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UNITED STATES

FORM 10-Q

(Mark One)

OR

Commission File Number 000-28782

SPECTRUM PHARMACEUTICALS, INC.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12B-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date:

SPECTRUM PHARMACEUTICALS, INC.

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SPECTRUM PHARMACEUTICALS, INC.

FORM 10-Q

For the Three-Month Period Ended June 30, 2003

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

Statement Regarding Financial Information

     The condensed consolidated financial statements of Spectrum Pharmaceuticals, Inc. (the “Company”) included herein have been prepared by management, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The Company recommends that you read the consolidated financial statements included herein in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission.

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)
Condensed Consolidated Balance Sheets
(Unaudited)

The accompanying notes are an integral part of these
condensed consolidated balance sheets.

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SPECTRUM PHARMACEUTICALS, INC.

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

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)
Condensed Consolidated Statements of Cash Flows
(Unaudited)

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

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)
Notes to condensed consolidated financial statements
June 30, 2003
(unaudited)

1.      Organization and Business and Basis of Presentation, Liquidity and Going Concern

Organization and Business

Organization

     We incorporated Spectrum Pharmaceuticals, Inc. (“Spectrum”) in Colorado as Americus Funding Corporation (“AFC”) in December 1987. In August 1996, we changed AFC’s name to NeoTherapeutics, Inc. and in June 1997, we reincorporated NeoTherapeutics, Inc. in the state of Delaware. In December 2002, NeoTherapeutics, Inc. changed its name to Spectrum Pharmaceuticals, Inc. We had three subsidiaries as of June 30, 2003: NeoTherapeutics GmbH, wholly owned, incorporated in Switzerland in April 1997 (or NeoGmbH); NeoGene Technologies, Inc., 88.4% owned, incorporated in California in October 1999 (or NeoGene); and NeoJB LLC, 80% owned by Spectrum and organized in California in April 2002. We dissolved two subsidiaries, NeoTravel, Inc., in December 2002 and NeoOncoRx, Inc. in February 2003. We merged a previously wholly owned subsidiary, Advanced ImmunoTherapeutics, Inc., into Spectrum Pharmaceuticals, Inc. in 2001. The accompanying consolidated financial statements include the operating results of Spectrum Pharmaceuticals, Inc. and its subsidiaries. Unless the context otherwise requires, all references to the “Company”, “we”, “our”, “us” and “Spectrum” refer to all of the companies above as a consolidated entity.

Business

     We are a pharmaceutical company engaged in (1) the in-licensing of oncology drug candidates and the further development of and strategic alliances for these drug candidates, (2) the development and marketing of generic drugs in the United States and (3) the out-licensing of our neurology drug candidates to strategic partners.

Basis of Presentation, Liquidity and Going Concern

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements are prepared on a consistent basis in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and consolidation and elimination entries) considered necessary for a fair presentation have been included. Operating results for the three-months and six-months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in our Amendment Number 2 to the Annual Report on Form 10-K for the year ended December 31, 2002.

     Certain quarterly amounts have been reclassified to conform to the current period presentation. All share and per share information has been restated to affect for the 25-for-1 reverse split of our outstanding common stock approved on September 5, 2002 and executed on September 6, 2002.

Liquidity

     On August 20, 2002, we announced a shift in our strategic focus from discovery and development of neurology drugs to the in-licensing of oncology drug candidates and the further development of and strategic alliances for these drug candidates and the development and marketing of generic drugs in the United States. As a result of these changes and the completion of a large Alzheimer’s disease clinical trial, our expense burn rate fell from approximately $7 million per quarter to approximately $1.6 million during the three-month period ended June 30, 2003. The recent and the prospective reduction in the burn rate is principally due to reductions in clinical, research and administrative personnel, the termination of a facility lease for office space used to administer the Alzheimer’s disease clinical trial, the reduction of expenses for the manufacturing of Neotrofin supplies (one of our neurology drug candidates), a reduction in our research and fellowship grant commitments, and the elimination of the research operations of our functional genomics business.

