach
breakeven by the end of 2002 substantial operating
losses will continue to occur. To date, our revenues have been
generated principally from sales of Acthar, Ethamolin,
Glofil-125, and Inulin, the licensing of rights to commercialize
certain research technology and the manufacturing of our
proprietary topical triple antibiotic wound care product for our
over-the-counter marketing partner, NutraMax Products, Inc.
During 2001, we discontinued the Neoflo product line and we
discontinued all work on Cordox. We do not expect Hypnostat,
Panistat, Migrastat, Ceresine, or any of the compounds currently
in pre-clinical testing to be commercially available for a
number of years, if at all. Further, our revenues from the sale
of Emitasol will also be dependent on the FDA approval and the
development of Emitasol in conjunction with a new strategic
partner which has not yet been obtained. In December 2001, we
acquired the U.S. rights to market VSL#3, a patented probiotic.
We intend to begin generating sales of VSL#3 in the first half
of 2002. Our ability to achieve a consistent, profitable level
of operations will be dependent in large part upon our ability
to:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | finance the operations with external capital
	until positive cash flows are achieved,                                                                                                                          
|
| |  | finance and acquire additional marketed products,                                                                                                                                                              
|
| |  | increase sales of current products,                                                                                                                                                                            
|
| |  | finance the future growth of the sales/marketing
	and customer service organization,                                                                                                                           
|
| |  | enter into agreement with corporate partners for
	the development of Emitasol,                                                                                                                                 
|
| |  | properly and timely perform the transfer of the
	manufacturing of our products to new contract manufacturers
	including receiving the appropriate approvals from the FDA and
	other regulatory authorities, and
|
| |  | continue to receive products from our sole-source
	contract manufacturers on a timely basis and at acceptable costs                                                                                            

With the exception of VSL#3, no new product
launches are planned. There can be no assurance that sufficient
revenues from the sale of our products will be generated, nor
can there be assurance that we will ever generate sufficient
revenues and be able to contain costs and expenses to become
profitable.

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

Although we recently completed a
$4.0 million financing in the form of convertible
debentures due in 2005 with an institutional investor and
Sigma-Tau, there can be no assurance that this investment
combined with our cash on hand will be adequate to fund
operations to reach cash flow breakeven. There can also be no
assurance that further capital investments will materialize nor
that these investments can be completed at attractive terms to
us, or that we will receive any additional capital investments
at all. In order to conduct our operating activities, we will
require substantial additional capital resources in order to
acquire new products, increase sales of existing products, and
maintain our operations. Our future capital requirements will
depend on many factors, including the following:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | existing product sales performance,                                                                                            
|
| |  | sales performance of VSL#3,                                                                                                    
|
| |  | cost maintenance and potential future expansion
	of the sales force,                                                           
|
| |  | achieving lower cost of goods sold and better
	operating efficiencies,                                                         
|
| |  | obtaining product from our sole-source contract
	manufacturers and completing the site transfer to new contract
	manufacturers,

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| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | the acquisition of additional product candidates,
	and                           
|
| |  | the status of the equity markets, in general, and
	investors tolerance for risk.

Based on our internal forecast and projections,
we believe that our cash on hand at December 2001, together with
the $4.0 million of cash raised through the issuance of the
convertible debentures and the cash to be generated through the
expected sales of our products, will be sufficient to fund
operations through December 31, 2002. We anticipate
obtaining additional financing through corporate partnerships
and public or private debt or equity financing. However,
additional financing may not be available to us on acceptable
terms, if at all. Further, additional equity financings will be
dilutive to our shareholders. If sufficient capital is not
available, then we may be required to delay, reduce the scope
of, eliminate or divest one or more of our product acquisition,
or manufacturing efforts. There can be no assurance we can
achieve cash flow breakeven by the end of 2002 or that our
existing cash resources will be adequate to fund operations
beyond the end of 2002.

Our reliance on contract manufacturers could
adversely affect our business

We will rely on third party contract
manufacturers to produce the clinical supplies for Emitasol, and
Ceresine and for the marketed products, Acthar, Ethamolin,
Glofil-125, Inulin and VSL#3, and other products that may be
developed or commercialized in the future. Third party
manufacturers may not be able to meet our needs with respect to
timing, quantity or quality. All of our manufacturers are
sole-source manufacturers and no alternative suppliers exist. In
addition, we do not have contracts in place with the contract
manufacturer for Ethamolin and the bulk product for Inulin. We
are negotiating a supply agreement with Aventis for the finished
product but we do not have a contract in place for the supply of
Acthar API. We are also attempting to transfer the finished
product manufacturing for Acthar and Ethamolin. If we are unable
to contract for a sufficient supply of required products and
substances on acceptable terms, or if we should encounter delays
or difficulties in our relationships with our manufacturers, or
if the site transfers and the corresponding approval by the FDA
and other regulatory authorities does not occur on a timely
basis at the appropriate costs to us, we will lose sales and our
clinical testing could be delayed, leading to a delay in the
submission of products for regulatory approval or the market
introduction and subsequent sales of these products. Moreover,
contract manufacturers that we may use must continually adhere
to current good manufacturing practices regulations enforced by
the FDA. If the facilities of these manufacturers cannot pass an
inspection, the FDA approval of our products will not be
granted. During December of 2001, we were on backorder for
Ethamolin and Acthar due to manufacturing constraints at two of
our third party contract manufacturers. At this time, we are
currently on backorder for Ethamolin. There is no guarantee that
we will not have backorders in the future for Ethamolin and
Acthar or any of our current or future products nor that we will
not be on backorder again. Failure to obtain product for sale
for any reason will have a material adverse impact on the
financial condition of Questcor.

We rely heavily on sales of Acthar

For the quarter and the year ended
December 31, 2001, Acthar revenues comprised 75% and 41% of
total product revenues respectively. We also expect that Acthar
could contribute to a significant portion of the revenues for
2002. Although our goal is to actively promote Acthar, and we
have no reason to believe Acthar will not be successful, there
can be no assurance that the strong demand for Acthar will
continue and that we will continue to generate significant
revenues from the sale of Acthar. If the demand for Acthar
declines, or if we are forced to reduce the price, or if the
cost to produce Acthar increases, our revenue and results from
operations would be adversely affected.

We will be dependent on key
personnel

We are highly dependent on the services of
Charles J. Casamento, Chairman, President, and Chief Executive
Officer and Kenneth Greathouse, Vice President of Commercial
Operations. While Mr. Casamento has executed an employment
agreement there can be no assurance that Mr. Casamento or
Mr. Greathouse will continue to be employed by us in the
future. The loss of Mr. Casamento, Mr. Greathouse or both
could

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materially harm our business. The future
potential growth and expansion of our business is expected to
place increased demands on our management skills and resources.
Although some increases in staffing levels are expected during
2002, these future demands are expected to require a substantial
increase in management personnel to perform operational work as
well as the development of additional expertise by existing
management personnel. Accordingly, recruiting and retaining
management and operational personnel to perform sales and
marketing, business development, regulatory affairs, medical
affairs and contract manufacturing in the future will also be
critical to our success. There can be no assurance that we will
be able to attract and retain skilled and experienced management
and operational personnel on acceptable terms given the intense
competition among numerous pharmaceutical and biotechnology
companies, universities and other research institutions for such
personnel.


Our products may not be accepted by the
market

Our current development program focuses on
Emitasol. Emitasol, (intranasal metoclopramide) could be
developed for two indications: diabetic gastroparesis and
delayed onset emesis associated with cancer chemotherapy
patients. The diabetic gastroparesis drug candidate was being
developed in collaboration with a subsidiary of Shire, in the
U.S. and had completed a Phase II clinical trial in the
treatment of diabetic gastroparesis. With the expiration in July
2001 of the exclusive option held by Shire, development under
this collaboration stopped. Further development of Emitasol is
on hold pending our entering into an agreement with a future
partner to fund the development of Emitasol. We also have two
intranasal drug candidates, on which pilot trials have been
conducted: Migrastat for migraine headache and Hypnostat for
insomnia. There is no guarantee that any of these drugs will
successfully complete Phase III testing. We expect that the
failure of one or more of these drugs to successfully pass
Phase III testing would likely have a materially adverse
effect on our future results of operations.

We cannot guarantee, however, that the products
will ever successfully pass such testing phases, and if so,
result in commercially successful products. Clinical trial
results are frequently susceptible to varying interpretations by
scientists, medical personnel, regulatory personnel,
statisticians and others, which may delay, limit or prevent
further clinical development or regulatory approvals of a
product candidate. Also, the length of time that it takes for us
to complete clinical trials and obtain regulatory approval for
product marketing can vary by product and by the indicated use
of a product. We expect that this will likely be the case with
future product candidates and we cannot predict the length of
time to complete necessary clinical trials and obtain regulatory
approval.

Any products that we successfully develop, if
approved for marketing, may never achieve market acceptance.
These products, if successfully developed, will compete with
drugs and therapies manufactured and marketed by major
pharmaceutical and other biotechnology companies. Physicians,
patients or the medical community in general may not accept and
utilize any products that we may develop or that our corporate
partners may develop.

The degree of market acceptance of any products
that we develop will depend on a number of factors, including:



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | the establishment and demonstration of the
	clinical efficacy and safety of the product candidates,
|
| |  | their potential advantage over alternative
	treatment methods and competing products,              
|
| |  | reimbursement policies of government and
	third-party payors, and                                  
|
| |  | our ability to market and promote the products
	effectively.                                       

The failure of our products to achieve market
acceptance could materially harm our business.

We have no experience marketing
VSL#3

We intend to market VSL#3 as a dietary
supplement. Dietary supplements are typically not reimbursable
by healthcare providers. This may limit our sales of VSL#3. We
also do not know what the demand for

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VSL#3 will be. These factors may adversely and
materially impact our ability to meet forecasted sales in 2002
and beyond.


Control by existing shareholders

Sigma-Tau and their affiliates own, directly or
indirectly, approximately 31% of the common stock outstanding as
of March 15, 2002. Accordingly, these shareholders can
control the outcome of certain shareholder votes, including
votes concerning the election of directors, the adoption or
amendment of provisions in our Articles of Incorporation, and
the approval of mergers and other significant corporate
transactions. This level of concentrated ownership may have the
effect of delaying or preventing a change in the management or
voting control of us. In addition, these shareholders own
warrants to purchase another 2,559,494 shares of common stock as
well as a $2.0 million 8% convertible debenture. If this
warrant exercise were to occur, Sigma-Tau and their affiliates
would own a significantly greater percentage of our outstanding
common stock, thus resulting in substantial dilution to existing
shareholders.

Our business could be harmed by intense
competition

The biotechnology and pharmaceutical industries
are intensely competitive and subject to rapid and significant
technological change. A number of companies are pursuing the
development of pharmaceuticals and products which target the
same diseases and conditions that we will target. For example,
there are products on the market that compete with Acthar,
Ethamolin, Glofil-125, Inulin, and VSL#3. Moreover, technology
controlled by third parties that may be advantageous to our
business, may be acquired or licensed by competitors of
Questcor, preventing us from obtaining this technology on
favorable terms, or at all.

Our ability to compete will depend on our
abilities to create and maintain scientifically advanced
technology and to develop and commercialize pharmaceutical
products based on this technology, as well as our ability to
attract and retain qualified personnel, obtain patent protection
or otherwise develop proprietary technology or processes and
secure sufficient capital resources for the expected substantial
time period between technological conception and commercial
sales of products based upon our technology.

Many of the companies developing competing
technologies and products have significantly greater financial
resources and expertise in development, manufacturing, obtaining
regulatory approvals and marketing than we do. Other smaller
companies may also prove to be significant competitors,
particularly through collaborative arrangements with large and
established companies. Academic institutions, government
agencies and other public and private research organizations may
also seek patent protection and establish collaborative
arrangements for clinical development, manufacturing and
marketing of products similar to ours. These companies and
institutions will compete with us in recruiting and retaining
qualified sales and marketing and management personnel as well
as in acquiring technologies complementary to our programs. We
will face competition with respect to:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | product efficacy and safety,                                                
|
| |  | the timing and scope of regulatory approvals,                               
|
| |  | availability of resources,                                                  
|
| |  | reimbursement coverage,                                                     
|
| |  | price, and                                                                  
|
| |  | patent position, including potentially dominant
	patent positions of others.

There can be no assurance that our competitors
will not succeed in developing technologies and drugs that are
more effective or less costly than any which we are developing
or which would render our technology and future drugs obsolete
and noncompetitive. In addition, our competitors may succeed in
obtaining the approval of the FDA or other regulatory approvals
for drug candidates more rapidly than we will. Companies that
complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before
their competitors may achieve a significant competitive
advantage, including patent and

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FDA marketing exclusivity rights that would delay
our ability to market specific products. There can be no
assurance that drugs resulting from the joint efforts of our
existing or future collaborative partner, will be able to
compete successfully with competitors existing products or
products under development or that we will obtain regulatory
approval in the U.S. or elsewhere.


Successful late stage Phase III clinical
trials for such potentially important treatments as diabetic
gastroparesis and delayed onset emesis will require the
enrollment of many patients. Together, the cost of these trials,
if funded solely by us, will exceed our current financial
resources.

If we fail to maintain or enter into new
contracts related to collaborations and in-licensed or acquired
technology and products, our business could adversely be
affected

Our business model has been dependent on our
ability to enter into licensing and acquisition arrangements
with commercial or academic entities to obtain technology or
marketed products for development and commercialization. There
is no assurance we can enter into any new agreements in the
future. Disputes may arise regarding the inventorship and
corresponding rights in inventions and know-how resulting from
the joint creation or use of intellectual property by us and our
licensors or scientific collaborators. We may not be able to
negotiate additional license and acquisition agreements in the
future on acceptable terms, if at all. In addition, current
license and acquisition agreements may be terminated, and we may
not be able to maintain the exclusivity of our exclusive
licenses.

There can be no assurance that any collaborators
will commit sufficient development resources, technology,
regulatory expertise, manufacturing, marketing and other
resources towards developing, promoting and commercializing
products incorporating our discoveries. Further, competitive
conflicts may arise among these third parties that could prevent
them from working cooperatively with us. The amount and timing
of resources devoted to these activities by the parties could
depend on the achievement of milestones by us and otherwise
generally may be controlled by other parties. In addition, we
expect that our agreements with future collaborators will likely
permit the collaborators to terminate their agreements upon
written notice to us. This type of termination would
substantially reduce the likelihood that the applicable research
program or any lead candidate or candidates would be developed
into a drug candidate, would obtain regulatory approvals and
would be manufactured and successfully commercialized.
Therefore, any such termination could materially harm our
business.

There can be no assurance that any of our
collaborations will be successful in developing and
commercializing products or that we will receive milestone
payments or generate revenues from royalties sufficient to
offset our significant investment in product development and
other costs. Disagreements with our collaborators could lead to
delays or interruptions in, or termination of, development and
commercialization of certain potential products or could require
or result in litigation or arbitration, which could be
time-consuming and expensive and could have a material adverse
effect on our business.

Our collaboration agreement with Shire
Pharmaceuticals Group plc presents a great amount of
uncertainty

Under a collaboration agreement between Shire
(after its acquisition of Roberts Pharmaceuticals) and us, Shire
had the option to acquire exclusive North American rights to
Emitasol. This option expired in July 2001. Under that
collaboration agreement, we were obligated to fund one-half of
the clinical development expenses for Emitasol up to an
aggregate of $7 million. Through December 31, 2001 we
have made development payments for Emitasol, under the terms of
the agreement with Shire, totaling $4.6 million, consisting
of $4.1 million paid to Shire and approximately $500,000
paid to other parties for allowable expenses including patent
and trademark costs.

Shire asserts we owe $348,000 in development
expenses incurred by it under the collaboration agreement prior
to the expiration of the option. We have requested that Shire
return certain items to us, including the manufacturing and
clinical data it obtained over the course of the agreement, the
transfer of the INDs relating to Emitasol (which is
substantially complete) and the assignment of the intellectual
property relating to Emitasol generated in the course of the
development program. While Shire has returned some of these
items,

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we are still in discussion with them as to the
resolution of other open items. The failure to quickly resolve
any open items on favorable terms relating to this collaboration
could have a material adverse impact on our ability to find a
new partner to continue the development of Emitasol. Shire holds
all of our outstanding 2,155,715 Series A preferred shares
which represents a beneficial ownership percentage of
approximately 5.34% as of March 5, 2002. If we are unable
to settle our disagreements quickly, we may end up in a
protracted contract dispute with a major shareholder which may
have unpredictable material adverse effects on us going forward.


Our business could be harmed if we are unable
to protect our proprietary rights

Our success will depend in part on our ability to:



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | obtain patents for our products and technologies,                     
|
| |  | protect trade secrets,                                                
|
| |  | operate without infringing upon the proprietary
	rights of others, and
|
| |  | prevent others from infringing on our proprietary
	rights.            

We will only be able to protect our proprietary
rights from unauthorized use by third parties to the extent that
these rights are covered by valid and enforceable patents or are
effectively maintained as trade secrets and are otherwise
protectable under applicable law. We will attempt to protect our
proprietary position by filing U.S. and foreign patent
applications related to our proprietary products, technology,
inventions and improvements that are important to the
development of our business.

The patent positions of biotechnology and
biopharmaceutical companies involve complex legal and factual
questions and, therefore, enforceability cannot be predicted
with certainty. Patents, if issued, may be challenged,
invalidated or circumvented. Thus, any patents that we own or
license from third parties may not provide any protection
against competitors. Pending patent applications we may file in
the future, or those we may license from third parties, may not
result in patents being issued. Also, patent rights may not
provide us with proprietary protection or competitive advantages
against competitors with similar technology. Furthermore, others
may independently develop similar technologies or duplicate any
technology that we have developed or we will develop. The laws
of some foreign countries may not protect the companys
intellectual property rights to the same extent as do the laws
of the U.S.

In addition to patents, we rely on trade secrets
and proprietary know-how. We currently seek protection, in part,
through confidentiality and proprietary information agreements.
These agreements may not provide meaningful protection or
adequate remedies for proprietary technology in the event of
unauthorized use or disclosure of confidential and proprietary
information. The parties may not comply or may breach these
agreements. Furthermore, our trade secrets may otherwise become
known to, or be independently developed by competitors.

Our success will further depend, in part, on our
ability to operate without infringing the proprietary rights of
others. There can be no assurance that our activities will not
infringe on patents owned by others. We could incur substantial
costs in defending ourselves in suits brought against any
licensor or us. Should our products or technologies be found to
infringe on patents issued to third parties, the manufacture,
use and sale of our products could be enjoined, and we could be
required to pay substantial damages. In addition, we, in
connection with the development and use of our products and
technologies, may be required to obtain licenses to patents or
other proprietary rights of third parties. No assurance can be
given that any licenses required under any such patents or
proprietary rights would be made available on terms acceptable
to us, if at all.

Our business and product approvals must comply
with strict government regulation

Any products that we develop are subject to
regulation by federal, state and local governmental authorities
in the U.S., including the FDA, and by similar agencies in other
countries. Any product that we develop must receive all relevant
regulatory approvals or clearances before it may be marketed in
a particular country. The regulatory process, which includes
extensive preclinical studies and clinical trials of each
product to establish its safety and efficacy, is uncertain, can
take many years and requires the expenditure of

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substantial resources. Data obtained from
preclinical and clinical activities are susceptible to varying
interpretations which could delay, limit or prevent regulatory
approval or clearance. In addition, delays or rejections may be
encountered based upon changes in regulatory policy during the
period of product development and the period of review of any
application for regulatory approval or clearance for a product.
Delays in obtaining regulatory approvals or clearances:




| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | would adversely affect the marketing, selling and
	distribution of any products that our corporate partners or we
	develop,
|
| |  | could impose significant additional costs on our
	corporate partners, and us                                               
|
| |  | could diminish any competitive advantages that we
	or our corporate partners may attain, and                               
|
| |  | could adversely affect our ability to receive
	royalties and generate revenues and profits.                                

Regulatory approval, if granted, may entail
limitations on the indicated uses for which the new product may
be marketed that could limit the potential market for the
product. Product approvals, once granted, may be withdrawn if
problems occur after initial marketing. Furthermore,
manufacturers of approved products are subject to pervasive
review, including compliance with detailed regulations governing
FDA good manufacturing practices. The FDA has recently revised
the good manufacturing practices regulations. Failure to comply
with applicable regulatory requirements can result in warning
letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal
of the government to grant marketing applications and criminal
prosecution.

In addition, we cannot predict the extent of
government regulations or the impact of new governmental
regulations that might have an adverse effect on the
development, production and marketing of our products. We may be
required to incur significant costs to comply with current or
future laws or regulations.

We may not be reimbursed by third party
payers

In both domestic and foreign markets, sales of
our products will depend in part on the availability of
reimbursement from third-party payors such as state and federal
governments (for example, under Medicare and Medicaid programs
in the U.S.) and private insurance plans. VSL#3 currently does
not qualify for any reimbursements by third party payors. In
certain foreign markets, the pricing and profitability of our
products generally are subject to government controls. In the
U.S., there have been, and we expect there will continue to be,
a number of state and federal proposals that limit the amount
that state or federal governments will pay to reimburse the cost
of drugs. In addition, we believe the increasing emphasis on
managed care in the U.S. has and will continue to put pressure
on the price and usage of our products, which may impact product
sales. Further, when a new therapeutic is approved, the
reimbursement status and rate of such a product is uncertain. In
addition, current reimbursement policies for existing products
may change at any time. Changes in reimbursement or our failure
to obtain reimbursement for our products may reduce the demand
for, or the price of, our products, which could result in lower
product sales or revenues which could have a material adverse
effect on us and our results of operations.

In the U.S. proposals have called for substantial
changes in the Medicare and Medicaid programs. If such changes
are enacted, they may require significant reductions from
currently projected government expenditures for these programs.
Driven by budget concerns, Medicaid managed care systems have
been under consideration in several states. If the Medicare and
Medicaid programs implement changes that restrict the access of
a significant population of patients to its innovative
medicines, our business could be materially affected. On the
other hand, relatively little pharmaceutical use is currently
covered by Medicare.

Legislation in the U.S. requires us to give
rebates to state Medicaid agencies based on each states
reimbursement of pharmaceutical products under the Medicaid
program. We also must give discounts or rebates on purchases or
reimbursements of pharmaceutical products by certain other
federal and state agencies and programs. There can be no
assurance that these discounts and rebates may become burdensome
to us, which may adversely affect our current business and
future product development.

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We will incur costs associated with expanding
the business

Management expects to grow the business in areas
in which we can be most competitive, either through
in-licensing, collaborations or acquisitions of products or
companies. In connection with these efforts, we may incur
significant charges, costs and expenses which could impact our
profitability, including impairment losses, restructuring
charges, the write-off of purchased in-process technologies,
transaction-related expenses, costs associated with integrating
new businesses and the cost of amortizing goodwill and other
intangibles.

Our stock price is subject to
volatility

The price of our stock, like that of other
specialty pharmaceutical companies, is subject to significant
volatility. Any number of events, both internal and external to
us, may affect the stock price. These include, without
limitation, the quarterly and yearly revenues and earnings,
results of clinical trials conducted by us, our partners or by
our competitors; announcement by us or our competitors regarding
product development efforts, including the status of regulatory
approval applications; the outcome of legal proceedings,
including claims filed by us against third parties to enforce
our patents and claims filed by third parties against us
relating to patents held by the third parties, the launch of
competing products; the resolution of (or failure to resolve)
disputes with collaboration partners; corporate restructuring by
us; licensing activities by us; and the acquisition or sale by
us of products, products in development or businesses.

In connection with our research and development
collaborations, from time to time we invest in equity securities
of our corporate partners. The price of these securities also is
subject to significant volatility and may be affected by, among
other things, the types of events that affect our stock. Changes
in the market price of these securities may impact our
profitability.

Our sales are affected by the availability of
reimbursement on non-prescription products

In the U.S. and other significant markets, sales
of our products may be affected by the availability of
reimbursement from the government or other third parties, such
as insurance companies. It is difficult to predict the
reimbursement status of newly approved, novel biotechnology and
pharmaceutical products, and current reimbursement policies for
existing products may change. In certain foreign markets,
governments have issued regulations relating to the pricing and
profitability of pharmaceutical companies. There have been
proposals in the U.S. (at both the federal and state level) to
implement such controls. The growth of managed care in the U.S.
also has placed pressure on the pricing of healthcare products.
These pressures can be expected to continue.

Our business may be affected by product
liability and availability of insurance

Our business will expose us to potential
liability risks that are inherent in the testing, manufacturing
and marketing of pharmaceutical products. The use of any drug
candidates ultimately developed by us or our collaborators in
clinical trials may expose us to product liability claims and
possible adverse publicity. These risks will expand for any of
our drug candidates that receive regulatory approval for
commercial sale. Product liability insurance for the
pharmaceutical industry is generally expensive, if available at
all. We currently have product liability insurance, however,
there can be no assurance that we will be able to maintain
insurance coverage at acceptable costs or in a sufficient
amount, if at all, or that a product liability claim would not
harm our reputation, stock price or our business.

We could be adversely affected by
litigation

Although there are currently no lawsuits pending
against us, we could be adversely affected by litigation.
Potential litigation could arise from a number of factors
including disputes with past, current and future employees and
partners, class action litigation relating to shareholder
lawsuits or product liability claims, frivolous lawsuits filed
on behalf of manufactured plaintiffs or any other items not
foreseen at this time. We believe we have adequate insurance to
protect ourselves against certain claims but there can be no
assurance that this insurance coverage will be of any use
against any future claims. If we were to become subject to any

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lawsuit, regardless of its nature and claims, our
time and resources, including that of management, could be
severely impacted. This in turn could have a material adverse
impact on our financial condition.





Item 2.     Properties

At December 31, 2001, we leased four
buildings. Our headquarters, which includes the Executive,
Finance and Administration, Sales and Marketing, Medical and
Regulatory Affairs departments, are located in Union City,
California. The building has 23,000 square feet of office space,
under a 10-year lease agreement. We are subleasing 100% of our
previous headquarter premises in Hayward, California. The
Hayward premises has 30,000 square feet of laboratory and office
space, under a lease that expires in November 2012. While we
anticipate that the sublessee will fulfill the term of the
sublease agreement, if they were to default, it would have a
negative impact on us as we would still be obligated to make
rent payments on the Hayward facility. We classify both the
rental income and costs related to this facility to rental
income, net.

We lease a building in Carlsbad, California. Our
distribution, contract manufacturing, quality control and
quality assurance functions are located in this facility of
8,203 square feet of space located at 2714 Loker
Avenue West. This lease commenced in November 2000 and has a
term of 63 months. In April 1997, we subleased our other
building in Carlsbad located at 2732 Loker Avenue West to
another pharmaceutical company. The lease on the 2732 Loker
Avenue West property commenced in December 1993 and had a term
of 81 months. Both leases have clauses providing for rent
increases at various points in time during the terms of the
leases. The subtenants lease covered the remainder of our
original lease term plus a 36-month option, and the
subtenants rental payments to us exceeded our rental
payments to the landlord. In addition, the sublease provide for
annual rent increases. Effective February 1, 2001, the
sub-lease at 2732 Loker Avenue was assigned to the landlord
and the master lease was terminated.

In May 2001, we closed our Neoflo manufacturing
facility for the Neoflo product line located in Lees
Summit, Missouri. The lease period ends in December 2004. We
closed this facility in May 2001 and are currently seeking a
sublessee for this facility. See further discussion under
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations.




Item 3.     Legal
Proceedings

We are subject to litigation from time to time
which could adversely affect our business.




Item 4.     Submission
of Matters to a Vote of Security Holders

Not Applicable

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PART II.




Item 5.     Market
for Registrants Common Equity and Related Shareholder
Matters

Our common stock was quoted on the Nasdaq
National Market System under the symbol CYPR until
January 1998. In January 1998, we were listed on the American
Stock Exchange, Inc. under the symbol CYP. On
November 17, 1999, we changed our name to Questcor
Pharmaceuticals, Inc. and began trading under the symbol
QSC.

The following table sets forth, for the periods
presented, the high and low closing price of a share of our
common stock.

|                   |  |               |      |     |  |   |      | 
|------------------ |  | ------------- | ---- | --- |  | - | ---- | 
|                   |  |              
|                   |  | Common Stock 
|                   |  | Closing Price
|                   |  |              
|Quarter Ended      |  | High          |      | Low
|                   |  |               |      |    
|December 31, 2001  |  | $             | 2.16 |     |  | $ | 0.85 | 
|September 30, 2001 |  |               | 1.53 |     |  |   | 0.55 | 
|June 30, 2001      |  |               | 1.00 |     |  |   | 0.43 | 
|March 31, 2001     |  |               | 1.00 |     |  |   | 0.58 | 
|                  
|December 31, 2000  |  | $             | 1.50 |     |  | $ | 0.56 | 
|September 30, 2000 |  |               | 2.19 |     |  |   | 1.38 | 
|June 30, 2000      |  |               | 3.06 |     |  |   | 1.25 | 
|March 31, 2000     |  |               | 5.25 |     |  |   | 1.31 | 

The last sales price of our common stock on
March 15, 2002 was $1.79. As of March 15, 2002 there
were approximately 271 holders of record of Questcors
common stock.

We have never paid a cash dividend on our common
stock. Our dividend policy is to retain our earnings, if we
achieve positive earnings and to support the expansion of our
operations. The Board of Directors of Questcor does not intend
to pay cash dividends on the common stock in the foreseeable
future. Any future cash dividends will depend on future
earnings, capital requirements, our financial condition and
other factors deemed relevant by the Board of Directors.

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Item 6. Selected Consolidated
Financial Data

The following table sets forth certain financial
data with respect to our business. The selected consolidated
financial data should be read in conjunction with our
Consolidated Financial Statements (including the Notes thereto)
and Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this Form 10-K.

|                                            |                                                                  |                                       |   |              |   |                      |   |         |   |      |   |         |   |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------- | ---------------------------------------------------------------- | ------------------------------------- | - | ------------ | - | -------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                            |                                                                  |                                       |   |              |   |                      |   |         |   |     
|                                            |                                                                  | Years Ended                           |   | Five Months  |   |                     
|                                            |                                                                  | December 31,                          |   | Ended        |   | Years Ended July 31,
|                                            |                                                                  |                                       |   | December 31, |   |                     
|                                            |                                                                  | 2001                                  |   | 2000         |   | 1999(1)              |   | 1999    |   | 1998 |   | 1997   
|                                            |                                                                  |                                       |   |              |   |                      |   |         |   |      |   |        
|                                            |                                                                  |                                      
|                                            |                                                                  | (In thousands, except per share data)
|Consolidated Statement of
	Operations Data: |                                                                  |                                       |   |              |   |                      |   |         |   |      |   |         |   |  |   |        |   |  |   |        |   |  |   |       
|                                            | Net product sales                                                |                                       | $ | 5,196        |   |                      | $ | 2,134   |   |      | $ | 624     |   |  | $ | 2,518  |   |  | $ | 3,446  |   |  | $ | 2,428  |  
|                                            | Total revenues                                                   |                                       |   | 5,667        |   |                      |   | 3,594   |   |      |   | 956     |   |  |   | 2,569  |   |  |   | 3,616  |   |  |   | 2,527  |  
|                                            | Total operating cost and expenses                                |                                       |   | 15,050       |   |                      |   | 17,752  |   |      |   | 23,257  |   |  |   | 10,026 |   |  |   | 9,910  |   |  |   | 8,004  |  
|                                            | Loss from operations                                             |                                       |   | (9,383       | ) |                      |   | (14,158 | ) |      |   | (22,301 | ) |  |   | (7,457 | ) |  |   | (6,294 | ) |  |   | (5,477 | )
|                                            | Other income (expense), net                                      |                                       |   | 686          |   |                      |   | 396     |   |      |   | 91      |   |  |   | 673    |   |  |   | 721    |   |  |   | (1,198 | )
|                                            | Net loss                                                         |                                       |   | (8,697       | ) |                      |   | (13,762 | ) |      |   | (22,210 | ) |  |   | (6,784 | ) |  |   | (5,573 | ) |  |   | (6,675 | )
|                                            | Net loss per share  basic and diluted                           |                                       |   | (0.28        | ) |                      |   | (0.56   | ) |      |   | (1.22   | ) |  |   | (0.43  | ) |  |   | (0.37  | ) |  |   | (0.54  | )
|                                            | Shares used in computing net loss per
	share  basic and diluted |                                       |   | 31,425       |   |                      |   | 24,722  |   |      |   | 18,240  |   |  |   | 15,712 |   |  |   | 15,187 |   |  |   | 12,303 |  

|                                 |                                                                                                                         |                |   |          |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | -------------- | - | -------- | - | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                 |                                                                                                                         |                |   |         
|                                 |                                                                                                                         | December 31,   |   | July 31,
|                                 |                                                                                                                         |                |   |         
|                                 |                                                                                                                         | 2001           |   | 2000     |   | 1999 |   | 1999    |   | 1998 |   | 1997   
|                                 |                                                                                                                         |                |   |          |   |      |   |         |   |      |   |        
|                                 |                                                                                                                         |               
|                                 |                                                                                                                         | (In thousands)
|Consolidated Balance Sheet Data: |                                                                                                                         |                |   |          |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |         |   |  |   |        
|                                
|                                 | Cash, cash equivalents and investments (includes
	$5 million compensating balance at December 31, 2001,
	2000 and 1999) |                | $ | 10,571   |   |      | $ | 8,151   |   |      | $ | 21,699  |   |  | $ | 7,263   |   |  | $ | 13,445  |   |  | $ | 14,567  |  
|                                 | Working capital                                                                                                         |                |   | 2,591    |   |      |   | 1,201   |   |      |   | 16,943  |   |  |   | 5,261   |   |  |   | 13,379  |   |  |   | 13,076  |  
|                                 | Total assets                                                                                                            |                |   | 15,072   |   |      |   | 14,969  |   |      |   | 32,221  |   |  |   | 13,140  |   |  |   | 19,736  |   |  |   | 21,345  |  
|                                 | Long-term obligations                                                                                                   |                |   | 122      |   |      |   | 548     |   |      |   | 6,078   |   |  |   | 147     |   |  |   | 217     |   |  |   | 4,176   |  
|                                 | Preferred stock                                                                                                         |                |   | 5,081    |   |      |   | 5,081   |   |      |   | 5,081   |   |  |   |        |   |  |   |        |   |  |   |        |  
|                                 | Common stock                                                                                                            |                |   | 74,018   |   |      |   | 66,152  |   |      |   | 65,423  |   |  |   | 41,497  |   |  |   | 41,328  |   |  |   | 32,345  |  
|                                 | Accumulated deficit                                                                                                     |                |   | (74,183  | ) |      |   | (65,486 | ) |      |   | (51,724 | ) |  |   | (29,514 | ) |  |   | (22,730 | ) |  |   | (17,157 | )
|                                 | Total stockholders equity (deficit)                                                                                    |                |   | (300     | ) |      |   | 927     |   |      |   | 13,626  |   |  |   | 11,914  |   |  |   | 18,511  |   |  |   | 15,026  |  



---



|    |                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the results of operations of RiboGene,
	Inc. from November 17, 1999 through December 31, 1999,
	including a one-time charge for restructuring costs and a
	non-cash charge for acquired in process research and development
	costs.

Quarterly Financial Information
(Unaudited)

|                      |  |                                       |        |          |  |          |        |          |  |   |        |   |  |   |        |  
|--------------------- |  | ------------------------------------- | ------ | -------- |  | -------- | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                      |  |                                      
|                      |  | Quarter Ended                        
|                      |  |                                      
|                      |  | 12/31/01                              |        | 09/30/01 |  | 06/30/01 |        | 03/31/01
|                      |  |                                       |        |          |  |          |        |         
|                      |  |                                      
|                      |  | (In thousands, except per share data)
|Total Revenues        |  | $                                     | 2,297  |          |  | $        | 1,321  |          |  | $ | 1,033  |   |  | $ | 1,016  |  
|Cost of product sales |  |                                       | 476    |          |  |          | 370    |          |  |   | 276    |   |  |   | 361    |  
|Net loss              |  |                                       | (2,566 | )        |  |          | (2,262 | )        |  |   | (1,997 | ) |  |   | (1,872 | )
|Net loss per share    |  |                                       | (0.07  | )        |  |          | (0.07  | )        |  |   | (0.07  | ) |  |   | (0.07  | )

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|                      |  |                                       |        |         |  |         |        |         |  |   |        |   |  |   |        |  
|--------------------- |  | ------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------ | -
|                      |  |                                      
|                      |  | Quarter Ended                        
|                      |  |                                      
|                      |  | 12/31/00                              |        | 9/30/00 |  | 6/30/00 |        | 3/31/00
|                      |  |                                       |        |         |  |         |        |        
|                      |  |                                      
|                      |  | (In thousands, except per share data)
|Total Revenues        |  | $                                     | 544    |         |  | $       | 1,809  |         |  | $ | 543    |   |  | $ | 698    |  
|Cost of product sales |  |                                       | 346    |         |  |         | 546    |         |  |   | 460    |   |  |   | 586    |  
|Net loss              |  |                                       | (2,798 | )       |  |         | (1,966 | )       |  |   | (3,747 | ) |  |   | (5,251 | )
|Net loss per share    |  |                                       | (0.11  | )       |  |         | (0.08  | )       |  |   | (0.15  | ) |  |   | (0.21  | )




Item 7. 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 its 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 Item 1 Business of
Questcor, including without limitation Risk
Factors, as well as those discussed in any documents
incorporated by reference herein or therein.

We are an integrated specialty pharmaceutical
company focused on the development, acquisition, and marketing
of acute care and critical care hospital/specialty
pharmaceutical and related healthcare products. We currently
market four products through our internal sales force in the
U.S. We expect to launch a fifth product in the U.S. in the
first half of 2002, and we market a sixth product in Italy
through a strategic partner. Our current products target
gastroenterologists, pediatric neurologists, nephrologists,
transplant centers and nuclear medicine centers.

On November 17, 1999, Questcor, formerly
Cypros Pharmaceutical Corporation, completed a merger with
RiboGene, Inc. (RiboGene) and subsequently changed
its name to Questcor Pharmaceuticals, Inc. Under the terms of
the merger agreement, each share of RiboGene common stock was
exchanged for 1.509 shares of our common stock and each
outstanding share of RiboGene Series A preferred stock was
converted into 1.509 shares of our Series A preferred stock. In
conjunction with the November 1999 acquisition of RiboGene, we
changed our fiscal year end from July 31 to
December 31. We accounted for the merger transaction as a
purchase. A write-off of $15,168,000 for in-process research and
development acquired from RiboGene is included in our statement
of operations for the five months ended December 31, 1999.
The intangible assets acquired are amortized over the estimated
useful lives of 3 years. Since the completion of the merger, we
have focused our resources on: i) acquiring new products, ii)
increasing the sales of our existing products, and iii)
out-licensing and partnering our research and development stage
products. During 2001, we completed our transition from
operating as essentially two independent companies to emerge as
a specialty pharmaceutical company focused on the sales and
marketing of our branded products.

We currently market four products in the U.S.:
Acthar, an injectable drug that helps patients with infantile
spasm or West Syndrome; Ethamolin, an injectable drug used to
treat esophageal varices that have recently bled; and Glofil-125
and Inulin in sodium chloride, which are both injectable agents
that assess kidney function by measuring glomerular filtration
rate. Additionally, we earn royalties from our strategic
partner, Crinos Industria Farmacobiologica SpA
(Crinos) on sales in Italy, of Pramidin, an
intranasal form of metoclopramide for the treatment of various
gastrointestinal disorders. We recently acquired the U.S. rights
to market VSL#3 a patented probiotic. We intend to begin sales
of VSL#3 in the first half of 2002.

Consistent with our efforts to focus on sales and
marketing, we have reduced our spending on research and
development. Accordingly, we have entered into several
agreements with pharmaceutical and biotechnology companies to
further the development of certain technology acquired from
RiboGene. We have signed a Letter of Understanding with Fabre
Kramer of Houston, TX which anticipates a License Agreement
whereby Fabre Kramer will manage and provide funding for the
clinical development programs for Hypnostat (intranasal
triazolam for insomnia) and Panistat (intranasal alprazolam for
panic disorders). The antifungal drug discovery program has been
partnered with Tularik, Inc., of South San Francisco, CA., the
antiviral drug discovery program has been partnered with Rigel
Pharmaceuticals, Inc. of South San Francisco, CA. and the
antibacterial program has been partnered with Dainippon
Pharmaceuticals Co., Ltd. Of Osaka, Japan.

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In 2001, our research and development programs
included the following products: Cordox as a blood preservative,
Sildaflo for wound care, Ceresine for CLA, Emitasol for diabetic
gastroparesis, Hypnostat for sleep disorders, Panistat for panic
disorders and the GERI compounds as cytoprotective agents. The
development of Hypnostat and Panistat will be controlled by
Fabre Kramer. The future development of Emitasol, Ceresine and
the GERI compounds, will be dependent in part on our ability to
enter into partnership arrangements or secure additional sources
of capital to fund the development efforts. The development of
Sildaflo and Cordox has been discontinued. As we rely on current
and future strategic partners to develop and fund the remaining
projects, we are unable to project estimated completion dates.
We have limited control, if any, over these programs due to our
reliance on partners for their development. Accordingly our
ability to disclose historical and future costs associated with
these projects is limited.

In April 2001, we entered into a Stock and
Warrant Purchase Agreement with Sigma-Tau Finance Holding S.A.
(Sigma-Tau) pursuant to which Sigma-Tau purchased
(i) an aggregate of 2,873,563 shares of common stock at a
purchase price of $0.52 per share, for an aggregate purchase
price of $1,500,000, and (ii) a warrant to purchase an
additional 2,873,563 shares of common stock at a purchase price
of $0.52 per share. In May 2001, as required under the rules of
AMEX, we sought and received shareholder approval to allow for
full exercise of the warrant. In July 2001, Sigma-Tau assigned
the warrant to Paolo Cavazza and Claudio Cavazza, the principal
shareholders of Sigma-Tau, who exercised the warrant in full,
purchasing 2,873,563 shares of common stock at a purchase price
of $0.52 per share, resulting in aggregate proceeds to us of
$1,500,000 (including the $100,000 originally paid by Sigma-Tau
to acquire the warrant).

In July 2001, concurrent with our agreement to
acquire Acthar from Aventis, we entered into a Stock Purchase
Agreement with Sigma-Tau pursuant to which Sigma-Tau purchased
5,279,034 shares of common stock at a purchase price of $0.66
per share, for an aggregate purchase price of $3,500,000.

In December 2001, we entered into a Promotion
Agreement with VSL Pharmaceuticals, Inc., a private company
owned in part by the principal shareholders of Sigma-Tau, to
promote, sell and distribute the product VSL#3 in the U.S. In
connection with this Promotion Agreement, we entered into two
Stock and Warrant Purchase Agreements, one with Paolo Cavazza
and one with Claudio Cavazza, to purchase (i) an aggregate
of 640,000 shares of common stock for a purchase price of $1.50
per share (representing a twenty percent premium to our market
price for the five days prior to execution of the Purchase
Agreements), for an aggregate purchase price of $960,000, and
(ii) warrants, at an aggregate purchase price of $300,000,
to purchase an additional 1,800,000 shares of common stock at a
purchase price of $1.75 per share before December 1, 2003. We
issued the common stock related to this transaction in February
2002. Additionally, in connection with this transaction, we
entered into a standstill agreement with Sigma-Tau whereby
Sigma-Tau and its affiliates agreed to limit purchases of common
stock on the open market to no more that 2,000,000 shares
through July 2003. Assuming Sigma-Tau exercises its warrants in
full, they would own approximately 34% (including the 640,000
shares of common stock issued in February 2002) of our
outstanding common stock as of December 31, 2001.