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)
notes to condensed consolidated financial statements
(continued)

June 30, 2003
(unaudited)

     During the six-month period ended June 30, 2003, we sold 600 shares of our Series D 8% Cumulative Convertible Voting Preferred Stock (“Series D Preferred Stock”) and warrants to purchase up to an aggregate of 2,553,190 shares of our common stock, half at an exercise price of $3.00 and the other half at an exercise price of $3.50 per share, for net cash proceeds of approximately $5.1 million. Additionally, we sold 347,788 shares of our common stock for net cash proceeds of approximately $715,000 and issued warrants to purchase 55,555 shares of our common stock at an exercise price of $3.25 per share. Subsequent to June 30, 2003, we received gross cash proceeds of $3.0 million from the sale of 737,040 shares of our common stock and warrants to purchase 368,520 shares of our common stock at an exercise price of $4.75 per share (for further information see Note 10 – Subsequent Events).

     On September 30, 2002, we entered into a co-development and license agreement with GPC Biotech AG for the development and commercialization of our lead drug candidate, satraplatin. Under the co-development and licensing agreement, Spectrum could receive up to $22 million in license fees and milestone payments. The license fee consists of a total of $4 million; $2 million received upon signing and $1 million in cash and a $1 million equity investment within 30 days after the first dosing of a patient in a registrational study. GPC Biotech has agreed to make additional payments totaling up to $18 million upon achieving agreed upon milestones. However, there can be no assurance that any milestone will be achieved. Furthermore, GPC Biotech has agreed to fully fund development and commercialization expenses for satraplatin. Upon commercial sale of satraplatin, if any, Spectrum will be entitled to receive royalty payments based upon net sales.

     Our common stock is listed on the Nasdaq SmallCap Market. To remain listed on this market, we must meet Nasdaq’s continued listing requirements. Among other requirements, Nasdaq rules require that a SmallCap Market company maintain a minimum stockholders’ equity of $2.5 million or a minimum market value of listed securities of $35 million or a net income from continuing operations (in latest fiscal year or 2 of the last 3 fiscal years) of at least $500,000. As of June 30, 2003, we were in compliance with this standard, however, there is no assurance that we will be able to maintain compliance with any of the continued listing requirements. If we fail to do so, our common stock could be delisted from the Nasdaq SmallCap Market. As an additional condition of its continued listing, the Company must show that it continues to meet the minimum stockholder’s equity and other requirements for continued listing on the Nasdaq SmallCap Market in timely filings of its Form 10-Q reports with the Securities and Exchange Commission for the second and third quarters of 2003. Please see “Risk Factors” under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for alternatives should our common stock be delisted.

     As shown in the accompanying condensed consolidated financial statements, we continue to incur significant losses and negative cash flow from operations. During the three-month period ended June 30, 2003, we incurred a loss of approximately $1.6 million.

Recent Accounting Pronouncements

     In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 is not expected to have any impact on the Company’s financial statements.

2.      Joint Venture

     On April 17, 2002, we formed a joint venture with J.B. Chemicals & Pharmaceuticals Ltd. of Mumbai, India (JBCPL) and created a new entity, NeoJB LLC, a Delaware limited liability company (NeoJB). Spectrum owns 80% of NeoJB and a JBCPL subsidiary owns 20% of NeoJB. NeoJB’s business operations include seeking U.S. regulatory approval of JBCPL pharmaceutical products and to subsequently market these products in the U.S. and possibly other countries. We will initially fund 100% of NeoJB’s operating expenses. In conjunction with the formation of NeoJB, we granted a five-year warrant to JBCPL to purchase up to 4,000 shares of our common stock at an exercise price of $11.25 per share, equal to the market price of our common stock on the date of grant. The fair value of the warrant was estimated to be $38,000 using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%; expected volatility of 119.8%; risk free interest rate of 5.0%; and an expected life of five years.