On April 30, 2001, we closed a financing
with various investors which totaled $442,000. This investment
came from a group of individual investors. We issued an
aggregate of 816,800 shares of common stock and sold warrants to
purchase an additional 408,400 shares of common stock with an
exercise price equal to $0.64 per share. The warrants are
exercisable from the date of issuance until the close of
business on April 30, 2006.

On March 15, 2002, in two separate
transactions, we issued $4.0 million of 8% convertible
debentures to an institutional investor and Sigma-Tau. We will
pay interest on the debentures at a rate of 8% per annum on a
quarterly basis. The debentures are convertible into shares of
our common stock at a fixed conversion price of $1.58 per
share (subject to adjustment for stock splits and
reclassifications). At the end of the term of the debenture,
under certain circumstances, we have the option to repay the
principal in stock and, under certain circumstances, we can also
redeem the debenture for cash prior to maturity. The debentures
mature on March 15, 2005. In conjunction with this
transaction, we issued warrants to both the institutional
investor and Sigma-Tau to acquire an aggregate of 1,518,988
shares of common stock at an exercise price of $1.70 per
share. Both warrants expire on March 15, 2006. In
connection with the issuance of the debentures and warrants, we
expect to record a deferred expense related to a beneficial
conversion feature. This amount will be amortized to interest
expense over the term of the debentures. Assuming the conversion
and exercise of the above-mentioned

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debenture and warrant by Sigma-Tau and assuming
the exercise of all other outstanding warrants held by
Sigma-Tau, Sigma-Tau would own approximately 38% of our
outstanding common stock as of March 15, 2002.


We have sustained an accumulated deficit of
$74,183,000 from inception through December 31, 2001. At
December 31, 2001, we had $10.2 million of cash on
hand. On January 18, 2002, we paid our $5 million note
and reduced our cash balance accordingly. Based on our internal
forecast and projections, we believe that our cash on hand at
December 31, 2001, together with the $4.0 million of
cash raised through the issuance of the above-mentioned
convertible debentures and the cash to be generated through the
expected sale of our products, will be sufficient to fund
operations through December 31, 2002.

While it is our goal to reach cash flow breakeven
before the end of 2002, if we are unable to achieve the revenue
forecast for 2002 or if our expenses and costs associated with
running our operations exceed our estimates, we may not reach
cash flow breakeven before the end of 2002, if ever, and we may
incur significant operating losses over the next several years.
Results of operations may vary significantly from quarter to
quarter depending on, among other factors, the results of our
sales efforts, the availability of finished goods from our
sole-source manufacturers, the timing of certain expenses, the
establishment of strategic alliances and corporate partnering
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 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 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

We record estimated sales allowances against
product revenues for expected returns, chargebacks and cash
discounts for prompt payment. We estimate product returns based
on historical return experience, the shelf life of our products
(ranging from 45 days to 3 years) and compliance with
our return goods policy. If historical return experience differs
from estimated future returns, or if a new product has return
experience different than our estimate, this could negatively
impact our revenue.



| |                  
| | -----------------
| | 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



| |                                                                           
| | --------------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
	to the Year Ended December 31, 2000

For the year ended December 31, 2001, we
incurred a net loss of $8,697,000 (or $0.28 per share), compared
to a net loss of $13,762,000 (or $0.56 per share) for the year
ended December 31, 2000.

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Product revenues increased 143% for the year
ended December 31, 2001 to $5,196,000 from $2,134,000 for
the year ended December 31, 2000. This increase was
primarily due to increased product sales and the introduction of
Acthar. We began shipping the Acthar product in the third
quarter of 2001 and recognized sales of $2,141,000 for the year
ended December 31, 2001. In addition, excluding revenues
from the discontinued Neoflo product line, we experienced an
overall increase of 97% in revenues from existing products when
compared to last years sales. Revenues of Ethamolin
increased 174% to $1,695,000, Glofil-125 increased 42% to
$982,000, Inulin increased 53% to $317,000, as compared to
$618,000, $691,000 and $207,000, respectively, for the year
ended December 31, 2000. The total increase in product
revenues from these core products was $1,478,000 of which 25% of
this increase is related to unit growth in 2001 as compared to
2000, with the remainder of this increase related to a price
increase in 2001 as compared to 2000. We estimate the use of
Ethamolin for the year ended December 31, 2001 increased 7%
from the year ended December 31, 2000. We are at times
unable to stock a sufficient supply of Acthar and Ethamolin to
meet the demand for these products. Ethamolin was placed on
backorder at the end of October 2001 and Acthar was placed on
backorder to customers at the end of November 2001. At
December 31, 2001 we had backorders amounting to $334,000
for Acthar and $408,000 for Ethamolin. All backorders for Acthar
and Ethamolin as of December 31, 2001 were shipped in
January 2002.

In May 2000, our sole customer for our Neoflo
product, NutraMax Products, Inc., filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code. On
April 2, 2001, the U.S. Bankruptcy Court granted NutraMax a
motion to terminate our supply agreement effective that date. In
May 2001, we closed our Lees Summit manufacturing facility
where the NutraMax product was being produced. Net sales to
NutraMax totaled $61,000 and $618,000 for the years ended
December 31, 2001 and 2000 respectively, $35,000 for the
five months ended December 31, 1999 and $167,000 for the
year ended July 31, 1999, representing 1%, 17%, 4% and 7%
of total revenues, respectively.

Contract research and grant revenue increased 77%
to $367,000 for the year ended December 31, 2001 due to a
full year of revenue recognized for government reimbursement
under the SBIR grant previously awarded to fund the GERI
project. We do not anticipate any additional contract revenue
after the SBIR grant expires on April 30, 2002. Technology
revenue for the year ended December 31, 2001 decreased to
$90,000 from $1,250,000 for the year ended December 31,
2000, due to the recognition of $1,250,000 in technology revenue
from the sale of our proprietary antiviral drug research
technology to Rigel Pharmaceuticals, Inc. in 2000. We do not
anticipate much, if any, technology revenue in the future.
Royalty revenue increased 367% to $14,000 due to increased sales
of Pramidin in Italy by Crinos.

Total revenue for the year ended
December 31, 2001 increased 58% to $5,667,000 as compared
to $3,594,000 for the year ended December 31, 2000.

Cost of product sales decreased 23% to $1,483,000
for the year ended December 31, 2001 from $1,938,000 for
the year ended December 31, 2000. These costs decreased
primarily as a result of our discontinuance of the Neoflo
product line in 2001. The Neoflo product had the highest
overhead and material costs relative to our other products.
Excluding the cost of product sales associated with Neoflo, cost
of product sales increased by 43% to $1,260,000 from $880,000
for the years ended December 31, 2001 and 2000,
respectively. This increase is related to the increased volume
of product sales in 2001 as compared to 2000.

Gross margins for marketed products for the year
ended December 31, 2001 were 82% for Acthar, 80% for
Ethamolin, 59% for Glofil-125 and 57% for Inulin, compared to
0%, 59%, 36% and 35%, respectively, for the year ended
December 31, 2000. Gross margins for the products other
than Acthar improved as a result of increased sales volume, and
product price increases in 2001. Acthar was introduced in
September 2001.

Sales and marketing expense increased by 23% to
$3,129,000 for the year ended December 31, 2001, from
$2,539,000 for the year ended December 31, 2000. This
increase is primarily due to increased headcount associated with
the expansion of our sales force, which began in late 2000.
However, as a percentage of total revenues, sales and marketing
expenses decreased to 55% for the year ended December 31,
2001 from 71% for the year ended December 31, 2000. We
expect sales and marketing expenses to increase in the future as
we expand our sales and marketing efforts on our existing
product lines and prepare for the launch of VSL#3.

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General and administrative expenses decreased 14%
to $4,707,000 for the year ended December 31, 2001 from
$5,495,000 for the year ended December 31, 2000. This
decrease was related to our cost reduction program that resulted
in a decrease in personnel and related expenses, lower facility
costs, legal fees, bad debt expense and professional services
costs, offset by an increase in non-cash equity related
compensation expense. We expect general and administrative costs
may slightly increase in the future as compared to 2001 if the
revenue levels exceed those for 2001, however, general and
administrative costs as a percentage of revenues should decline
in 2002.

Research and development expense decreased 45% to
$2,847,000 for the year ended December 31, 2001, from
$5,221,000 for the year ended December 31, 2000. Since the
completion of our merger with RiboGene in 1999, we have reduced
our focus on research and development of non-marketed products.
The decrease was related to lower development expenses for
EmitasolTM and an overall reduction of expenses
related to our research and development activities. Should we
elect to undertake any development work, we expect to fund
future clinical trials and additional research and development
from our anticipated revenues. Should our revenue projections
differ from actual results we would expect our research and
development costs to increase or decrease accordingly.

Since we no longer market or sell the Neoflo
product we recorded a loss related to the discontinued Neoflo
product line in the amount of $677,000 as of December 31,
2001. This loss represents a writedown of the assets directly
related to the Neoflo product line and the estimated remaining
lease payments for the Lees Summit manufacturing facility.

Depreciation and amortization expense for the
period decreased by 14% to $2,207,000 for the year ended
December 31, 2001 from $2,559,000 for the year ended
December 31, 2000 due to an additional charge of $303,000
in 2000 to depreciation expense in order to reflect the change
in the estimated useful life of certain laboratory and
manufacturing equipment.

Net interest and other income decreased by 45% to
$74,000 for the year ended December 31, 2001 from $135,000
for the year ended December 31, 2000 principally due to a
lower return on invested cash, as well as a lower average cash
balance, partially offset by reduced interest expense due to
lower rates.

Net rental income increased by 134% to $612,000
for the year ended December 31, 2001 from $261,000 for the
year ended December 31, 2000 due to the receipt of a
one-time payment of $250,000 for vacating our Hayward facility
in May 2001. When we moved to our new headquarters in Union
City, CA., we subleased 100% of our Hayward facility. All
sublease income, and the related costs for the Hayward premises
are classified as rental income, net. Although the current
rental income from the sublessee exceeds the current rental
expense on the Hayward facility, there can be no assurance our
sublessee will not default on the sublease agreement, and if
they were to do so, we would still be obligated to pay rent
expense on this property. Estimated 2002 sublease income and
rent expense for the Hayward facility is $949,000 and $651,000,
respectively.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Year Ended December 31, 2000 Compared
	to the Five Months Ended December 31, 1999

The comparison data presented below is for
information purposes. It is difficult to analyze variances
between the year ended December 31, 2000 and the five
months ended December 31, 1999 for two reasons:
(1) the comparative periods are different and (2) the
five months ended December 31, 1999 includes merger related
restructuring charges. For a more meaningful comparison, please
refer to the information presented in the Year ended
December 31, 2000 compared to the year ended July 31,
1999.

For the year ended December 31, 2000, we
incurred a net loss of $13,762,000 (or $0.56 per share),
compared to a net loss of $22,210,000 (or $1.22 per share) for
the five months ended December 31, 1999. During the five
months ended December 31, 1999, we completed our merger
with RiboGene, Inc. As a result of the merger, operations for
the period include a one-time non-cash charge of $15,168,000 for
acquired in-process research and development and a $1,530,000
one-time charge for restructuring costs, primarily related to
severance of former Cypros employees.

37



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Revenue for the year ended December 31, 2000
totaled $3,594,000 as compared to $956,000 for the five months
ended December 31, 1999. This relative increase was
primarily due to the recognition of $1,250,000 in technology
revenue from the sale our proprietary antiviral drug research
technology, HCV IRES and HCV NS5A-PKR, to Rigel Pharmaceuticals,
Inc. In addition, product sales increased to $2,134,000 for the
year ended December 31, 2000 from $624,000 for the five
months ended December 31, 1999. The increase in product
sales consisted of $618,000 in Ethamolin sales, $691,000 in
Glofil-125 sales, and $207,000 in Inulin sales for the year
ended December 31, 2000 compared to $319,000, $251,000 and
$20,000, respectively for the five month period ended
December 31, 1999. In addition, the startup of the supplies
of rolled padded stock (Neoflo) amounted to $618,000 for the
year ended December 31, 2000 compared to $35,000 for the
five months ended December 31, 1999. During 2000, we hired
additional sales personnel and initiated a sales and marketing
plan to increase product sales.

In May 2000, one of our major customers, NutraMax
Products, Inc. (NutraMax) filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code. We had a
multi-year marketing and joint venture agreement with NutraMax
Products, Inc. under which were supplying its proprietary triple
antibiotic product using the Dermaflo technology to NutraMax for
conversion and sale in the form of adhesive strips and patches.
NutraMax had the exclusive right to sell the finished products
to the retail and industrial first aid markets. Further, the
agreement called for Questcor and NutraMax to jointly develop
several new products using the Dermaflo technology and to share
the development expense and profits from future sales. We began
shipping the products to NutraMax in March 1999. Net sales to
NutraMax totaled $618,000 for the year ended December 31,
2000, $35,000 for the five months ended December 31, 1999
and $167,000 for the year ended July 31, 1999, representing
17%, 4% and 7% of total revenues, respectively. As of
May 2, 2000, NutraMax filed for protection under
Chapter 11 of the U.S. Bankruptcy Code, we had a claim
outstanding of $190,000 as an unsecured creditor. We were able
to recover $19,000 for this claim. Since the filing date, we
have agreed on new payment terms with NutraMax and have sold
$293,000 of product for which we were paid in accordance with
the revised terms. In February 2001, NutraMaxs plan of
reorganization was approved by the U.S. Bankruptcy Court. Since
NutraMax emerged from Chapter 11, NutraMax has further
reduced its forecast for adhesive strips to be supplied. On
April 2, 2001, NutraMax filed a motion with the U.S.
Bankruptcy Court to reject our supply agreement effective that
date.

Costs of product sales increased to $1,938,000
for the year ended December 31, 2000 from $500,000 for the
five months ended December 31, 1999. The relative increase
in cost resulted from the increase in production of our topical
triple antibiotic rolled padded stock and higher product sales
for Glofil-125 and Inulin, in addition to a $50,000 write-down
to accurately reflect the current value of inventory in stock.

Gross margins for the marketed products for the
year ended December 31, 2000 were 59% for Ethamolin, 36%
for Glofil-125, 35% for Inulin, and (80%) for the rolled padded
stock, compared to the 54%, 51%, 1% and (504%), respectively,
for the five month period ended December 31, 1999. The
negative gross margin in rolled padded stock for the 1999 period
resulted from the initial production and start up costs for that
product. The rolled padded stock is made with costly raw
materials, and, in addition, our sales price to NutraMax is
contractually fixed by our agreement with them. The gross
margins for Glofil-125 and Inulin have been historically
affected by shrinkage resulting from short shelf lives.

Sales and marketing expense increased to
$2,539,000 for the year ended December 31, 2000 from
$946,000 for the five month period ended December 31, 1999.
This relative increase is principally due to salary and
recruiting costs associated with the expansion of the sales
force from seven people at December 31, 1999 to nineteen
people at December 31, 2000.

General and administrative expense increased to
$5,495,000 for the year ended December 31, 2000 from
$1,684,000 for the five month period ended December 31,
1999. This relative increase resulted from merger related
expenses associated with the consolidation of our corporate
offices and a combination of administrative functions, higher
expenses for audit, legal and other professional services, a
charge for the settlement of the A. R. Baron litigation, as
well as a $144,000 write-off of accounts receivable associated
with NutraMax.

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Research and development expense increased to
$5,221,000 for the year ended December 31, 2000 from
$2,855,000 for the five month period ended December 31,
1999, due to the increased costs associated with the clinical
co-development of Emitasol acquired in the RiboGene merger,
legal costs and ongoing obligations associated with drug
discovery programs, including those acquired in the RiboGene
merger, offset by the termination of our research collaboration
with Dainippon in January 2000. As a result we discontinued all
related early stage drug discovery programs.

Depreciation and amortization expense increased
to $2,559,000 for the year ended December 31, 2000 from
$574,000 for the five month period ended December 31, 1999,
due to the additional tangible and intangible assets acquired in
the RiboGene merger as well as an additional charge of $303,000
to depreciation expense in order to reflect a change in the
estimated useful life of certain leased laboratory and
manufacturing equipment.

Net interest and other income for the year ended
December 31, 2000 increased to $135,000 from $86,000 for
the five month period ended December 31, 1999, principally
due to the addition of debt and capital lease obligations for
leased laboratory equipment with the acquisition of RiboGene.

Net rental income, increased to $261,000 for the
year ended December 31, 2000 from $5,000 for the five month
period ended December 31, 1999 primarily due to the
sublease of a portion of our Hayward facility, commencing in
July 2000.



| |                                                                       
| | ----------------------------------------------------------------------
| | Year Ended December 31, 2000 Compared
	to the Year Ended July 31, 1999

For the year ended December 31, 2000, we
incurred a net loss of $13,762,000 (or $0.56 per share),
compared to a net loss of $6,784,000 (or $0.43 per share) for
the year ended July 31, 1999.

Revenue for the year ended December 31, 2000
increased 40% to $3,594,000 as compared to $2,569,000 for the
year ended July 31, 1999. This increase was primarily due
to the recognition of $1,250,000 of technology revenue from the
sale of our proprietary antiviral drug research technology, HCV
IRES and HCV NS5A-PKR, to Rigel Pharmaceuticals, Inc.

Product sales decreased 15% to $2,134,000 for the
year ended December 31, 2000 from $2,518,000 for the year
ended July 31, 1999. This decrease was primarily due to a
63% decline in Ethamolin sales versus the prior period. This
decrease was partially offset by an increase in sales of our
rolled padded stock of Neoflo. Ethamolin sales declines were a
result of wholesale stocking during the 1999 period and
competition from certain medical devices in the Ethamolin market.

Costs of product sales increased 151% to
$1,938,000 for the year ended December 31, 2000 from
$771,000 for the year ended July 31, 1999. The increase in
cost resulted from the increase in the sales of Neoflo, and,
therefore, the related cost of goods sold in addition to a
$50,000 write-down to accurately reflect the current value of
inventory in stock.

Gross margins for the marketed products for the
year ended December 31, 2000 were 59% for Ethamolin, 36%
for Glofil-125, 35% for Inulin, and (80%) for the rolled padded
stock compared to the 82%, 46%, 55%, and 62%, respectively, for
the year ended July 31, 1999.

Sales and marketing expense increased by 49% to
$2,539,000 for the year ended December 31, 2000 from
$1,703,000 for the year ended July 31, 1999. This increase
is principally due to salary and recruiting costs associated
with the expansion of the sales force.

General and administrative expense increased 143%
to $5,495,000 for the year ended December 31, 2000 from
$2,261,000 for the year ended July 31, 1999. This increase
resulted from merger related expenses associated with the
consolidation of our corporate offices and a combination of
administrative functions, higher expenses for audit, legal and
other professional services, a charge for the settlement of the
A. R. Baron litigation, as well as a write-off of
$144,000 of accounts receivable associated with NutraMax.

Research and development expense increased 29% to
$5,221,000 for the year ended December 31, 2000 from
$4,052,000 for the year ended July 31, 1999, due to the
increased costs associated with the clinical

39



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##### Table of Contents



co-development of Emitasol, and other legal costs
and ongoing obligations associated with drug discovery programs
acquired in the RiboGene merger. In January 2000, we terminated
our research collaboration with Dainippon.


Depreciation and amortization expense increased
107% to $2,559,000 for the year ended December 31, 2000
from $1,239,000 for the year ended July 31, 1999, due to
the additional tangible and intangible assets acquired in the
RiboGene merger as well as an additional charge of $303,000 to
depreciation in order to reflect a change in the estimated
useful life of certain leased laboratory and manufacturing
equipment.

Net interest and other income for the year ended
December 31, 2000 decreased 77% to $135,000 from $590,000
for the year ended July 31, 1999, principally due to the
addition of debt and capital lease obligations for leased
laboratory equipment with the acquisition of RiboGene.

Net rental income increased to $261,000 for the
year ended December 31, 2000 from $83,000 for the year
ended July 31, 1999 primarily due to the sublease of a
portion of our Hayward facility, commencing in July 2000.

Liquidity and Capital Resources

We have principally funded our activities to date
through various issuances of equity securities, which, through
December 31, 2001, have raised total net proceeds of
$45.6 million, and to a lesser extent through product sales.

At December 31, 2001, we had cash, cash
equivalents and short-term investments of $10,571,000 compared
to $8,151,000 at December 31, 2000, including a
compensating balance of $5,000,000 in each period. At
December 31, 2001, working capital was $2,591,000 compared
to $1,201,000 at December 31, 2000. The increase in working
capital was principally due to the equity investments from
Sigma-Tau, coupled with lower operating expenses.

As a result of the merger with RiboGene, we
assumed $5 million of long-term debt financing with a bank.
The note required us to make monthly interest payments, at prime
plus 1% (5.75% at December 31, 2001), with the principal
payment due at the end of the three-year term (December 2001).
The note was collateralized by a perfected security interest in
all of our unencumbered assets of Questcor and required that we
maintain depository balances. We were also required to comply
with financial covenants based on certain ratios. At
June 30, 2000 we were not in compliance with at least one
such financial covenant. Hence, we reclassified the
$5 million note payable from long-term to short-term debt.
In November 2000, the $5 million note payable was converted
into a $5 million cash secured facility, the financial
covenants were removed and the blanket lien on all assets were
released. The interest expense on the $5 million note was
fixed at a rate of 2% greater than the Certificate of Deposit
interest rate earned on the underlying $5 million cash
investment which serves as a compensating bank balance with its
use restricted. The note had a 90 day extension period, and
the notes term was extended to March 2002. We paid the
note in full on January 18, 2002.