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)
notes to condensed consolidated financial statements
(continued)

June 30, 2003
(unaudited)

3.      Co-Development and License Agreement with GPC Biotech AG

     On September 30, 2002, we entered into a co-development and license agreement with GPC Biotech AG for the development and commercialization of our lead drug candidate, satraplatin. Under the co-development and licensing agreement, Spectrum could receive up to $22 million in license fees and milestone payments. The license fee consists of a total of $4 million; $2 million received upon signing and $1 million in cash and a $1 million equity investment within 30 days after the first dosing of a patient in a registrational study. GPC Biotech has agreed to make additional payments totaling up to $18 million upon achieving agreed upon milestones. However, there can be no assurance that any milestone will be achieved. Furthermore, GPC Biotech has agreed to fully fund development and commercialization expenses for satraplatin. Upon commercial sale of satraplatin, if any, Spectrum will be entitled to receive royalty payments based upon net sales. In accordance with our revenue recognition policy the initial payment of $2 million was recognized as revenue as the Company has satisfied its commitments under the license agreement.

4.      Commitments and Contingencies

Research and Fellowship Grants

     We periodically make non-binding commitments to various universities and not-for-profit research organizations to fund scientific research and fellowship grants that may further our research programs. During 2002, we terminated all research and fellowship grants and at December 31, 2002 and June 30, 2003, we had no commitments to pay any research or fellowship grants. Grant expense for the six-month periods ended June 30, 2003 and 2002, were approximately zero and $301,000, respectively, and is included in research and development on the consolidated statement of operations.

Debt and Capital Leases

     Beginning in the second quarter of 2002, we were not in compliance with one of our debt covenants under our Master Note and Security Agreement secured by certain items of our lab equipment and computer software. An event of default had occurred because we had not maintained the required minimum balance of cash or equivalents. During the three-months ended September 30, 2002, we executed a modification of the lease providing the leaseholder a security interest in the property and equipment and accounts of the Company and in return, the leaseholder waived its rights to any remedies or actions due to the default.

Other

     On September 30, 2002, the Company entered into a co-development and license agreement with GPC Biotech AG for the development and commercialization of our lead drug candidate, satraplatin. Under the agreement, we became obligated to maintain certain contractual obligations related to an underlying license agreement for satraplatin.

5.      Stockholders’ Equity

Common Stock and Warrant transactions

     On January 16, 2003, we sold 222,223 shares of our common stock at $2.25 per share for gross cash proceeds of $500,000 under our shelf registration statement. Included in this transaction was the issuance of warrants to purchase up to 55,555 shares of our common stock at an exercise price of $3.25 per share. The fair value of the warrants were estimated to be $83,000 using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%; expected volatility of 89.9% risk free interest rate of 2.8%; and an expected life of five years. Offering costs of this transaction were approximately $35,000.

     On February 3, 2003, we entered into an agreement with a strategic investor who has agreed to invest $1 million in Spectrum to support the Company’s emerging generic drug business. The investment will be subject to the achievement of two milestones, both of which relate to the first Abbreviated New Drug Application (ANDA) filed by Spectrum with the U.S. Food and Drug Administration (FDA) in January 2003. The investor purchased $250,000 of unregistered shares of our common stock at a purchase price of $1.99 per

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)
notes to condensed consolidated financial statements
(continued)

June 30, 2003
(unaudited)

share on March 26, 2003, the closing price of our common stock on the day prior to acceptance by the FDA of the ANDA. The investor will purchase an additional $750,000 of unregistered shares of our common stock upon approval of this ANDA by the FDA. The purchase price in the transaction will be at the closing price of our common stock on the day prior to approval.

     On April 2, 2003, a warrant holder exercised warrants to purchase 161,460 shares of our common stock at an exercise price of $0.25 per share.