On January 2, 2002, we entered into a
revolving accounts receivable line of credit with Pacific
Business Funding, a division of Greater Bay Bancorp, the parent
company of Cupertino National Bank. Cupertino National Bank
previously held the $5 million note. 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. As of March 15, 2002 there were no
borrowings under this line of credit.

We lease four buildings with lease terms expiring
in 2004 to 2012. Annual rent payments for all of our facilities
in 2002 are estimated to be $1,449,000. We use the Union City
facility as our headquarters and the Carlsbad facility as our
warehousing and distribution center. Annual rent payments for
2002 for these facilities are $660,000. We have subleased
laboratory space and laboratory equipment in Hayward, California
for a term of six years and anticipate that we will receive
$949,000 in 2002 as sublease income to be used to pay the annual
rental expense of $651,000 in 2002. The Lees Summit
facility was closed in May 2001 and this facility

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is available for sublease. Lease payments under
the facility in Lees Summit, Missouri are $138,000 for
2002. Additionally, we have other contractual obligations as
shown in the table below:


|                                   |  |                        |        |                |  |              |       |         |  |       |       |  |  |   |       |  |  |   |       | 
|---------------------------------- |  | ---------------------- | ------ | -------------- |  | ------------ | ----- | ------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |        | Greater Than   |  | 4 to 5       |       | After 5
|Contractual Obligations            |  | Total                  |        | 1 Year or Less |  | 1 to 3 Years |       | Years   |  | Years
|                                   |  |                        |        |                |  |              |       |         |  |      
|                                   |  |                       
|                                   |  | (In thousands)        
|Long Term Debt                     |  | $                      | 5,489  |                |  | $            | 5,368 |         |  | $     | 121   |  |  | $ |      |  |  | $ |      | 
|Capital Lease Obligations          |  |                        | 58     |                |  |              | 57    |         |  |       | 1     |  |  |   |      |  |  |   |      | 
|Operating Leases                   |  |                        | 14,819 |                |  |              | 1,449 |         |  |       | 3,046 |  |  |   | 2,760 |  |  |   | 7,564 | 
|Total Contractual Cash Obligations |  | $                      | 20,366 |                |  | $            | 6,874 |         |  | $     | 3,168 |  |  | $ | 2,760 |  |  | $ | 7,564 | 

We also held 83,333 shares of Rigel
Pharmaceuticals Inc. (NASD: RIGL) common stock that we received
in conjunction with the agreement to sell Rigel exclusive rights
to certain of our proprietary antiviral drug research
technology. As of December 31, 2001, the shares had a
market value of $388,000. It is our intention to sell these
securities when it is practical.

On March 15, 2002, in two separate
transactions, we issued $4.0 million of 8% convertible
debentures to an institutional investor and Sigma-Tau. We will
pay interest on the debentures at a rate of 8% per annum on a
quarterly basis. The debentures are convertible into shares of
our common stock at a fixed conversion price of $1.58 per
share (subject to adjustment for stock splits and
reclassifications). At the end of the term of the debenture,
under certain circumstances, we have the option to repay the
principal in stock and, under certain circumstances, we can also
redeem the debenture for cash prior to maturity. The debentures
mature on March 15, 2005. In conjunction with this
transaction, we issued a warrant to both the institutional
investor and Sigma-Tau to acquire 1,518,988 shares of common
stock at an exercise price of $1.70 per share. Both
warrants expire on March 15, 2006. Assuming the conversion
and exercise of the above-mentioned debenture and warrant by
Sigma-Tau and assuming the exercise of all other outstanding
warrants held by Sigma-Tau, Sigma-Tau would own approximately
38% of our outstanding common stock as of March 15, 2002.

We anticipate that our capital needs will
decrease in 2002 as compared to the capital required during
2001. We anticipate increased product sales in 2002 as compared
to 2001, which should result in a decrease of capital
requirements for 2002. Based on our internal forecasts and
projections, we believe that our working capital, together with
the $4.0 million of cash raised through the above-mentioned
convertible debentures and the cash to be generated through the
expected sales of our products, will be sufficient to fund
operations through the end of 2002. Our future funding
requirements will depend on many factors, including; the timing
and extent of product sales any expansion or acceleration of our
development programs; the results of preclinical studies and
clinical trials conducted by Questcor or our collaborative
partners or licensees, if any; 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 extent of product sales, and other
factors.

We are funding a portion of our operating
expenses through our cash flow from product sales, but expect to
seek additional funds through public or private equity financing
or from other sources. There can be no assurance that additional
funds can be obtained on desirable terms or at all. 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.

Sigma-Tau Investment

In April 2001, we entered into a Stock and
Warrant Purchase Agreement with Sigma-Tau Finance Holding S.A.
(Sigma-Tau) pursuant to which Sigma-Tau purchased
(i) an aggregate of 2,873,563 shares of common stock at a
purchase price of $0.52 per share, for an aggregate purchase
price of $1,500,000, and (ii) a warrant to purchase an
additional 2,873,563 shares of common stock at a purchase price
of $0.52 per share. In May 2001, as required under the rules of
AMEX, we sought and received shareholder approval to

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allow for full exercise of the warrant. In July
2001, Sigma-Tau assigned the warrant to Paolo Cavazza and
Claudio Cavazza, the principal shareholders of Sigma-Tau, who
exercised the warrant in full, purchasing 2,873,563 shares of
common stock at a purchase price of $0.52 per share, resulting
in aggregate proceeds to us of $1,500,000 (including the
$100,000 originally paid by Sigma-Tau to acquire the warrant).


In July 2001, we entered into a Stock Purchase
Agreement with Sigma-Tau pursuant to which Sigma-Tau purchased
5,279,034 shares of common stock at a purchase price of $0.66
per share, for an aggregate purchase price of $3,500,000.

In December 2001, we entered into a Promotion
Agreement with VSL Pharmaceuticals, Inc., a private company
owned in part by the principal shareholders of Sigma-Tau, to
promote, sell and distribute the product VSL#3 in the U.S. In
connection with this Promotion Agreement, we entered into two
Stock and Warrant Purchase Agreements, one with Paolo Cavazza
and one with Claudio Cavazza, to purchase (i) an aggregate
of 640,000 shares of common stock for a purchase price of $1.50
per share (representing a twenty percent premium to our market
price for the five days prior to execution of the Purchase
Agreements), for an aggregate purchase price of $960,000, and
(ii) warrants, at an aggregate purchase price of $300,000,
to purchase an additional 1,800,000 shares of common stock at a
purchase price of $1.75 per share before December 1, 2003.
We issued the common stock related to this transaction in
February 2002. Additionally, in connection with this
transaction, we entered into a standstill agreement with
Sigma-Tau whereby Sigma-Tau and its affiliates agreed to limit
purchases of common stock on the open market to no more that
2,000,000 shares through July 2003. Assuming Sigma-Tau exercises
its warrants in full, they would own approximately 34%
(including the 640,000 shares of common stock issued in February
2002) of our outstanding common stock as of December 31,
2001.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards
Board (FASB) Issued Statement of Financial Accounts
Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133). SFAS 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires companies to
recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Our
adoption of SFAS 133 as of January 1, 2001, did not have a
material impact on our financial statements.

In July 2001, the FASB issued Statement
No. 141, Business Combinations (SFAS 141)
and Statement No. 142, Goodwill and Other Intangible Assets
(SFAS 142). SFAS 141 establishes new
standards for accounting and reporting for business combinations
and will require that the purchase method of accounting be used
for all business combinations initiated after June 30,
2001. Use of the pooling-of-interests method will be prohibited.
SFAS 142 establishes new standards for goodwill, including
the elimination of goodwill amortization to be replaced with
methods of periodically evaluating goodwill for impairment. We
will adopt these statements during the first quarter of fiscal
2002. We are currently evaluating the provisions of
SFAS 142 related to $479,000 of unamortized goodwill and
workforce at December 31, 2001.

In August 2001, the FASB issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS 144 supercedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of and the accounting and
reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. SFAS 144 establishes a
single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired.
SFAS 144 retains the provisions of APB No. 30 for
presentation of discontinued operations in the income statement,
but broadens the presentation to include a component of an
entity. SFAS 144 is effective for fiscal years beginning
after December 15, 2001 and the interim periods within. We
do not believe that the adoption of SFAS 144 on
January 1, 2002 will have a material impact on our
financial position or results of operations.

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Income Taxes

As of December 31, 2001, the Company had
federal and state net operating loss carryforwards of
approximately $92.1 million and $16.5 million,
respectively. The Company also had federal and California
research and development tax credits of approximately
$1.8 million and $1.1 million. The federal and state
net operating loss and credit carryforwards expire at various
dates beginning in the years 2006 through 2021, if not utilized.




Item 7A.     Quantitative
and Qualitative Disclosures about Market Risk

Market Rate Risk

Our exposure to market rate risk for changes in
interest rates relates primarily to our investment portfolio. We
do not use derivative financial instruments in our investment
portfolio. We place our investments with high quality issuers
and follow internally developed guidelines to limit the amount
of credit exposure to any one issuer. Additionally, in an
attempt to limit interest rate risk, we follow guidelines to
limit the average and longest single maturity dates. We are
adverse to principal loss and ensure the safety and preservation
of our invested funds by limiting default, market and
reinvestment risk. Our investments include money market
accounts, commercial paper and corporate notes. The table below
presents the amounts and related interest rates of our
investment portfolio as of December 31, 2001.

|                                                                       |  |                       |        |       |  |            |        |  |  |   |        | 
|---------------------------------------------------------------------- |  | --------------------- | ------ | ----- |  | ---------- | ------ |  |  | - | ------ | 
|                                                                       |  |                       |        |       |  | Fair Value
|                                                                       |  | 2001                  |        | Total |  | 12/31/01  
|                                                                       |  |                       |        |       |  |           
|                                                                       |  |                      
|                                                                       |  | (In thousands, except
|                                                                       |  | interest rates)      
|Assets                                                                 |  |                       |        |       |  |            |        |  |  |   |        | 
|Cash and cash equivalents (includes a
	compensating balance of $5,000) |  | $                     | 10,183 |       |  | $          | 10,183 |  |  | $ | 10,183 | 
|Average interest rate                                                  |  |                       | 4.36   | %     |  |            |       |  |  |   |       | 
|                                                                      
|Liabilities                                                            |  |                       |        |       |  |            |        |  |  |   |        | 
|Notes payable  Short term                                             |  | $                     | 5,368  |       |  | $          | 5,368  |  |  | $ | 5,368  | 
|Average interest rate                                                  |  |                       | 8.66   | %     |  |            |       |  |  |   |       | 




Item 8.     Financial
Statements and Supplementary Data

QUESTCOR PHARMACEUTICALS, INC.

CONTENTS

|                                                   |                                                                               |      |    |    | 
|-------------------------------------------------- | ----------------------------------------------------------------------------- | ---- | -- | -- | 
|                                                   |                                                                               | Page
|                                                   |                                                                               |     
|Report of Ernst & Young LLP, Independent
	Auditors |                                                                               |      | 46 |   
|Audited Financial Statements                       |                                                                               |      |    |   
|                                                   | Consolidated Balance Sheets                                                   |      |    | 47 | 
|                                                   | Consolidated Statements of Operations                                         |      |    | 48 | 
|                                                   | Consolidated Statement of Preferred Stock and
	Stockholders Equity (Deficit) |      |    | 49 | 
|                                                   | Consolidated Statements of Cash Flows                                         |      |    | 50 | 
|Notes to Consolidated Financial Statements         |                                                                               |      | 51 |   
|Financial Statement Schedule                       |                                                                               |      | 69 |   

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##### Table of Contents






Item 9.     Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure

Not Applicable




PART III.






Item 10.     Directors
and Executive Officers of the Registrant


The information required is hereby incorporated
by reference from the information contained in our definitive
Proxy Statement with respect to our 2002 Annual Meeting of
Shareholders, filed with the Commission pursuant to
Regulation 14A (the Proxy Statement) under the
headings Nominees and Company Management.




Item 11.     Executive
Compensation

The information required by this item is hereby
incorporated by reference from information contained in the
Proxy Statement under the heading Compensation of
Directors and Executive Officers.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this item is hereby
incorporated by reference from information contained in the
Proxy Statement under the heading of Security Ownership of
Certain Beneficial Owners and Management.




Item 13.     Certain
Relationships and Related Transactions

The information required by this item is hereby
incorporated by reference from information contained in the
Proxy Statement under the heading Certain Relationships
and Related Transactions and Executive
Compensation.




Item 14.     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

(a)(1) The following financial statements
are included in Item 8.

Report of Ernst & Young LLP

Balance Sheet as of December 31, 2001 and
2000



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Statements of Operations for years ended
	December 31, 2001 and 2000, the five months ended
	December 31, 1999 and 1998 and the year ended July 31,
	1999                                  
|
| | Statement of Preferred Stock and
	Stockholders Equity (Deficit) for the years ended
	December 31, 2001 and 2000, the five months ended
	December 31, 1999 and the year ended July 31, 1999
|
| | Statements of Cash Flows for years ended
	December 31, 2001 and 2000 and the five months ended
	December 31, 1999 and 1998 and the year ended July 31,
	1999                               

(a)(2) The following financial statement
schedule is included in Item 14(a)(2) Valuation and
Qualifying Accounts.

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##### Table of Contents






SIGNATURES

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



| |                               
| | ------------------------------
| | QUESTCOR PHARMACEUTICALS, INC.



| |    |                         
| | -- | ------------------------
| | BY | /s/ CHARLES J. CASAMENTO

| |                        
| | -----------------------
| |                        
| | Charles J. Casamento   
| | Chairman, President and
| | Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints
Charles J. Casamento and Timothy E. Morris, and each
of them, his attorney-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any
amendments to this report, and to file the same, with exhibits
thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue
hereof.

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

|                                             |  |                                                                                                                     |  |               
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                    |  | Title                                                                                                               |  | Date          
|                                             |  |                                                                                                                     |  |               
|/s/ CHARLES J. CASAMENTOCharles J. Casamento |  | Chairman, President and Chief Executive Officer
	and Director (Principal Executive Officer)                         |  | March 19, 2002
|                                            
|/s/ TIMOTHY E. MORRISTimothy E. Morris       |  | Vice President, Finance & Administration
	and Chief Financial Officer (Principal Financial and Accounting
	Officer) |  | March 19, 2002
|                                            
|/s/ ROBERT F. ALLNUTTRobert F. Allnutt       |  | Director                                                                                                            |  | March 19, 2002
|                                            
|/s/ FRANK J. SASINOWSKIFrank J. Sasinowski   |  | Director                                                                                                            |  | March 19, 2002
|                                            
|/s/ JON S. SAXEJon S. Saxe                   |  | Director                                                                                                            |  | March 19, 2002
|                                            
|/s/ JOHN T. SPITZNAGELJohn T. Spitznagel     |  | Director                                                                                                            |  | March 19, 2002
|                                            
|/s/ ROGER G. STOLL, PH.D.Roger G. Stoll      |  | Director                                                                                                            |  | March 19, 2002
|                                            
|/s/ VIRGIL D. THOMPSONVirgil D. Thompson     |  | Director                                                                                                            |  | March 19, 2002

45



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Stockholders

Questcor Pharmaceuticals, Inc.


We have audited the accompanying consolidated
balance sheets of Questcor Pharmaceuticals, Inc. as of
December 31, 2001 and 2000, and the related consolidated
statements of operations, preferred stock and stockholders
equity (deficit), and cash flows for the years ended
December 31, 2001 and 2000, the five months ended
December 31, 1999 and for the year ended July 31,
1999. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Questcor Pharmaceuticals,
Inc. as of December 31, 2001 and 2000, and the results of
its operations and its cash flows for the years ended
December 31, 2001 and 2000, the five months ended
December 31, 1999 and for the year ended July 31,
1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.



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

Palo Alto, California

February 12, 2002


(Except for Note 1, paragraph 4,


and Note 17, as to which the date is


March 15, 2002)


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##### Table of Contents



QUESTCOR PHARMACEUTICALS, INC.






CONSOLIDATED BALANCE SHEETS


|                                                |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |         |       |        | 
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ----------------------------------------------------- | ------------ | ----- | ------ | ----- | ------- | ----- | ------ | 
|                                                |                                                                                                                                                                                                                | December 31,                |                                                       | December 31,
|                                                |                                                                                                                                                                                                                | 2001                        |                                                       | 2000        
|                                                |                                                                                                                                                                                                                |                             |                                                       |             
|                                                |                                                                                                                                                                                                                |                            
|                                                |                                                                                                                                                                                                                | (In thousands, except share
|                                                |                                                                                                                                                                                                                | amounts)                   
|ASSETS                                         
|Current assets:                                 |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        
|                                                | Cash and cash equivalents (includes a
	compensating balance of $5,000 see Note 9)                                                                                                                              |                             | $                                                     | 10,183       |       |        | $     | 6,818   |      
|                                                | Short-term investments                                                                                                                                                                                         |                             |                                                       | 388          |       |        |       | 1,333   |      
|                                                | Accounts receivable, net of allowance for
	doubtful accounts of $78 and $56 at December 31, 2001 and
	2000, respectively                                                                                       |                             |                                                       | 672          |       |        |       | 172     |      
|                                                | Inventories                                                                                                                                                                                                    |                             |                                                       | 96           |       |        |       | 56      |      
|                                                | Prepaid expenses and other current assets                                                                                                                                                                      |                             |                                                       | 377          |       |        |       | 499     |      
|                                                |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        
|                                                |                                                                                                                                                                                                                |                             | Total current assets                                  |              |       | 11,716 |       |         |       | 8,878  | 
|Property and equipment, net                     |                                                                                                                                                                                                                |                             | 602                                                   |              |       |        | 1,427 |        
|Goodwill and other intangibles, net             |                                                                                                                                                                                                                |                             | 1,638                                                 |              |       |        | 3,357 |        
|Deposits and other assets                       |                                                                                                                                                                                                                |                             | 1,116                                                 |              |       |        | 1,307 |        
|                                                |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        
|                                                |                                                                                                                                                                                                                |                             | Total assets                                          |              | $     | 15,072 |       |         | $     | 14,969 | 
|                                                |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        
|LIABILITIES AND STOCKHOLDERS EQUITY
	(DEFICIT)
|Current liabilities:                            |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        
|                                                | Accounts payable                                                                                                                                                                                               |                             | $                                                     | 1,095        |       |        | $     | 476     |      
|                                                | Accrued compensation                                                                                                                                                                                           |                             |                                                       | 575          |       |        |       | 392     |      
|                                                | Accrued development costs                                                                                                                                                                                      |                             |                                                       |             |       |        |       | 541     |      
|                                                | Unissued common stock                                                                                                                                                                                          |                             |                                                       | 960          |       |        |       |        |      
|                                                | Other accrued liabilities                                                                                                                                                                                      |                             |                                                       | 1,070        |       |        |       | 798     |      
|                                                | Short-term debt and current portion of long-term
	debt                                                                                                                                                         |                             |                                                       | 5,368        |       |        |       | 5,382   |      
|                                                | Current portion of capital lease obligations                                                                                                                                                                   |                             |                                                       | 57           |       |        |       | 88      |      
|                                                |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        
|                                                |                                                                                                                                                                                                                | Total current liabilities   |                                                       |              | 9,125 |        |       |         | 7,677 |       
|Long-term debt                                  |                                                                                                                                                                                                                |                             | 121                                                   |              |       |        | 489   |        
|Capital lease obligations                       |                                                                                                                                                                                                                |                             | 1                                                     |              |       |        | 59    |        
|Other non-current liabilities                   |                                                                                                                                                                                                                |                             | 1,044                                                 |              |       |        | 736   |        
|Commitments                                     |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        
|                                                | Preferred stock, no par value, 7,500,000 shares
	authorized; 2,155,715 Series A shares issued and
	outstanding at December 31, 2001 and 2000 (aggregate
	liquidation of $10,000 at December 31, 2001 and 2000) |                             |                                                       | 5,081        |       |        |       | 5,081   |      
|Stockholders equity (deficit):                 |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        
|                                                | Common stock, no par value, 75,000,000 shares
	authorized; 37,389,603 and 25,303,091 shares issued and
	outstanding at December 31, 2001 and 2000, respectively                                                |                             |                                                       | 74,018       |       |        |       | 66,152  |      
|                                                | Deferred compensation                                                                                                                                                                                          |                             |                                                       | (20          | )     |        |       | (71     | )    
|                                                | Accumulated deficit                                                                                                                                                                                            |                             |                                                       | (74,183      | )     |        |       | (65,486 | )    
|                                                | Accumulated other comprehensive gain (loss)                                                                                                                                                                    |                             |                                                       | (115         | )     |        |       | 332     |      
|                                                |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        
|                                                |                                                                                                                                                                                                                |                             | Total stockholders equity (deficit)                  |              |       | (300   | )     |         |       | 927    | 
|                                                |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        
|                                                |                                                                                                                                                                                                                |                             | Total liabilities and stockholders equity
	(deficit) |              | $     | 15,072 |       |         | $     | 14,969 | 
|                                                |                                                                                                                                                                                                                |                             |                                                       |              |       |        |       |        

See accompanying notes.

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QUESTCOR PHARMACEUTICALS, INC.






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                               |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |        |        | 
|------------------------------ | ---------------------------------------------------- | ---------------------------------------- | ------ | ----------------- | ------ | ---------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------ | ------ | ----- | - | ------ | ------ | ------ | 
|                               |                                                      |                                          |        |                   |        |           
|                               |                                                      | Year Ended                               |        | Five Months Ended |        |           
|                               |                                                      | December 31,                             |        | December 31,      |        | Year Ended
|                               |                                                      |                                          |        |                   |        | July 31,  
|                               |                                                      | 2001                                     |        | 2000              |        | 1999       |         | 1998   |        | 1999
|                               |                                                      |                                          |        |                   |        |            |         |        |        |     
|                               |                                                      |                                         
|                               |                                                      | (In thousands, except per share amounts)
|                               |                                                      |                                          |        |                  
|                               |                                                      |                                          |        | (Unaudited)      
|Revenue:                       |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |       
|                               | Net product sales                                    |                                          | $      | 5,196             |        |            | $       | 2,134  |        |      | $       | 624    |        |   | $      | 897    |       |   | $      | 2,518  |       
|                               | Contract research and grant revenue                  |                                          |        | 367               |        |            |         | 207    |        |      |         | 332    |        |   |        | 11     |       |   |        | 51     |       
|                               | Technology revenue                                   |                                          |        | 90                |        |            |         | 1,250  |        |      |         |       |        |   |        |       |       |   |        |       |       
|                               | Royalty revenue                                      |                                          |        | 14                |        |            |         | 3      |        |      |         |       |        |   |        |       |       |   |        |       |       
|                               |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |       
|                               |                                                      | Total revenues                           |        |                   | 5,667  |            |         |        | 3,594  |      |         |        | 956    |   |        |        | 908   |   |        |        | 2,569  | 
|Operating costs and expenses:  |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |       
|                               | Cost of product sales                                |                                          |        | 1,483             |        |            |         | 1,938  |        |      |         | 500    |        |   |        | 271    |       |   |        | 771    |       
|                               | Sales and marketing                                  |                                          |        | 3,129             |        |            |         | 2,539  |        |      |         | 946    |        |   |        | 733    |       |   |        | 1,703  |       
|                               | General and administrative                           |                                          |        | 4,707             |        |            |         | 5,495  |        |      |         | 1,684  |        |   |        | 837    |       |   |        | 2,261  |       
|                               | Research and development                             |                                          |        | 2,847             |        |            |         | 5,221  |        |      |         | 2,855  |        |   |        | 1,634  |       |   |        | 4,052  |       
|                               | Restructuring costs                                  |                                          |        |                  |        |            |         |       |        |      |         | 1,530  |        |   |        |       |       |   |        |       |       
|                               | Depreciation and amortization                        |                                          |        | 2,207             |        |            |         | 2,559  |        |      |         | 574    |        |   |        | 507    |       |   |        | 1,239  |       
|                               | Loss on discontinued product line                    |                                          |        | 677               |        |            |         |       |        |      |         |       |        |   |        |       |       |   |        |       |       
|                               | Acquired in process research and development         |                                          |        |                  |        |            |         |       |        |      |         | 15,168 |        |   |        |       |       |   |        |       |       
|                               |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |       
|                               |                                                      | Total operating costs and expenses       |        |                   | 15,050 |            |         |        | 17,752 |      |         |        | 23,257 |   |        |        | 3,982 |   |        |        | 10,026 | 
|                               |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |       
|Loss from operations           |                                                      |                                          | (9,383 | )                 |        |            | (14,158 | )      |        |      | (22,301 | )      |        |   | (3,074 | )      |       |   | (7,457 | )     
|Interest and other income, net |                                                      |                                          | 74     |                   |        |            | 135     |        |        |      | 86      |        |        |   | 300    |        |       |   | 590    |       
|Rental income, net             |                                                      |                                          | 612    |                   |        |            | 261     |        |        |      | 5       |        |        |   | 35     |        |       |   | 83     |       
|                               |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |       
|Net loss                       |                                                      | $                                        | (8,697 | )                 |        | $          | (13,762 | )      |        | $    | (22,210 | )      |        | $ | (2,739 | )      |       | $ | (6,784 | )     
|                               |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |       
|Net loss per common share:     |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |       
|                               | Basic and diluted                                    |                                          | $      | (0.28             | )      |            | $       | (0.56  | )      |      | $       | (1.22  | )      |   | $      | (0.17  | )     |   | $      | (0.43  | )     
|                               |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |       
|                               | Weighted average shares of common stock
	outstanding |                                          |        | 31,425            |        |            |         | 24,722 |        |      |         | 18,240 |        |   |        | 15,712 |       |   |        | 15,712 |       
|                               |                                                      |                                          |        |                   |        |            |         |        |        |      |         |        |        |   |        |        |       |   |        |       

See accompanying notes.

48



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##### Table of Contents



QUESTCOR PHARMACEUTICALS, INC.






CONSOLIDATED STATEMENT OF PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)


Years Ended December 31, 2001 and 2000,
Five Months Ended December 31, 1999


and Year Ended July 31, 1999


|                                                                                |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |         |         |  
|------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------ | --------- | ------------ | - | -------- | ----- | ----------- | - | ------------- | ---------- | ------------- | - | ----------- | ------ | ---------------- | - | - | --- | ---- | - | - | ------- | ------- | - | - | ---- | ---- | - | - | ------ | ------- | ------- | -
|                                                                                |                                                          |                                      |           |              |   |          |       |             |   | Accumulated   |            |              
|                                                                                |                                                          | Preferred Stock                      |           | Common Stock |   |          |       |             |   | Other         |            | Total        
|                                                                                |                                                          |                                      |           |              |   | Deferred |       | Accumulated |   | Comprehensive |            | Stockholders
|                                                                                |                                                          | Shares                               |           | Amount       |   | Shares   |       | Amount      |   | Compensation  |            | Deficit       |   | Gain/(Loss) |        | Equity/(Deficit)
|                                                                                |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                 
|                                                                                |                                                          |                                     
|                                                                                |                                                          | (In thousands, except share amounts)
|Balances at July 31, 1998.                                                      |                                                          |                                      |          |              |   |          |      |             |   |               | 15,711,877 |               |   | $           | 41,328 |                  |   | $ | (87 | )    |   | $ | (22,730 | )       |   | $ |     |      |   | $ | 18,511 |        
|                                                                                | Deferred compensation                                    |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        | 169              |   |   |     | (169 | ) |   |         |        |   |   |      |     |   |   |        |        |        
|                                                                                | Amortization of deferred compensation                    |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        |                 |   |   |     | 187  |   |   |         |        |   |   |      |     |   |   |        | 187     |        
|                                                                                | Net loss                                                 |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        |                 |   |   |     |     |   |   |         | (6,784  | ) |   |      |     |   |   |        | (6,784  | )      
|                                                                                |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        
|Balances at July 31, 1999                                                       |                                                          |                                      |          |              |   |          |      |             |   |               | 15,711,877 |               |   |             | 41,497 |                  |   |   | (69 | )    |   |   | (29,514 | )       |   |   |     |      |   |   | 11,914 |        
|                                                                                | Issuance of preferred stock in business
	acquisition     |                                      |           | 2,155,715    |   |          |       | 5,081       |   |               |            |              |   |             |        |                 |   |   |     |     |   |   |         |        |   |   |      |     |   |   |        |        |        
|                                                                                | Issuance of common stock in business acquisition         |                                      |           |             |   |          |       |            |   |               |            | 8,735,061     |   |             |        | 18,562           |   |   |     |     |   |   |         |        |   |   |      |     |   |   |        | 18,562  |        
|                                                                                | Issuance of stock options in business acquisition        |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        | 5,310            |   |   |     |     |   |   |         |        |   |   |      |     |   |   |        | 5,310   |        
|                                                                                | Issuance of common stock to board members                |                                      |           |             |   |          |       |            |   |               |            | 23,130        |   |             |        | 54               |   |   |     |     |   |   |         |        |   |   |      |     |   |   |        | 54      |        
|                                                                                | Amortization of deferred compensation                    |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        |                 |   |   |     | 16   |   |   |         |        |   |   |      |     |   |   |        | 16      |        
|Comprehensive income (loss):                                                    |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        
|                                                                                | Net unrealized loss on investments                       |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        |                 |   |   |     |     |   |   |         |        |   |   |      | (20  | ) |   |        | (20     | )      
|                                                                                | Net loss                                                 |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        |                 |   |   |     |     |   |   |         | (22,210 | ) |   |      |     |   |   |        | (22,210 | )      
|                                                                                |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        
|                                                                                |                                                          | Total comprehensive income/(loss)    |           |              |  |          |       |             |  |               |            |               |  |             |        |                  |  |   |     |      |  |   |         |         |  |   |      |      |  |   |        |         | (22,230 | )
|                                                                                |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        
|Balances at December 31, 1999                                                   |                                                          |                                      | 2,155,715 |              |   |          | 5,081 |             |   |               | 24,470,068 |               |   |             | 65,423 |                  |   |   | (53 | )    |   |   | (51,724 | )       |   |   | (20  | )    |   |   | 13,626 |        
|Stock compensation for options and warrant
	granted to consultants              |                                                          |                                      |          |              |   |          |      |             |   |               |           |               |   |             | 15     |                  |   |   |    |      |   |   |        |         |   |   |     |      |   |   | 15     |        
|                                                                                | Deferred compensation                                    |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        | 46               |   |   |     | (46  | ) |   |         |        |   |   |      |     |   |   |        |        |        
|                                                                                | Amortization of deferred compensation                    |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        |                 |   |   |     | 28   |   |   |         |        |   |   |      |     |   |   |        | 28      |        
|                                                                                | Issuance of common stock upon exercise of stock
	options |                                      |           |             |   |          |       |            |   |               |            | 298,665       |   |             |        | 602              |   |   |     |     |   |   |         |        |   |   |      |     |   |   |        | 602     |        
|                                                                                | Issuance of common stock to board members                |                                      |           |             |   |          |       |            |   |               |            | 60,000        |   |             |        | 16               |   |   |     |     |   |   |         |        |   |   |      |     |   |   |        | 16      |        
|Issuance of shares pursuant to employee stock
	purchase plan                    |                                                          |                                      |          |              |   |          |      |             |   |               | 93,666     |               |   |             | 50     |                  |   |   |    |      |   |   |        |         |   |   |     |      |   |   | 50     |        
|Other issuance of common stock                                                  |                                                          |                                      |          |              |   |          |      |             |   |               | 380,692    |               |   |             |       |                  |   |   |    |      |   |   |        |         |   |   |     |      |   |   |       |        
|Comprehensive income (loss):                                                    |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        
|                                                                                | Net unrealized gain on investments                       |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        |                 |   |   |     |     |   |   |         |        |   |   |      | 352  |   |   |        | 352     |        
|                                                                                | Net loss                                                 |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        |                 |   |   |     |     |   |   |         | (13,762 | ) |   |      |     |   |   |        | (13,762 | )      
|                                                                                |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        
|                                                                                |                                                          | Total comprehensive loss             |           |              |  |          |       |             |  |               |            |               |  |             |        |                  |  |   |     |      |  |   |         |         |  |   |      |      |  |   |        |         | (13,410 | )
|                                                                                |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        
|Balances at December 31, 2000                                                   |                                                          |                                      | 2,155,715 |              |   |          | 5,081 |             |   |               | 25,303,091 |               |   |             | 66,152 |                  |   |   | (71 | )    |   |   | (65,486 | )       |   |   | 332  |      |   |   | 927    |        
|Deferred compensation offset by cancellation of
	unvested options to a director |                                                          |                                      |          |              |   |          |      |             |   |               |           |               |   |             | (26    | )                |   |   | 26  |      |   |   |        |         |   |   |     |      |   |   |       |        
|Stock compensation for options and warrants
	granted to consultants             |                                                          |                                      |          |              |   |          |      |             |   |               |           |               |   |             | 601    |                  |   |   |    |      |   |   |        |         |   |   |     |      |   |   | 601    |        
|Amortization of deferred compensation                                           |                                                          |                                      |          |              |   |          |      |             |   |               |           |               |   |             |       |                  |   |   | 25  |      |   |   |        |         |   |   |     |      |   |   | 25     |        
|Issuance of shares pursuant to employee stock
	purchase plan                    |                                                          |                                      |          |              |   |          |      |             |   |               | 193,214    |               |   |             | 112    |                  |   |   |    |      |   |   |        |         |   |   |     |      |   |   | 112    |        
|Issuance of common stock to investors, net of
	issuance costs                   |                                                          |                                      |          |              |   |          |      |             |   |               | 8,969,397  |               |   |             | 5,270  |                  |   |   |    |      |   |   |        |         |   |   |     |      |   |   | 5,270  |        
|Issuance of common stock upon exercise of warrant                               |                                                          |                                      |          |              |   |          |      |             |   |               | 2,873,563  |               |   |             | 1,500  |                  |   |   |    |      |   |   |        |         |   |   |     |      |   |   | 1,500  |        
|Issuance of common stock upon exercise of stock
	options                        |                                                          |                                      |          |              |   |          |      |             |   |               | 50,338     |               |   |             | 58     |                  |   |   |    |      |   |   |        |         |   |   |     |      |   |   | 58     |        
|Warrant issuances for cash                                                      |                                                          |                                      |          |              |   |          |      |             |   |               |           |               |   |             | 351    |                  |   |   |    |      |   |   |        |         |   |   |     |      |   |   | 351    |        
|Comprehensive income (loss)                                                     |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        
|                                                                                | Net unrealized loss on investments                       |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        |                 |   |   |     |     |   |   |         |        |   |   |      | (447 | ) |   |        | (447    | )      
|                                                                                | Net loss                                                 |                                      |           |             |   |          |       |            |   |               |            |              |   |             |        |                 |   |   |     |     |   |   |         | (8,697  | ) |   |      |     |   |   |        | (8,697  | )      
|                                                                                |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        
|                                                                                |                                                          | Total comprehensive loss:            |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |         | (9,144  | )
|                                                                                |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        
|Balances at December 31, 2001                                                   |                                                          |                                      | 2,155,715 |              |   | $        | 5,081 |             |   |               | 37,389,603 |               |   | $           | 74,018 |                  |   | $ | (20 | )    |   | $ | (74,183 | )       |   | $ | (115 | )    |   | $ | (300   | )      
|                                                                                |                                                          |                                      |           |              |   |          |       |             |   |               |            |               |   |             |        |                  |   |   |     |      |   |   |         |         |   |   |      |      |   |   |        |        

See accompanying notes.

49



---



##### Table of Contents



QUESTCOR PHARMACEUTICALS, INC.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |       |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------- | -------------- | ------ | ----------------- | - | ---------- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------ | ---- | - | - | ------ | ----- | -
|                                                                                |                                                                     |                |        |                   |   |           
|                                                                                |                                                                     | Years Ended    |        | Five Months Ended |   |           
|                                                                                |                                                                     | December 31,   |        | December 31,      |   | Year Ended
|                                                                                |                                                                     |                |        |                   |   | July 31,  
|                                                                                |                                                                     | 2001           |        | 2000              |   | 1999       |         | 1998   |   | 1999
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |     
|                                                                                |                                                                     |               
|                                                                                |                                                                     | (In thousands)
|                                                                                |                                                                     |                |        |                  
|                                                                                |                                                                     |                |        | (Unaudited)      
|Operating Activities                                                            |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Net loss                                                                        |                                                                     | $              | (8,697 | )                 |   | $          | (13,762 | )      |   | $    | (22,210 | )      |   | $ | (2,739 | )    |   | $ | (6,784 | )    
|Adjustments to reconcile net loss to net cash
	used in operating activities:    |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|                                                                                | Stock compensation for options and warrants
	granted to consultants |                |        | 601               |   |            |         | 15     |   |      |         |       |   |   |        |     |   |   |        |      |  
|                                                                                | Amortization of deferred compensation                               |                |        | 25                |   |            |         | 28     |   |      |         | 16     |   |   |        | 123  |   |   |        | 187   |  
|                                                                                | Depreciation and amortization                                       |                |        | 2,207             |   |            |         | 2,559  |   |      |         | 661    |   |   |        | 520  |   |   |        | 1,273 |  
|                                                                                | Charge for in process research and development                      |                |        |                  |   |            |         |       |   |      |         | 15,168 |   |   |        |     |   |   |        |      |  
|                                                                                | Issuance of common stock to board members                           |                |        |                  |   |            |         | 16     |   |      |         | 54     |   |   |        |     |   |   |        |      |  
|                                                                                | Loss (gain) on the sale of equipment                                |                |        | 43                |   |            |         | 21     |   |      |         | 30     |   |   |        | (6   | ) |   |        | (6    | )
|                                                                                | Loss on discontinued product line                                   |                |        | 677               |   |            |         |       |   |      |         |       |   |   |        |     |   |   |        |      |  
|Write down of licenses and patents                                              |                                                                     |                | 81     |                   |   |            |        |        |   |      |        |        |   |   |       |      |   |   |       |      
|Changes in operating assets and liabilities, net
	of effects from acquisitions: |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|                                                                                | Accounts receivable                                                 |                |        | (500              | ) |            |         | 1,717  |   |      |         | 303    |   |   |        | 306  |   |   |        | 125   |  
|                                                                                | Inventories                                                         |                |        | (40               | ) |            |         | 120    |   |      |         | 29     |   |   |        | (70  | ) |   |        | (122  | )
|                                                                                | Prepaid expenses and other current assets                           |                |        | 122               |   |            |         | (87    | ) |      |         | (183   | ) |   |        | 15   |   |   |        | 102   |  
|                                                                                | Accounts payable                                                    |                |        | 619               |   |            |         | (1,968 | ) |      |         | (134   | ) |   |        | (246 | ) |   |        | (53   | )
|                                                                                | Accrued compensation                                                |                |        | 183               |   |            |         | (1,290 | ) |      |         | 1,217  |   |   |        |     |   |   |        |      |  
|                                                                                | Deferred revenue                                                    |                |        |                  |   |            |         | (167   | ) |      |         | (239   | ) |   |        |     |   |   |        |      |  
|                                                                                | Accrued development costs                                           |                |        | (541              | ) |            |         | (1,038 | ) |      |         | (36    | ) |   |        |     |   |   |        |      |  
|                                                                                | Other accrued liabilities                                           |                |        | 149               |   |            |         | 25     |   |      |         | 380    |   |   |        | 23   |   |   |        |      |  
|                                                                                | Other non-current liabilities                                       |                |        | 105               |   |            |         | 532    |   |      |         |       |   |   |        | (6   | ) |   |        | 154   |  
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Net cash used in operating activities                                           |                                                                     |                | (4,966 | )                 |   |            | (13,279 | )      |   |      | (4,944  | )      |   |   | (2,080 | )    |   |   | (5,124 | )    
|Investing Activities                                                            |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Purchase of short-term investments                                              |                                                                     |                |       |                   |   |            |        |        |   |      | (909    | )      |   |   | (2,308 | )    |   |   | (1,148 | )    
|Proceeds from the maturity of short-term
	investments                           |                                                                     |                |       |                   |   |            |        |        |   |      | 2,292   |        |   |   | 5,140  |      |   |   | 6,821  |      
|Proceeds from the sale of short-term investments                                |                                                                     |                | 499    |                   |   |            | 9,806   |        |   |      | 2,667   |        |   |   |       |      |   |   |       |      
|Net cash from RiboGene acquisition                                              |                                                                     |                |       |                   |   |            |        |        |   |      | 9,258   |        |   |   |       |      |   |   |       |      
|Purchase of property, equipment and leasehold
	improvements                     |                                                                     |                | (183   | )                 |   |            | (85     | )      |   |      | (100    | )      |   |   | (139   | )    |   |   | (651   | )    
|Proceeds from the sale of equipment                                             |                                                                     |                | 44     |                   |   |            | 10      |        |   |      |        |        |   |   | 11     |      |   |   | 11     |      
|Increase in licenses and patents                                                |                                                                     |                |       |                   |   |            |        |        |   |      |        |        |   |   | (10    | )    |   |   | (14    | )    
|Increase (decrease) in deposits and other
	assets                               |                                                                     |                | 191    |                   |   |            | (550    | )      |   |      | 269     |        |   |   | 21     |      |   |   | (198   | )    
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Net cash provided by investing activities                                       |                                                                     |                | 551    |                   |   |            | 9,181   |        |   |      | 13,477  |        |   |   | 2,715  |      |   |   | 4,820  |      
|Financing Activities                                                            |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Issuance of common stock and warrants, net                                      |                                                                     |                | 7,290  |                   |   |            | 652     |        |   |      |        |        |   |   |       |      |   |   |       |      
|Net proceeds from common stock to be issued                                     |                                                                     |                | 960    |                   |   |            |        |        |   |      |        |        |   |   |       |      |   |   |       |      
|Issuance of long-term debt                                                      |                                                                     |                |       |                   |   |            |        |        |   |      |        |        |   |   | 4      |      |   |   |       |      
|Issuance of capital leases                                                      |                                                                     |                |       |                   |   |            |        |        |   |      |        |        |   |   | 100    |      |   |   |       |      
|Repayment of long-term debt                                                     |                                                                     |                | (382   | )                 |   |            | (370    | )      |   |      | (71     | )      |   |   | (52    | )    |   |   | (95    | )    
|Repayments of capital lease obligations                                         |                                                                     |                | (88    | )                 |   |            | (278    | )      |   |      | (59     | )      |   |   | (39    | )    |   |   | (108   | )    
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Net cash (used in) provided by financing
	activities                            |                                                                     |                | 7,780  |                   |   |            | 4       |        |   |      | (130    | )      |   |   | 13     |      |   |   | (203   | )    
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Increase (decrease) in cash and cash
	equivalents                               |                                                                     |                | 3,365  |                   |   |            | (4,094  | )      |   |      | 8,403   |        |   |   | 648    |      |   |   | (507   | )    
|Cash and cash equivalents at beginning of period                                |                                                                     |                | 6,818  |                   |   |            | 10,912  |        |   |      | 2,509   |        |   |   | 3,016  |      |   |   | 3,016  |      
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Cash and cash equivalents at end of period                                      |                                                                     | $              | 10,183 |                   |   | $          | 6,818   |        |   | $    | 10,912  |        |   | $ | 3,664  |      |   | $ | 2,509  |      
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Supplemental Disclosures of Cash Flow
	Information:                             |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Cash paid for interest                                                          |                                                                     | $              | 466    |                   |   | $          | 667     |        |   | $    | 11      |        |   | $ | 23     |      |   | $ | 47     |      
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Noncash Investing and Financing
	Activities:                                    |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Equipment subleased under direct finance lease                                  |                                                                     | $              |       |                   |   | $          | 591     |        |   | $    |        |        |   | $ |       |      |   | $ | 104    |      
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Cash Flow for Acquisition of
	RiboGene                                          |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Tangible assets acquired (net of $10,324 cash
	received)                        |                                                                     |                |        |                   |   |            |         |        |   | $    | 2,417   |        |   |   |        |      |   |   |        |      
|Acquired in process research and development                                    |                                                                     |                |        |                   |   |            |         |        |   |      | 15,168  |        |   |   |        |      |   |   |        |      
|Goodwill and other intangibles                                                  |                                                                     |                |        |                   |   |            |         |        |   |      | 2,110   |        |   |   |        |      |   |   |        |      
|Common stock issued                                                             |                                                                     |                |        |                   |   |            |         |        |   |      | (18,562 | )      |   |   |        |      |   |   |        |      
|Preferred stock issued                                                          |                                                                     |                |        |                   |   |            |         |        |   |      | (5,081  | )      |   |   |        |      |   |   |        |      
|Stock issued                                                                    |                                                                     |                |        |                   |   |            |         |        |   |      | (5,310  | )      |   |   |        |      |   |   |        |      
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      
|Cash received for acquisition (net of $1,066
	acquisition costs)                |                                                                     |                |        |                   |   |            |         |        |   | $    | (9,258  | )      |   |   |        |      |   |   |        |      
|                                                                                |                                                                     |                |        |                   |   |            |         |        |   |      |         |        |   |   |        |      |   |   |        |      

See accompanying notes.

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##### Table of Contents



QUESTCOR PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization
and Summary of Significant Accounting Policies



| |                                    
| | -----------------------------------
| | Organization and Business
	Activity

Questcor Pharmaceuticals, Inc., formerly Cypros
Pharmaceutical Corporation, (the Company) was
incorporated in California in 1990. The Company markets and
sells acute-care, hospital-based products. The Company sells
four products, HP Acthar® Gel (Acthar), an
injectable drug that treats seriously ill children with a
seizure complex, referred to as infantile spasm or West
Syndrome, Ethamolin®, an injectable drug that treats
bleeding esophageal varices, GlofilTM-125 and Inulin,
both injectable drugs that assess kidney function by measuring
glomerular filtration rate. In conjunction with the acquisition
of RiboGene, Inc. (RiboGene), the Company changed
its fiscal year end from July 31 to December 31.
RiboGene had operated using a fiscal year ending
December 31. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.



| |                                      
| | -------------------------------------
| | Matters Affecting Ongoing
	Operations

In May 2000, the Companys sole customer for
its NeofloTM product, NutraMax Products, Inc., filed
a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code. The NutraMax bankruptcy filing has had a
negative impact on the Companys sales and cash flow during
calendar year 2000 and first quarter of 2001. On April 2,
2001, the U.S. Bankruptcy Court granted NutraMax a motion to
terminate the Companys supply agreement effective that
date. In May 2001, the Company closed its Lees Summit
manufacturing facility where the NeofloTM product was
being produced. As of December 31, 2001, there were no
definitive purchasers of the NeofloTM product and its
related assets, and as a result, the Company recorded a loss on
the discontinuance of the NeofloTM product line of
$677,000.

The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. The Company has experienced recurring operating losses
since inception. From inception to December 31, 2001, the
Company incurred cumulative net losses of approximately
$74.2 million. The Company has cash, cash equivalents and
short-term investments at December 31, 2001 of
$10.6 million (including a compensating balance of
$5 million, see Note 9).

On March 15, 2002, in two separate
transactions, the Company issued $4.0 million of 8%
convertible debentures to an institutional investor and
Sigma-Tau. The Company will pay interest on the debentures at a
rate of 8% per annum on a quarterly basis. The debentures are
convertible into shares of the Companys common stock at a
fixed conversion price of $1.58 per share (subject to
adjustment for stock splits and reclassifications). The
debentures mature on March 15, 2005. In conjunction with
this transaction, the Company issued warrants to both the
institutional investor and Sigma-Tau to acquire an aggregate of
1,518,988 shares of common stock at an exercise price of
$1.70 per share. Both warrants expire on March 15,
2006 (see Note 17).

While historical losses have been significant,
the Company expects that based upon funds received from the
convertible debentures, together with the expected sales from
its marketed products, it will have sufficient capital to fund
its operating requirements through the end of 2002.



| |                 
| | ----------------
| | Use of Estimates

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

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | Cash Equivalents and
	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 determines the
appropriate classification of investment securities at the time
of purchase and reaffirms such designation as of each balance
sheet date. Available-for-sale securities are carried at fair
value, with the unrealized gains and losses, if any, reported in
a separate component of stockholders equity. The cost of
securities sold is based on the specific identification method.
Realized gains and losses, if any, are included in the statement
of operations, in interest and other income, net.



| |                      
| | ---------------------
| | Concentration of Risk

Financial instruments which subject the Company
to potential credit risk consist of cash, cash equivalents,
short-term investments and accounts receivable. The Company
invests its cash in high credit quality government and corporate
debt instruments and believes the financial risks associated
with these instruments are minimal. The Company extends credit
to its customers, primarily large drug wholesalers and
distributors and certain hospitals and treatment centers, in
connection with its product sales. The Company has not
experienced significant credit losses on its customer accounts,
with the exception of the product sales to NutraMax on which the
Company wrote off $29,000 in 2001 and $144,000 in 2000. Three
customers accounted for 29%, 23% and 22% of product sales for
the year ended December 31, 2001. NutraMax individually
accounted for 29% of product sales for the year ended
December 31, 2000. Three customers individually accounted
for 24%, 17% and 14% of sales for the five months ended
December 31, 1999. Two customers individually accounted for
23% and 21% of sales for the year ended July 31, 1999. The
percentages above represent different customers for each year.

The Company relies on third party sole-source
manufacturers to produce its finished goods and raw materials.
Third party manufacturers may not be able to meet the
Companys needs with respect to timing, quantity or
quality. All of the Companys manufacturers are sole-source
manufacturers and no alternative suppliers exist.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost
(first-in, first-out method) or market value.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost and
depreciated over the estimated useful lives of the assets
(generally five years) using the straight-line method. Leasehold
improvements are amortized over the lesser of the estimated
useful lives (five years) or the remaining term of the lease.



| |                                      
| | -------------------------------------
| | Goodwill and Other Intangible
	Assets

Goodwill was generated from the merger with
RiboGene and is being amortized on a straight-line basis over
three years. Other intangible assets consist of the assembled
workforce, purchased technology and license and patent costs.
Purchased technology associated with the acquisitions of
GlofilTM-125, Inulin and Ethamolin® is stated at
cost and amortized over the estimated sales life of the product
(seven years). The assembled workforce and purchased technology
acquired from the merger with RiboGene are amortized on a
straight-line basis over the period estimated to be benefited
(three years). License and patent costs are amortized over the
estimated economic lives (generally six years) commencing at the
time the license rights are granted or the patents are issued
(see Note 8).

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                        
| | -------------------------------------------------------
| | Accounting Standard on Impairment of
	Long-Lived Assets

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, the Company regularly evaluates its
long-lived assets for indicators of possible impairment,
whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully
recoverable. Under SFAS 121, an impairment loss would be
recognized when estimated undiscounted future cash flows
expected to result from the use of the asset and its eventual
disposition are less than its carrying amount. Impairment, if
any, is assessed using discounted cash flows.



| |                    
| | -------------------
| | Revenue Recognition

Revenues from product sales of Acthar®,
Ethamolin®, GlofilTM-125, and Inulin are
recognized based upon shipping terms, net of estimated reserves
for sales returns and discounts. Revenues from
GlofilTM-125 unit dose sales are recognized upon
receipt by the Company of monthly sales reports from its
third-party distributor. The Company sells product to
wholesalers, who in turn sell our products to doctors and
hospitals. The Companys return policy allows customers to
return expired product within six months beyond the expiration
date. All returns are subject to quality assurance reviews prior
to acceptance. We do not require collateral from our customers.

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

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



| |                         
| | ------------------------
| | Research and Development

Research and development expenditures, including
direct and allocated expenses, are charged to expense as
incurred.



| |                   
| | ------------------
| | Net Loss Per Share

Basic and diluted net loss per share is based on
net loss for the relevant period, divided by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share gives effect to all potential
dilutive common shares outstanding during the period such as
options, warrants, convertible preferred stock, and contingently
issuable shares. Diluted net loss per share has not been
presented separately as, due to the Companys net loss
position, it is anti-dilutive. Had the Company been in a net
income position at December 31, 2001, shares used in
calculating diluted earnings per share would have included the
dilutive effect of an additional 6,878,466 stock options,
2,155,715 convertible preferred shares, placement unit options
for 986,898 shares and 3,185,185 warrants. For the twelve months
ended December 31, 2000 shares used in calculating diluted
earnings per share would have included the dilutive effect of an
additional 5,580,068 stock options, 2,155,715 convertible
preferred shares, placement unit options for 986,898 shares and
989,664 warrants. For the five months ended December 31,
1999, an aggregate of 9,308,734 stock options, preferred shares,
placement unit options and warrants would have been included in
the diluted net loss per share calculation. For the year ended
July 31, 1999, an aggregate of 2,268,686 stock options and
warrants would have been included in the diluted net loss per
share calculation.

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                   
| | ------------------
| | Stock Compensation

The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options
because the alternative fair value accounting provided for under
SFAS No. 123, Accounting for Stock-Based
Compensation requires use of option valuation models that
were not developed for use in valuing employee stock options.
Under APB 25, when the exercise price of the Companys
employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense
is recognized.

For equity awards to non-employees, including
lenders and lessors and consultants, the Company applies the
Black-Scholes method to determine the fair value of such
instruments. The options and warrants granted to non employees
are re-measured as they vest and the resulting value is
recognized as expense over the period of services received or
the term of the related financing.



| |                     
| | --------------------
| | Comprehensive Income

SFAS No. 130, Reporting Comprehensive
Income established standards for the reporting and display
of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial
statements. The Company provides the required disclosure in the
Statement of Preferred Stock and Stockholders Equity
(Deficit).



| |                    
| | -------------------
| | Segment Information

SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information
redefines segments and requires companies to report financial
and descriptive information about their operating segments. The
Company has determined that it operates in one business segment
and therefore SFAS 131 does not affect the Companys
financial statements.

Product sales revenue consists of the following
(in thousands):

|               |  |              |       |              |  |              |       |            |  |   |     |  |  |   |       | 
|-------------- |  | ------------ | ----- | ------------ |  | ------------ | ----- | ---------- |  | - | --- |  |  | - | ----- | 
|               |  |              |       |              |  | Five Months  |       |           
|               |  | Year Ended   |       | Year Ended   |  | Ended        |       | Year Ended
|               |  | December 31, |       | December 31, |  | December 31, |       | July 31,  
|               |  | 2001         |       | 2000         |  | 1999         |       | 1999      
|               |  |              |       |              |  |              |       |           
|HP Acthar® Gel |  | $            | 2,141 |              |  | $            |      |            |  | $ |    |  |  | $ |      | 
|Ethamolin®     |  |              | 1,695 |              |  |              | 618   |            |  |   | 319 |  |  |   | 1,522 | 
|GlofilTM-125   |  |              | 982   |              |  |              | 691   |            |  |   | 251 |  |  |   | 621   | 
|Inulin         |  |              | 317   |              |  |              | 207   |            |  |   | 19  |  |  |   | 208   | 
|NeofloTM       |  |              | 61    |              |  |              | 618   |            |  |   | 35  |  |  |   | 167   | 
|               |  |              |       |              |  |              |       |            |  |   |     |  |  |   |       | 
|               |  | $            | 5,196 |              |  | $            | 2,134 |            |  | $ | 624 |  |  | $ | 2,518 | 
|               |  |              |       |              |  |              |       |            |  |   |     |  |  |   |       | 



| |                                      
| | -------------------------------------
| | Recently Issued Accounting
	Standards

In June 1998, the Financial Accounting Standards
Board Issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133).
SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It
requires companies to recognize all derivatives as either assets
or liabilities on the balance sheet and measure those
instruments at fair value. The Companys adoption of
SFAS 133 as of January 1, 2001 did not have a material
impact on its financial statements.

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In July 2001, the FASB issued Statement
No. 141, Business Combinations (SFAS 141)
and Statement No. 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 141 establishes new
standards for accounting and reporting for business combinations
and will require that the purchase method of accounting be used
for all business combinations initiated after June 30,
200l. Use of the pooling-of-interests method will be prohibited.
SFAS 142 establishes new standards for goodwill, including
the elimination of goodwill amortization to be replaced with
methods of periodically evaluating goodwill for impairment. The
Company will adopt these statements during the first quarter of
fiscal 2002. The Company is currently evaluating the provisions
of SFAS 142 related to $479,000 of unamortized goodwill and
workforce at December 31, 2001.

In August 2001, the FASB issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS 144 supercedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of and the
accounting and reporting provisions of Accounting Principals
Board Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. SFAS 144 establishes a
single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired.
SFAS 144 retains the provisions of APB No. 30 for
presentation of discontinued operations in the income
statements, but broadens the presentation to include a component
of an entity. SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and the interim periods
within. The Company does not believe that the adoption of
SFAS 144 on January 1, 2002 will have a material
impact on the Companys financial position or results of
operations.



| |                  
| | -----------------
| | Reclassifications

Certain amounts in the prior years
financial statements have been reclassified to conform with the
current year presentation.

2.     Acquisition of
RiboGene, Inc.

On November 17, 1999 the Company completed
its merger with RiboGene. The Company issued
8,735,061 shares of its common stock and
2,155,715 shares of its preferred stock, valued at
$18.6 million and $5.1 million, respectively, for all
the outstanding common and preferred stock of RiboGene. In
addition, the Company assumed RiboGenes outstanding stock
options and warrants, valued at $5.3 million, and incurred
transaction and other costs of approximately $1.0 million.
The transaction was accounted for under the purchase method of
accounting. Accordingly, the results of operations of RiboGene
are included in the consolidated statement of operations from
the acquisition date.

The purchase price was allocated based upon the
estimated fair value of the assets acquired as follows (in
thousands):

|                                    |  |   |        | 
|----------------------------------- |  | - | ------ | 
|In process research and development |  | $ | 15,168 | 
|Net tangible assets acquired        |  |   | 12,742 | 
|Goodwill                            |  |   | 1,023  | 
|Developed technology                |  |   | 470    | 
|Assembled workforce                 |  |   | 616    | 
|                                    |  |   |        | 
|                                    |  | $ | 30,019 | 
|                                    |  |   |        | 

The Company calculated amounts allocated to
in-process research and development using established valuation
techniques in the pharmaceutical industry, and expensed such
amounts in the quarter the acquisition was consummated because
technological feasibility of the in-process technologies
acquired had not been

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

achieved and no alternative future uses had been
established. The Company computed its valuation of purchased
in-process research and development using a discounted cash flow
analysis on the anticipated income stream to be generated by the
purchased technologies. In process research and development
represents the estimated value of EmitasolTM which
was being tested in a Phase II clinical trial.

In addition to in-process research and
development, the excess purchase price over the estimated value
of the net tangible assets acquired was allocated to developed
technology, assembled work force and goodwill. The value
assigned to developed technology was based upon future
discounted cash flows related to the projected income streams
from sales of EmitasolTM in a particular country
where the drug has received regulatory approval. The value of
the assembled workforces was based upon the cost to replace
those work forces. Amounts allocated to goodwill and other
intangibles are amortized on a straight-line basis over a
three-year period.

The following summary unaudited proforma
information shows the proforma combined results of Questcor and
RiboGene for the five months ended December 31, 1999 and
for the year ended July 31, 1999, as if the RiboGene
acquisition had occurred on August 1, 1998 at the purchase
price established in December 1999. Accordingly, the results are
not necessarily indicative of those which would have occurred
had the acquisition actually been made on August 1, 1998 or
of future operations of the combined companies. The following
net loss and loss per share amounts have been adjusted to
exclude the write-off of acquired in process research and
development of $15.2 million and include the goodwill and
other intangible amortization of $293,000 for the five months
ended December 31, 1999 and $703,000 for the year ended
July 31, 1999.

|                                     |  |                                |         |            |  |   |         |  
|------------------------------------ |  | ------------------------------ | ------- | ---------- |  | - | ------- | -
|                                     |  | Five Months Ended              |         | Year Ended
|                                     |  | December 31,                   |         | July 31,  
|                                     |  | 1999                           |         | 1999      
|                                     |  |                                |         |           
|                                     |  |                               
|                                     |  | (In thousands except per share
|                                     |  | amounts)                      
|Net revenue                          |  | $                              | 1,698   |            |  | $ | 4,948   |  
|Net loss                             |  |                                | (12,746 | )          |  |   | (18,366 | )
|Basic and diluted net loss per share |  |                                | (0.52   | )          |  |   | (0.75   | )

As a result of the RiboGene acquisition, the
Company incurred restructuring costs of $1.5 million that
consisted primarily of employee severance costs, of which
$594,000 was accrued at December 31, 1999 and paid in the
first quarter of 2000. Employee severance costs relate to the
termination of approximately 20 former Cypros
Pharmaceuticals employees in the general and
administrative, research and development, clinical and
regulatory, and sales and marketing departments following the
merger with RiboGene.

During 2000, the Company issued 380,692 common
stock to certain former stockholders to replace their shares of
Questcor common stock which should have been issued in the
RiboGene acquisition but which apparently had been lost. The
Company decided to not establish a bond required by the transfer
agent to cancel the original shares.

3.     Development
and Collaboration Agreements

In January 1998, RiboGene entered into a
collaboration with Dainippon for two of its targets in the
antibacterial program. As part of the collaboration, Dainippon
agreed to provide research support payments over three years,
and fund additional research and development at Dainippon.
Following the merger with RiboGene, the Company recognized
approximately $240,000 of research revenue related to this
agreement. Collaborative research payments from Dainippon are
non-refundable. In January 2000, the Company modified its
existing agreement with Dainippon. In exchange for a
$2.0 million cash payment and potential future milestone
and royalty payments, the Company has granted an exclusive,
worldwide license to Dainippon to use the Companys ppGpp
Degradase and Peptide Deformylase technology for the research,
development and commercialization of pharmaceutical products.
The Company has retained the right to co-promote, in Europe

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and the U.S., certain products resulting from the
arrangement. The Company will be entitled to receive milestone
payments upon the achievement of clinical and regulatory
milestones in the amount of $5.0 million in Japan and
$5.0 million in one other major market. Additionally, the
Company will receive a royalty on net sales that will range from
5% to 10%, depending on sales volume and territory. Both
companies have agreed to terminate the antibacterial research
collaboration that was established in January 1998 between the
two companies. The original agreement anticipated a third year
of research collaboration between the two firms. Hence, all drug
discovery efforts at the Company have ceased and have been
transferred to Dainippon in Osaka, Japan.

On September 27, 2000 Questcor entered into
an agreement with Rigel Pharmaceuticals, Inc. to sell exclusive
rights to certain proprietary antiviral drug research
technology. In exchange for a cash payment of $750,000,
83,333 shares of Rigels preferred stock valued at
$500,000 (or $6 per share) and potential future milestone
and royalty payments, Questcor has assigned to Rigel certain
antiviral technology, including its Hepatitis C drug
discovery technology for the research, development and
commercialization of pharmaceutical products. As part of this
agreement the Company assigned to Rigel the exclusive worldwide
license to certain patent rights and technology relating to the
interaction of the hepatitis C virus NS5A protein and PKR
which the Company received from the University of Washington
pursuant to an agreement entered into with the University of
Washington in 1997. As a result, the Company has no further
interest in any patent or technology rights under any agreement
with the University of Washington.

As a result of the merger with RiboGene, the
Company assumed an option and license agreement entered into
with Roberts Pharmaceutical Corporation, a subsidiary of Shire
Pharmaceuticals Ltd, (Shire) in July 1998 for the
development of EmitasolTM, an intranasally
administered drug being developed for the treatment of diabetic
gastroparesis and for the prevention of delayed onset emesis.
Under the terms of the agreement, Shire had the option to
acquire exclusive North American rights to
EmitasolTM. This option expired in July 2001. Under
the collaboration agreement, the Company was obligated to fund
one-half of the clinical development expenses for
EmitasolTM up to an aggregate of $7.0 million.
Through December 31, 2001 the Company has made development
payments for EmitasolTM, under the terms of the
agreement with Shire, totaling $4.6 million, consisting of
$4.1 million paid to Shire and approximately $500,000 paid
to other parties for allowable expenses including patent and
trademark costs. Shire asserts that the Company owes $348,000 in
development expenses incurred by it under the collaboration
agreement prior to the expiration of the option, which the
Company has accrued for as of December 31, 2001. The
Company has requested that Shire return certain items to the
Company, including the transfer of the Investigational New Drug
applications (INDs) relating to
EmitasolTM and the assignment of the intellectual
property relating to EmitasolTM generated in the
course of the development program. Shire also holds all
2,155,715 outstanding shares of the Companys Series A
preferred stock which it originally acquired from RiboGene for a
payment of $10 million. The Company intends to seek a new
corporate partner to continue the development of
EmitasolTM in North America.

The Company had licenses to various patents for
Cordox. The license agreements require payments of cash,
warrants or the issuance of stock options to the licensors upon
accomplishment of various milestones and the payment of
royalties to the licensors upon the commercial sale of products
incorporating the licensed compound. In September 2001 the
Company completed its final review of a study conducted on
CordoxTM, and based on the results, decided to
discontinue all further work on CordoxTM. The Company
intends to, therefore, terminate all agreements related to
CordoxTM. The Company has also abandoned any patents
related to CordoxTM.

In February 2001, the Company announced that it
had exclusively licensed certain antifungal drug research
technology to Tularik, Inc. In exchange, the Company received a
$90,000 cash payment, $30,000 for the reimbursement of patent
expenses and is entitled to future potential milestone and
royalty payments. In

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

addition, the Company transferred to Tularik
certain biological and chemical reagents to be used in the
discovery and development of novel antifungal agents.

In June 2001, the Company signed a Letter of
Understanding with Fabre Kramer Pharmaceuticals, Inc
(Fabre Kramer) of Houston, TX, to jointly
pursue the worldwide development and commercialization of
HypnostatTM (intranasal traizolam) for insomnia and
PanistatTM (intranasal alprazolam) for panic
disorders, two of its product candidates. In January 2002 the
Company modified the original Letter of Understanding and signed
a new Letter of Understanding with Fabre Kramer whereby the
firms anticipate to license these products to Fabre Kramer in
exchange for milestone and revenue share payments.

In December 2001, the Company entered into a
promotion agreement with VSL Pharmaceuticals, Inc., a
private company owned in part by the major shareholders of
Sigma-Tau to promote, sell and distribute VSL#3TM in
the U.S. VSL#3TM is a patented probiotic dietary
supplement used to promote normal gastrointestinal
(GI) function. The promotion agreement requires the Company
to remit quarterly payments, based on a percentage of net sales
of VSL#3TM, to VSL Pharmaceuticals. The Company will
also receive from VSL Pharmaceuticals a percentage of net sales
for incremental expenses related to certain warehousing and
customer support services.

4.     Product
Acquisition

In July 2001, the Company had entered into an
Asset Purchase agreement with Aventis Pharmaceuticals Inc.
(Aventis) to acquire the worldwide rights to
Acthar® as well as inventory and certain assets used to
manufacture Acthar®. Acthar® is a corticotropin
product that has been used, as part of a special program
administered by the National Organization for Rare Disorders
(NORD), to treat seriously ill children with a
seizure complex, referred to as infantile spasm or West
Syndrome, a potentially fatal disorder, and patients with
multiple sclerosis who experience severe and painful episodes of
flare. The Company paid an upfront fee, has agreed
to pay an annual royalty on net sales above a predetermined
amount and has agreed to acquire certain remaining inventory at
a predetermined price. Aventis has also agreed to supply
Acthar® at the predetermined price until the earlier of the
transfer of the manufacturing process to another vendor of
July 27, 2002. The Company expects to have adequate supply
of Acthar® to support forecasted demand through December
2002. The Company began shipping Acthar® in the third
quarter of 2001.

5.     Investments

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

|                                                            |  |              |        |              |  |   |        |  
|----------------------------------------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | -
|                                                            |  | December 31, |        | December 31,
|                                                            |  | 2001         |        | 2000        
|                                                            |  |              |        |             
|Money market funds                                          |  | $            | 4,943  |              |  | $ | 1,275  |  
|Certificates of deposit (compensating balance,
	see Note 9) |  |              | 5,000  |              |  |   | 5,000  |  
|Corporate debt securities                                   |  |              |       |              |  |   | 499    |  
|Corporate equity investments                                |  |              | 388    |              |  |   | 834    |  
|                                                            |  |              |        |              |  |   |        |  
|                                                            |  |              | 10,331 |              |  |   | 7,608  |  
|Less amounts classified as cash equivalents                 |  |              | (9,943 | )            |  |   | (6,275 | )
|                                                            |  |              |        |              |  |   |        |  
|Short-term investments                                      |  | $            | 388    |              |  | $ | 1,333  |  
|                                                            |  |              |        |              |  |   |        |  

At December 31, 2001, the equity investment
had a cost of $500,000 and an unrealized loss of $112,000. At
December 31, 2000, the equity investment had a cost of
$500,000 and an unrealized gain of $334,000. At
December 31, 2001, and 2000, the differences between the
fair value and amortized cost of all other

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

investments were insignificant. The Company has
not experienced any significant realized gains or losses on its
investments.

6.     Inventories

Inventories consist of the following (in
thousands):

|                                        |  |              |     |              |  |   |     |  
|--------------------------------------- |  | ------------ | --- | ------------ |  | - | --- | -
|                                        |  | December 31, |     | December 31,
|                                        |  | 2001         |     | 2000        
|                                        |  |              |     |             
|Raw materials                           |  | $            |    |              |  | $ | 41  |  
|Finished goods                          |  |              | 152 |              |  |   | 43  |  
|Less allowance for obsolete inventories |  |              | (56 | )            |  |   | (28 | )
|                                        |  |              |     |              |  |   |     |  
|                                        |  | $            | 96  |              |  | $ | 56  |  
|                                        |  |              |     |              |  |   |     |  

7.     Property and
Equipment

Property and equipment consist of the following
(in thousands):

|                                               |  |              |       |              |  |   |        |  
|---------------------------------------------- |  | ------------ | ----- | ------------ |  | - | ------ | -
|                                               |  | December 31, |       | December 31,
|                                               |  | 2001         |       | 2000        
|                                               |  |              |       |             
|Laboratory equipment                           |  | $            | 477   |              |  | $ | 1,014  |  
|Office equipment, furniture and fixtures       |  |              | 895   |              |  |   | 887    |  
|Leasehold improvements                         |  |              | 206   |              |  |   | 806    |  
|                                               |  |              |       |              |  |   |        |  
|                                               |  |              | 1,578 |              |  |   | 2,707  |  
|Less accumulated depreciation and amortization |  |              | (976  | )            |  |   | (1,280 | )
|                                               |  |              |       |              |  |   |        |  
|                                               |  | $            | 602   |              |  | $ | 1,427  |  
|                                               |  |              |       |              |  |   |        |  

Depreciation and amortization expense totaled
$580,000 for the year ended December 31, 2001 and $886,000
for the year ended December 31, 2000, respectively.

8.     Goodwill and
Other Intangibles

Goodwill and other intangibles consist of the
following (in thousands):

|                              |  |              |        |              |  |   |        |  
|----------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | -
|                              |  | December 31, |        | December 31,
|                              |  | 2001         |        | 2000        
|                              |  |              |        |             
|Goodwill                      |  | $            | 1,023  |              |  | $ | 1,023  |  
|Purchased technology          |  |              | 6,752  |              |  |   | 6,752  |  
|Assembled workforce           |  |              | 616    |              |  |   | 616    |  
|Licenses and patents          |  |              |       |              |  |   | 351    |  
|                              |  |              |        |              |  |   |        |  
|                              |  |              | 8,391  |              |  |   | 8,742  |  
|Less accumulated amortization |  |              | (6,753 | )            |  |   | (5,385 | )
|                              |  |              |        |              |  |   |        |  
|                              |  | $            | 1,638  |              |  | $ | 3,357  |  
|                              |  |              |        |              |  |   |        |  

The Company wrote off the remaining unamortized
balance associated with licenses and patents of $81,000 as these
were related to drugs that are no longer in development.

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     Long-Term
Debt

Long-term debt consists of the following (in
thousands):

|                                                                                                                                                                              |       |              |        |              |  |   |        |     | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | ------------ | ------ | ------------ |  | - | ------ | --- | 
|                                                                                                                                                                              |       | December 31, |        | December 31,
|                                                                                                                                                                              |       | 2001         |        | 2000        
|                                                                                                                                                                              |       |              |        |             
|Note payable to a bank due March 2002 (with
	exercise of 90 day extension), collateralized by a cash
	secured facility, bearing interest at CD Rate plus 2%                   |       | $            | 5,000  |              |  | $ | 5,000  |    
|Notes payable for equipment financing due August
	2002, November 2002, February 2003, and April 2003
	collateralized by the underlying equipment, bearing interest at
	12.72% |       |              | 489    |              |  |   | 871    |    
|                                                                                                                                                                              |       |              |        |              |  |   |        |    
|                                                                                                                                                                              |       |              | 5,489  |              |  |   | 5,871  |    
|Less current portion                                                                                                                                                          |       |              | (5,368 | )            |  |   | (5,382 | )  
|                                                                                                                                                                              |       |              |        |              |  |   |        |    
|                                                                                                                                                                              | Total |              | $      | 121          |  |   | $      | 489 | 
|                                                                                                                                                                              |       |              |        |              |  |   |        |    

The cost of equipment specifically pledged under
these agreements totals $1.5 million and $1.7 million
at December 31, 2001 and 2000, respectively.

In December 1998, RiboGene borrowed
$5.0 million pursuant to a long-term note payable to a
bank. The note required monthly interest only payments at prime
plus 1.0%. The rate at December 31, 2001 was 5.75%. In
November 2000, the $5.0 million long-term note payable was
converted into $5.0 million cash secured facility. The
minimum $5.0 million compensatory balance, which was
invested in certificates of deposit, is included in cash and
cash equivalents. The note was paid in full on January 18,
2002.

The amounts due for notes payable for equipment
financing in 2002 and 2003, are $368,000 and $121,000,
respectively.

The fair value of notes payable is estimated
based on current interest rates available to the Company for
debt instruments of similar terms, degrees of risk and remaining
maturities. The carrying value of these obligations approximate
their respective fair values as of December 31, 2001 and
2000. Interest expense was $465,000, $729,000 and $10,000 for
the years ended December 31, 2001 and 2000 and the five
months ended December 31, 1999, respectively.

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10.     Commitments



| |       
| | ------
| | Leases

The Company leases its office and distribution
facilities under operating lease agreements and certain
equipment under capital lease agreements, the terms of which
range from 5 years to 15 years. Minimum future
obligations under both operating and capital leases as of
December 31, 2001 are as follows (in thousands):

|                                             |  |           |        |         |  |   |     |  
|-------------------------------------------- |  | --------- | ------ | ------- |  | - | --- | -
|                                             |  | Operating |        | Capital
|                                             |  | Leases    |        | Leases 
|                                             |  |           |        |        
|2002                                         |  | $         | 1,449  |         |  | $ | 60  |  
|2003                                         |  |           | 1,497  |         |  |   | 1   |  
|2004                                         |  |           | 1,549  |         |  |   |    |  
|2005                                         |  |           | 1,466  |         |  |   |    |  
|2006                                         |  |           | 1,294  |         |  |   |    |  
|Thereafter                                   |  |           | 7,564  |         |  |   |    |  
|                                             |  |           |        |         |  |   |     |  
|                                             |  |           | 14,819 |         |  |   | 61  |  
|                                             |  |           |        |         |  |   |     |  
|Less amounts representing interest           |  |           |        |         |  |   | (3  | )
|Present value of minimum lease payments      |  |           |        |         |  |   | 58  |  
|Current portion of capital lease obligations |  |           |        |         |  |   | (57 | )
|                                             |  |           |        |         |  |   |     |  
|Long-term capital lease obligations          |  |           |        |         |  | $ | 1   |  
|                                             |  |           |        |         |  |   |     |  

The net book value of the equipment acquired
under capital leases totaled $153,000 (net of accumulated
amortization of $370,000) at December 31, 2001, and
$319,000 (net of accumulated amortization of $191,000) at
December 31, 2000. Amortization of equipment under capital
leases is included within depreciation expense.

In July 2000, the Company entered into an
agreement to sublease 15,000 square feet of laboratory and
office space including sub-leasing its laboratory equipment for
its Hayward, California facility. Due to the termination of the
Companys drug discovery programs, the space and equipment
were no longer needed. Thus, the Company subleased this space.
The current sublessee of the Hayward facility subleased and
fully occupied the 30,000 square feet facility after the
Companys relocation occurred in May 2001.

On October 26, 2000, the Company entered
into an agreement to lease a new facility in Union City,
California. The initial lease term is for 120 months, with
an option for an additional five years. As a condition of this
agreement, the Company provided an irrevocable Letter of Credit
in the amount of $659,000 for a period of 24 months, with
the face value of the Letter of Credit, subject to certain
conditions, declining thereafter. The Company entered into this
new lease agreement in order to take advantage of lower rent
costs as laboratory space is no longer necessary. This letter of
credit is included in Deposits and other assets on
the balance sheet.

Rent expense totaled $1,556,000 for the year
ended December 31, 2001, $1,037,000 for the year ended
December 31, 2000, $313,000 for the five months ended
December 31, 1999 and $509,000 for the year ended
July 31, 1999. Rent expense comprises the cost associated
with four buildings leased by the Company including its current
headquarters located in Union City, California, its former
headquarters in Hayward, California, Carlsbad, California, and a
production facility in Lees Summit, Missouri. Net rental
income totaled $612,000 for the year ended December 31,
2001, $261,000 for the year ended December 31, 2000, $5,000
for the five months ended December 31, 1999 and $83,000 for
the year ended July 31, 1999. In the above table, minimum
lease payments have not been reduced by minimum sublease income
of approximately

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$949,000, $997,000, $1,048,000, $1,100,000 and
$563,000 in the years ended December 31, 2002, 2003, 2004,
2005 and 2006, respectively.

11.     Preferred
Stock and Stockholders Equity



| |                
| | ---------------
| | Preferred Stock

Pursuant to its Articles of Incorporation, the
Company is authorized to issue up to 7,500,000 shares of
Preferred Stock in one or more series and has issued 2,155,715
shares of its Series A Preferred Stock, as of
December 31, 2001. The holders of outstanding shares of
Series A Preferred Stock are entitled to receive dividends
concurrently with the Common Stock, if any, as may be declared
from time to time by the Board of Directors out of assets
legally available therefrom. The holders of Series A
Preferred Stock are entitled to the number of votes equal to the
number of shares of Common Stock into which each share of
Series A Preferred Stock could be converted on the record
date. Each share of Series A Preferred Stock is
convertible, at the option of the holder of such share, into one
share of Common Stock, subject to adjustments for stock splits,
stock dividends or combinations of outstanding shares of Common
Stock. The Articles of Incorporation authorizes the issuance of
Preferred Stock in classes, and the Board of Directors may
designate and determine the voting rights, redemption rights,
conversion rights and other rights relating to such class of
Preferred Stock, and to issue such stock in either public or
private transactions.

The Series A Preferred Stock has a
liquidation preference equal to $4.64 per share plus all
declared and unpaid dividends which is payable upon the
occurrence of a liquidation, consolidation, merger or the sale
of substantially all of the Companys stock or assets. The
Company excluded the Series A Preferred Stock from total
stockholders equity due to the nature of the liquidation
preference of the preferred stock.



| |             
| | ------------
| | Common Stock

The holders of outstanding shares of Common Stock
are entitled to receive ratably such dividends, if any, as may
be declared from time to time by the Board of Directors out of
assets legally available therefore, subject to the payment of
preferential dividends with respect to any Preferred Stock that
may be outstanding. In the event of a liquidation, dissolution
and winding-up of the Company, the holders of outstanding Common
Stock are entitled to share ratably in all assets available for
distribution to the Common Stock shareholders after payment of
all liabilities of the Company, subject to rights of the
Preferred Stock. The holders of the Common Stock are entitled to
one vote per share.

In April 2001, the Company entered into a Stock
and Warrant Purchase Agreement with Sigma-Tau pursuant to which
Sigma-Tau purchased (i) an aggregate of 2,873,563 shares of
common stock at a purchase price of $0.52 per share, for an
aggregate purchase price of $1,500,000, and (ii) a warrant
to purchase an additional 2,873,563 shares of common stock at a
purchase price of $0.52 per share. In May 2001, as required
under the rules of AMEX, the Company sought and received
shareholder approval to allow for full exercise of the warrant.
In July 2001, Sigma-Tau assigned the warrant to Paolo Cavazza
and Claudio Cavazza, the principal shareholders of Sigma-Tau,
who exercised the warrant in full, purchasing 2,873,563 shares
of common stock at a purchase price of $0.52 per share,
resulting in aggregate proceeds to the Company of $1,500,000
(including the $100,000 originally paid by Sigma-Tau to acquire
the warrant).

In July 2001, the Company entered into a Stock
Purchase Agreement with Sigma-Tau pursuant to which Sigma-Tau
purchased 5,279,034 shares of common stock at a purchase price
of $0.66 per share, for an aggregate purchase price of
$3,500,000.

In December 2001, the Company entered into a
Promotion Agreement with VSL Pharmaceuticals, Inc., a
private company owned in part by the principal shareholders of
Sigma-Tau, to promote, sell and distribute the product VSL#3 in
the U.S. In connection with this Promotion Agreement, the
Company entered into two Stock and Warrant Purchase Agreements,
one with Paolo Cavazza and one with Claudio Cavazza, to

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purchase (i) an aggregate of 640,000 shares
of common stock for a purchase price of $1.50 per share
(representing a twenty percent premium to its market price for
the five days prior to execution of the Purchase Agreements),
for an aggregate purchase price of $960,000, and
(ii) warrants, at an aggregate purchase price of $300,000,
to purchase an additional 1,800,000 shares of common stock at a
purchase price of $1.75 per share before December 1, 2003.
The Company issued the common stock related to this transaction
in February 2002, and as such, it is reflected as Unissued
common stock on the Companys balance sheet.
Additionally, in connection with this transaction, the Company
entered into a standstill agreement with Sigma-Tau whereby
Sigma-Tau and its affiliates agreed to limit purchases of common
stock on the open market to no more that 2,000,000 shares
through July 2003. Assuming Sigma-Tau exercises its warrants in
full, they would own approximately 34% (including the 640,000
shares of common stock issued in February 2002) of the
Companys outstanding common stock as of December 31,
2001.

On April 30, 2001, the Company closed a
financing which totaled $442,000. This investment came from a
group of individual investors. The Company issued an aggregate
of 816,800 shares of common stock and sold warrants to purchase
an additional 408,400 shares of common stock with an exercise
price of these warrants of $0.64 per share. The warrants are
exercisable from the date of issuance until the close of
business on April 30, 2006.



| |                             
| | ----------------------------
| | Placement Agent Unit Options

As part of the acquisition of RiboGene, the
Company assumed placement agent options from a 1997 offering of
preferred stock by RiboGene. At December 31, 2001, options
to purchase 986,898 shares of common stock and 61,475
Class A warrants were outstanding at an aggregate exercise
price of approximately $1,096,000. The Class A warrants
have an exercise price of $4.64 per share.



| |         
| | --------
| | Warrants

The Company has 3,123,710 warrants outstanding at
December 31, 2001 (excluding 61,475 Class A warrants
underlying Placement Agent Unit Options), entitling the holders
thereof to purchase a total of 4,172,083 shares of Common Stock.

|                            |       |        |           |                  |  |                  |      |      |  |  |     |     | 
|--------------------------- | ----- | ------ | --------- | ---------------- |  | ---------------- | ---- | ---- |  |  | --- | --- | 
|                            |       |        |           | Weighted Average |  | Weighted Average
|                            |       |        |           | Exercise Price   |  | Remaining       
|                            |       |        |           | per Share of     |  | Contractual Life
|                            |       | Shares |           | Common Stock     |  | (In Years)      
|                            |       |        |           |                  |  |                 
|Class A common stock        |       |        | 245,917   |                  |  | $                | 4.64 |      |  |  | 2.5 |    
|Other common stock warrants |       |        | 2,877,793 |                  |  | $                | 1.86 |      |  |  | 2.2 |    
|                            |       |        |           |                  |  |                  |      |      |  |  |     |    
|                            | Total |        |           | 3,123,710        |  |                  | $    | 2.08 |  |  |     | 2.2 | 
|                            |       |        |           |                  |  |                  |      |      |  |  |     |    



| |                   
| | ------------------
| | Stock Option Plans

For the years ended December 31, 2001 and
2000, the five months ended December 31, 1999 and the year
ended July 31, 1999, the Company recorded amortization of
deferred stock compensation of $25,000, $28,000, $16,000 and
$187,000, respectively. As of December 31, 2001 the Company
had $20,000 of remaining unamortized deferred compensation. This
amount is included as a deduction of stockholders equity
and is being amortized over the vesting period of the underlying
options.

Pro forma information regarding net loss and loss
per share is required by SFAS 123, and has been determined
as if the Company has accounted for its employee stock options
under the fair value method set forth in SFAS 123. The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

volatility. Because the Companys employee
stock options have characteristics significantly different from
those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not
necessarily provide a single reliable measure of the fair value
of its employee stock options. For purposes of pro forma
disclosures, the estimated fair value of the options is
amortized to expense over the options vesting period.

The weighted-average fair value of granted
options was $1.65, $2.19, $2.70 and $2.14 for the years ended
December 31, 2001 and 2000, the five months ended
December 31, 1999 and the year ended July 31, 1999,
respectively. The fair value of these options was estimated at
the date of grant using the Black-Scholes option pricing model
and a graded-vesting approach using the following
weighted-average assumptions for years ended December 31,
2001 and 2000, the five months ended December 31, 1999, and
the year ended July 31, 1999, respectively: risk-free
interest rate of 5%, 5%, 6% and 6%, respectively;
weighted-average expected option life of 7.6 years;
volatility of 86%, 72%, 85% and 85%, respectively, and no
dividends.

The Companys pro forma net loss was
$9.9 million, $15.3 million, $22.9 million and
$10.5 million for the years ended December 31, 2001
and 2000 the five months ended December 31, 1999 and the
year ended July 31, 1999, respectively. The Companys
pro forma net loss per share was $0.31, $0.62, $1.26 and $0.67
for the years ended December 31, 2001 and 2000, for the
five months ended December 31, 1999 and the year ended
July 31, 1999, respectively.

On September 28, 2000, the Company adopted
the Employee Stock Purchase Plan (ESPP). As of
December 31, 2001, 600,000 shares of common stock were
reserved for issuance under the ESPP. The ESPP provides for
payroll deductions for eligible employees to purchase common
stock at the lesser of (i) 85% of the fair market value of
the common stock on the offering date and (ii) 85% of the
fair market value of the common stock on the purchase date. The
first purchase date was December 31, 2000. On this date
93,666 shares were purchased at $0.53 per share. For the year
ended December 31, 2001, 193,214 shares have been purchased
under this plan at an average purchase price of $0.58 per share.

As of December 31, 2001, 12,500,000 shares
of common stock were reserved for issuance under the 1992 Stock
Option Plan (the 1992 Plan). The 1992 Plan provides
for the grant of incentive and nonstatutory stock options with
various vesting periods, generally four years, to employees,
directors and consultants. The exercise price of incentive stock
options must equal at least the fair market value on the date of
grant, and the exercise price of nonstatutory stock options may
be no less than 85% of the fair market value on the date of
grant. The maximum term of options granted under the 1992 Plan
is ten years.

As of December 31, 2001, 1,250,000 shares of
common stock were reserved for issuance under the 1993 Non
Employee Directors Stock Option Plan (the Directors
Plan). The Directors Plan provides for the granting
of 25,000 options to purchase common stock upon appointment as a
non-employee director and an additional 10,000 options each
January thereafter upon reappointment. Additionally, each
director received payment of $2,000 for each board meeting
attended. The options vest over four years and the exercise
price of the options is 85% of the fair market value on the date
of grant. The maximum term of options granted under the 1993
Directors Plan is ten years.

For the calendar year 2001, the Company
compensated members of the Board of Directors for attending the
Board of Directors meetings, by granting them 30,000 options
each to purchase common stock in lieu of the $2,000 payment per
meeting. The options were issued under the 1992 Plan and vest
over twelve months. For the calendar year 2000, the Company paid
members of the Board of Directors in cash ($2,000) for attending
the Board of Directors meetings, and terminated the stock bonus
program, which was in effect for the five month period ended
December 31, 1999, during which the Company paid directors
in shares of common stock (stock bonus). The number
of shares of common stock issued with each stock bonus was equal
to $2,000 divided by the ten-day average of the closing sales
price for the common stock as quoted on the American Stock
Exchange for the ten trading days immediately preceding the date
of the board meeting

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

at which the Stock Bonus is earned. Stock bonuses
were 100% vested on the date of the grant. The Company
recognized $16,000 of expense related to stock bonuses for the
year ended December 31, 2000 and $54,000 for the five
months ended December 31, 1999.

The following table summarizes stock option
activity under the 1992 and 1993 Plans:

|                             |           |             |           |                  |   |   |      |      | 
|---------------------------- | --------- | ----------- | --------- | ---------------- | - | - | ---- | ---- | 
|                             |           | Options     |           | Weighted Average
|                             |           | Outstanding |           | Exercise Price  
|                             |           |             |           |                 
|Balance at July 31, 1998.    |           |             | 1,892,489 |                  |   | $ | 4.36 |     
|                             | Granted   |             |           | 570,550          |   |   | $    | 2.78 | 
|                             | Canceled  |             |           | (194,353         | ) |   | $    | 3.44 | 
|                             |           |             |           |                  |   |   |      |     
|Balance at July 31, 1999.    |           |             | 2,268,686 |                  |   | $ | 3.94 |     
|                             | Granted   |             |           | 3,003,791        |   |   | $    | 1.27 | 
|                             | Canceled  |             |           | (83,563          | ) |   | $    | 2.48 | 
|                             |           |             |           |                  |   |   |      |     
|Balance at December 31, 1999 |           |             | 5,188,914 |                  |   | $ | 2.70 |     
|                             |           |             |           |                  |   |   |      |     
|                             | Granted   |             |           | 1,732,015        |   |   | $    | 1.34 | 
|                             | Exercised |             |           | (298,665         | ) |   | $    | 2.14 | 
|                             | Canceled  |             |           | (1,042,196       | ) |   | $    | 3.44 | 
|                             |           |             |           |                  |   |   |      |     
|Balance at December 31, 2000 |           |             | 5,580,068 |                  |   | $ | 2.19 |     
|                             |           |             |           |                  |   |   |      |     
|                             | Granted   |             |           | 3,284,900        |   |   | $    | 1.00 | 
|                             | Exercised |             |           | (50,338          | ) |   | $    | 1.15 | 
|                             | Canceled  |             |           | (1,936,164       | ) |   | $    | 2.11 | 
|                             |           |             |           |                  |   |   |      |     
|Balance at December 31, 2001 |           |             | 6,878,466 |                  |   | $ | 1.65 |     
|                             |           |             |           |                  |   |   |      |     

Options granted in 1999 include options granted
at the close of the merger to former employees of RiboGene in
exchange for their RiboGene options.

At December 31, 2001, options to purchase
3,346,440 shares of common stock were exercisable and there were
6,471,402 shares available for future grant under both plans.

At December 31, 2001 and 2000, there were
743,633 and 173,633 options outstanding that were granted to
consultants. These options are re-measured as they vest, using
the Black-Scholes pricing model, and the resulting value is
recognized as expense over the period of services received. For
the years ended December 31, 2001 and 2000 the Company
recorded $601,000 and $15,000, respectively, as compensation
expense.

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Exercise prices and weighted average remaining
contractual life for the options outstanding as of
December 31, 2001 are as follows:

|                |  |                     |           |                     |  |                  |      |             |  |                  |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | ----------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                     |  |                 
|                |  | Options Outstanding |           |                    
|                |  |                     |           | Options Exercisable
|                |  |                     |           | Weighted Average    |  |                  |      |            
|Range of        |  | Number              |           | Remaining           |  | Weighted Average |      | Number      |  | Weighted Average
|Exercise Price  |  | Outstanding         |           | Contractual Life    |  | Exercise Price   |      | Exercisable |  | Exercise Price  
|                |  |                     |           |                     |  |                  |      |             |  |                 
|$ 0.47 - $ 0.67 |  |                     | 549,550   |                     |  |                  | 9.03 |             |  | $                | 0.60  |  |  |  | 116,484   |  |  | $ | 0.59  | 
|$ 0.75 - $ 0.75 |  |                     | 760,000   |                     |  |                  | 8.92 |             |  | $                | 0.75  |  |  |  | 232,291   |  |  | $ | 0.75  | 
|$ 0.81 - $ 1.10 |  |                     | 820,270   |                     |  |                  | 7.47 |             |  | $                | 0.95  |  |  |  | 357,451   |  |  | $ | 0.86  | 
|$ 1.13 - $ 1.21 |  |                     | 523,000   |                     |  |                  | 9.53 |             |  | $                | 1.20  |  |  |  | 25,769    |  |  | $ | 1.15  | 
|$ 1.24 - $ 1.25 |  |                     | 1,417,115 |                     |  |                  | 7.90 |             |  | $                | 1.25  |  |  |  | 781,565   |  |  | $ | 1.25  | 
|$ 1.30 - $ 1.53 |  |                     | 725,755   |                     |  |                  | 8.17 |             |  | $                | 1.45  |  |  |  | 205,648   |  |  | $ | 1.38  | 
|$ 1.56 - $ 1.69 |  |                     | 721,376   |                     |  |                  | 7.24 |             |  | $                | 1.65  |  |  |  | 464,232   |  |  | $ | 1.65  | 
|$ 1.69 - $ 3.73 |  |                     | 920,967   |                     |  |                  | 5.76 |             |  | $                | 3.06  |  |  |  | 722,567   |  |  | $ | 3.17  | 
|$ 3.83 - $ 5.50 |  |                     | 437,200   |                     |  |                  | 4.40 |             |  | $                | 4.87  |  |  |  | 437,200   |  |  | $ | 4.87  | 
|$20.88 - $20.88 |  |                     | 3,233     |                     |  |                  | 4.72 |             |  | $                | 20.88 |  |  |  | 3,233     |  |  | $ | 20.88 | 
|                |  |                     |           |                     |  |                  |      |             |  |                  |       |  |  |  |           |  |  |   |       | 
|                |  |                     | 6,878,466 |                     |  |                  | 7.62 |             |  | $                | 1.65  |  |  |  | 3,346,440 |  |  | $ | 2.12  | 
|                |  |                     |           |                     |  |                  |      |             |  |                  |       |  |  |  |           |  |  |   |       | 



| |                
| | ---------------
| | Reserved Shares

The Company has reserved shares of common stock
for future issuance as follows:

|                                                                                       |  |              |            | 
|-------------------------------------------------------------------------------------- |  | ------------ | ---------- | 
|                                                                                       |  | December 31,
|                                                                                       |  | 2001        
|                                                                                       |  |             
|Outstanding options                                                                    |  |              | 6,878,466  | 
|Convertible preferred stock issued and outstanding                                     |  |              | 2,155,715  | 
|Placement agent unit options                                                           |  |              | 986,898    | 
|Class A warrants (including Class A
	warrants underlying Placement Agent Unit Options) |  |              | 307,392    | 
|Common stock warrants                                                                  |  |              | 2,877,793  | 
|Reserved for future grant or sale under option
	plans                                  |  |              | 6,471,402  | 
|                                                                                       |  |              |            | 
|                                                                                       |  |              | 19,677,666 | 
|                                                                                       |  |              |            | 

12.     Discontinued
Product Line

As a result of the Companys sole customer
for its NeofloTM product, NutraMax Products, Inc.,
filing a voluntary petition under Chapter 11 of the
U.S. Bankruptcy Code and the Companys inability to
produce NeofloTM profitably, the Company has
discontinued its NeofloTM product line. In May 2001,
the Company closed its Lees Summit manufacturing facility
where the NeofloTM product was produced. As of
December 31, 2001, the Company was unable to find a
purchaser for the NeofloTM product and associated
assets. As such, the Company has determined that it is
appropriate to record a loss related to the discontinuance of
the NeofloTM product line. The loss of $677,000
represents a writedown of the assets of approximately $262,000
consisting mainly of manufacturing equipment directly related to
the NeofloTM product line and estimated remaining
lease payments of $415,000 for the Lees Summit facility.

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Income
Taxes

As of December 31, 2001, the Company had
federal and state net operating loss carryforwards of
approximately $92.1 million and $16.5 million,
respectively. The Company also had federal and California
research and development tax credits of approximately
$1.8 million and $1.1 million. The federal and state
net operating loss and credit carryforwards expire at various
dates beginning in the years 2006 through 2021, if not utilized.

Utilization of the Companys net operating
loss and credit carryforwards may be subject to substantial
annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state
provisions. Such an annual limitation could result in the
expiration of the net operating loss and credit carryforwards
before utilization.

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
for financial reporting and the amount used for income tax
purposes. Significant components of the Companys deferred
tax assets for federal and state income taxes are as follows (in
thousands):

|                          |                                               |              |         |              |  |   |         |        | 
|------------------------- | --------------------------------------------- | ------------ | ------- | ------------ |  | - | ------- | ------ | 
|                          |                                               | December 31, |         | December 31,
|                          |                                               | 2001         |         | 2000        
|                          |                                               |              |         |             
|Deferred tax liabilities: |                                               |              |         |              |  |   |         |       
|                          | Goodwill and purchased intangibles            |              | $       | 500          |  |   | $       | 600    | 
|                          |                                               |              |         |              |  |   |         |       
|Deferred tax assets:      |                                               |              |         |              |  |   |         |       
|                          | Net operating loss carryforwards              |              | $       | 32,300       |  |   | $       | 30,700 | 
|                          | Research and development credits              |              |         | 2,500        |  |   |         | 2,400  | 
|                          | Capitalized research and development expenses |              |         | 1,200        |  |   |         | 3,200  | 
|                          | Acquired research and development             |              |         | 1,100        |  |   |         | 1,100  | 
|                          | Other, net                                    |              |         | 900          |  |   |         | 500    | 
|                          |                                               |              |         |              |  |   |         |       
|Total deferred tax assets |                                               |              | 38,000  |              |  |   | 37,900  |       
|Valuation allowance       |                                               |              | (37,500 | )            |  |   | (37,300 | )     
|                          |                                               |              |         |              |  |   |         |       
|Net deferred taxes        |                                               | $            |        |              |  | $ |        |       
|                          |                                               |              |         |              |  |   |         |       

Due to the Companys lack of earnings
history, the net deferred tax assets have been fully offset by a
valuation allowance. The valuation allowance increased by
$200,000, 22.3 million and $2.6 million during the
periods ended December 31, 2001, 2000, and 1999,
respectively.

14.     Legal
Proceedings

In July 1998, the Company was served with a
complaint in the U.S. Bankruptcy Court for the southern
District of New York by the Trustee for the liquidation of the
business of A.R. Baron & Co., Inc.
(A.R. Baron) and the Trustee of The Baron
Group, Inc. (the Baron Group), the parent of
A.R. Baron. The complaint alleged that A.R. Baron and the
Baron Group made certain preferential or fraudulent transfers of
funds to the Company prior to the commencement of bankruptcy
proceedings involving A.R. Baron and the Baron Group. The
Trustee sought return of the funds totaling $3.2 million.

During the quarter ended June 30, 2000, the
Company reached an agreement to settle the Baron litigation and
pay a total amount of $525,000 to the bankruptcy estates of the
Baron entities. Additionally, the Company also reached a
settlement agreement with a former insurer in connection with
the Baron litigation in which the insurer would pay the company
$150,000 in exchange for policy releases. The Company believes
that settling this claim for a new payment of $375,000 which was
charged to operations in 2000, was an

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QUESTCOR PHARMACEUTICALS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

acceptable outcome to avoid incurring further
legal fees and management diversion. On September 26, 2000,
the courts formally approved the settlement and the case is now
closed.

15.     Related Party
Transactions

Sigma Tau owns approximately 30% of the
Companys outstanding common stock as of December 31,
2001. In December 2001, the Company entered into a promotion
agreement with VSL Pharmaceuticals Inc., a private company owned
in part by the major shareholders of Sigma Tau, to promote, sell
and distribute VSL#3TM in the U.S.

In January 2002, the Company entered into a
royalty agreement with Glenridge Pharmaceuticals LLC,
(Glenridge). Kenneth R. Greathouse, the
Companys 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 $104,000 in February 2002 related to
2001 royalties on Acthar® sales.

16.     Defined
Contribution Plan

The Company sponsors a defined-contribution
savings plan under Section 401(k) of the Internal Revenue
Code covering substantially all full-time U.S. employees.
Participating employees may contribute up to 15% of their
eligible compensation up to the annual Internal Revenue Service
contribution limit and the Plan was adopted in 2000. The Company
matched employee contributions according to specified formulas
and contributed $48,000 and $64,000 for the years ended
December 31, 2001 and 2000, respectively.

17.     Subsequent
Events

On January 2, 2002, the Company entered into
a revolving accounts receivable line of credit with Pacific
Business Funding, a division of Greater Bay Bancorp, the parent
company of Cupertino National Bank. Under the Agreement, the
Company can borrow up to the lesser of 80% of the 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 note is one year and
the note automatically renews annually, unless the Company
terminates the agreement.

On March 15, 2002, in two separate
transactions, the Company issued $4.0 million of 8%
convertible debentures to an institutional investor and
Sigma-Tau. The Company will pay interest on the debentures at a
rate of 8% per annum on a quarterly basis. The debentures are
convertible into shares of the Companys common stock at a
fixed conversion price of $1.58 per share (subject to
adjustment for stock splits and reclassifications). At the end
of the term of the debenture, under certain circumstances, the
Company has the option to repay the principal in stock and,
under certain circumstances, the Company can also redeem the
debenture for cash prior to maturity. The debentures mature on
March 15, 2005. In conjunction with this transaction, the
Company issued warrants to both the institutional investor and
Sigma-Tau to acquire an aggregate of 1,518,988 shares of
common stock at an exercise price of $1.70 per share. Both
warrants expire on March 15, 2006. In connection with the
issuance of the debentures and warrants, the Company expects to
record a deferred expense related to a beneficial conversion
feature. This amount will be amortized to interest expense over
the term of the debentures. Assuming the conversion and exercise
of the above-mentioned debenture and warrant by Sigma-Tau and
assuming the exercise of all other outstanding warrants held by
Sigma-Tau, Sigma-Tau would own approximately 38% of the
Companys outstanding common stock as of March 15,
2002.

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QUESTCOR PHARMACEUTICALS, INC.

FINANCIAL STATEMENT SCHEDULES (ITEM
14(a)(2))




SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

Years Ended December 31, 2001 and 2000,
Five Months Ended December 31, 1999 and the


Year Ended July 31, 1999.


|                                          |  |                |    |            |  |            |     |            |  |   |     |  |  |   |     | 
|----------------------------------------- |  | -------------- | -- | ---------- |  | ---------- | --- | ---------- |  | - | --- |  |  | - | --- | 
|                                          |  | Balance at     |    | Additions  |  | Deductions |     |           
|                                          |  | Beginning      |    | Charged to |  | and        |     | Balance at
|                                          |  | Period         |    | Income     |  | Write-offs |     | Period    
|                                          |  |                |    |            |  |            |     |           
|                                          |  |               
|                                          |  | (In thousands)
|Reserves for uncollectible accounts       |  |                |    |            |  |            |     |            |  |   |     |  |  |   |     | 
|December 31, 2001                         |  | $              | 56 |            |  | $          | 51  |            |  | $ | 29  |  |  | $ | 78  | 
|December 31, 2000                         |  | $              | 30 |            |  | $          | 170 |            |  | $ | 144 |  |  | $ | 56  | 
|December 31, 1999                         |  | $              | 15 |            |  | $          | 15  |            |  |   |    |  |  | $ | 30  | 
|July 31, 1999                             |  |                |   |            |  | $          | 16  |            |  | $ | 1   |  |  | $ | 15  | 
|                                         
|Reserves for sales returns and allowances |  |                |    |            |  |            |     |            |  |   |     |  |  |   |     | 
|December 31, 2001                         |  |                |   |            |  | $          | 271 |            |  | $ | 50  |  |  | $ | 221 | 
|                                         
|Reserves for obsolete inventories         |  |                |    |            |  |            |     |            |  |   |     |  |  |   |     | 
|December 31, 2001                         |  | $              | 28 |            |  | $          | 45  |            |  | $ | 17  |  |  | $ | 56  | 
|December 31, 2000                         |  |                |   |            |  | $          | 28  |            |  |   |    |  |  | $ | 28  | 

All other financial statement schedules are
omitted because the information described therein is not
applicable, not required or is furnished in the financial
statements or notes thereto.

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##### Table of Contents






EXHIBIT INDEX

|           |  |                                                                                                                                                                                                                                                                                                                   
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit    |  |                                                                                                                                                                                                                                                                                                                   
|Number     |  | Description                                                                                                                                                                                                                                                                                                       
|           |  |                                                                                                                                                                                                                                                                                                                   
|2.1*       |  | Merger agreement entered into August 4,
	1999, by and among Cypros Pharmaceutical Corporation, a
	California corporation (Parent), Cypros Acquisition
	Corporation, a Delaware corporation and a wholly owned
	subsidiary of Parent (Merger Sub), and RiboGene,
	Inc., a Delaware corporation (the Company).
|3.1*****   |  | By-laws of the Registrant                                                                                                                                                                                                                                                                                         
|3.2**      |  | Restated Certificate of Incorporation of Cypros
	Pharmaceutical Corporation, a California corporation, dated
	November 5, 1999                                                                                                                                                                                    
|4.1        |  | Warrant dated December 1, 2001 between
	Registrant and Paolo Cavazza                                                                                                                                                                                                                                              
|4.2        |  | Warrant dated December 1, 2001 between
	Registrant and Claudio Cavazza                                                                                                                                                                                                                                            
|10.1***    |  | Forms of Incentive Stock Option and Non-statutory
	Stock Option                                                                                                                                                                                                                                                   
|10.2****   |  | Amended 1992 Employee Stock Option Plan                                                                                                                                                                                                                                                                           
|10.3*****  |  | 1993 Non-employee Directors Equity Incentive
	Plan, as amended, and related form of Nonstatutory Stock Option                                                                                                                                                                                                     
|10.4*****  |  | Employment Agreement dated as of August 4,
	1999 between the Registrant and Charles J. Casamento                                                                                                                                                                                                                  
|10.5****** |  | 2000 Employee Stock Purchase Plan                                                                                                                                                                                                                                                                                 
|10.6       |  | Asset Purchase Agreement dated July 27, 2001
	between the Registrant and Aventis Pharmaceuticals Products,
	Inc.Δ                                                                                                                                                                                                 
|10.7       |  | First Amendment to Asset Purchase Agreement dated
	January   ,      between
	the Registrant and Aventis Pharmaceuticals Products, Inc.                                                                                                                                                                            
|23.1       |  | Consent of Ernst & Young LLP, Independent
	Auditors                                                                                                                                                                                                                                                               



---



|       |                                                                                                                                                         
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------
|*      | Filed as an exhibit to the Registrants
	Form 10-K for the fiscal year ended December 31, 1999                                                          
|      
|**     | Filed as an exhibit to the Registrants
	Registration Statement on Form S-8, Registration Statement
	No. 333-30558, and incorporated herein by reference
|      
|***    | Filed as an exhibit to the Registrants
	Registration Statement on Form S-1, Registration
	No. 33-51682, and incorporated herein by reference           
|      
|****   | Filed as an exhibit to the Registrants
	Proxy Statement for the 2002 Annual Meeting of Shareholders, and
	incorporated herein by reference             
|      
|*****  | Filed as an exhibit to the Registrants
	Registration Statement Form S-4, Registration Statement
	No. 333-87611, and incorporated herein by reference   
|      
|****** | Filed as an exhibit to the Registrants
	Registration Statement on Form S-8, Registration Statement
	No. 333-46990, and incorporated herein by reference
|      
|Δ      | Questcor has requested confidential treatment
	with respect to portions of this exhibit                                                                 

70