Preferred Stock transactions

     On May 7 and 13, 2003, we sold a total of 600 shares of our Series D 8% Cumulative Convertible Voting Preferred Stock (“Series D Preferred Stock”) and Series D Warrants to purchase shares of our common stock for gross cash proceeds of $6,000,000. The Series D Preferred Stock is convertible into 2,553,191 shares of Spectrum common stock based on a conversion price of $2.35 per share. Dividends on the Series D Preferred Stock are payable quarterly at an annual rate of 8 percent either in cash or shares of our common stock at the discretion of the Company. In addition, purchasers of the Series D Preferred Stock received five-year warrants to purchase up to a total of 1,276,595 shares of our common stock at an exercise price of $3.00 per share and five-year warrants to purchase up to a total of 1,276,595 shares of our common stock at an exercise price of $3.50 per share. Under a preexisting agreement with a placement agent, we issued to the placement agent, in addition to cash fees, a five-year warrant to purchase up to a total of 255,319 shares of our common stock at an exercise price of $3.00 per share. The fair value of the warrants were estimated to be $5,484,000 using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%; expected volatility of 92.1% risk free interest rate of 2.6%; and an expected life of five years. Offering costs, including cash commissions paid to placement agents, of this transaction were $844,000.

     Certain provisions of the Preferred Stock and Warrant Purchase Agreement and Certificate of Designation, Rights and Preferences of the Series D Preferred Stock require us to obtain the approval of the preferred stockholders to (i) amend, alter or repeal any provision of the Charter or Bylaws which may be deemed to adversely affect the terms of the Preferred Stock (ii) offer, sell or designate a security senior to or equal with the Preferred Stock, (iii) sell or issue common stock or securities convertible into or exercisable for shares of our common stock below $2.35 per share, (iv) incur any bank or non-trade indebtedness, (v) grant or make any mortgage or pledge of our property, (vi) merge or consolidate with another entity or sell or dispose of substantially of all our assets or businesses or (vii) take certain other actions.

     On June 18, 2003, 23 shares of our Series D Preferred Stock were converted into 97,872 shares of our common stock. On June 27, 2003, the Company declared a dividend of $69,205 on the Series D Preferred Stock payable on June 30, 2003 in the form of 13,899 shares of our common stock.

Comprehensive Loss

     During the six-month periods ended June 30, 2003 and 2002, comprehensive loss was $3,341,548 and $11,526,167, respectively. For the six-month periods ended June 30, 2003 and 2002, other comprehensive income of $1,614 and $6,458 consisted of unrealized gains and losses on our marketable securities and short-term investments that are held as available-for-sale.

6.      Equity Compensation

     Below is a summary of Spectrum stock option activity during the six-month period ended June 30, 2003:

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)
notes to condensed consolidated financial statements
(continued)

June 30, 2003
(unaudited)

     Included in the granted options are options to purchase an aggregate of 140,000 shares at an exercise price of $1.99 per share granted to employees on March 28, 2003. The Company also granted options to purchase an aggregate of 20,000 shares at an exercise price of $2.01 per share to certain directors on April 1, 2003. We determined the exercise prices of these options based on the fair market value on the date of grant. During our Annual Shareholder meeting in June 2003, shareholders approved an increase in the number of shares of our common stock subject to our 1997 Stock Incentive Plan to 1,219,000 shares.

     We granted 54,080 stock options to employees in 2000 with exercise prices less than the fair market value of our common stock at the measurement date. The intrinsic value of the option grants amounting to $959,850 was recorded as deferred compensation and is being amortized to expense over the vesting period, in accordance with APB Opinion No. 25. During the six-month periods ended June 30, 2003 and 2002, we recorded compensation expense of $13,565 and $309,138, respectively, as a result of such amortization.

     We account for stock options under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net loss for options granted under those plans that have an exercise price equal to the market value of the underlying common stock on the date of grant. We recognize expense related to options granted that have an exercise price that is below the market price of the underlying stock at the time of grant and for options issued to non-employees. The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation, for the three-months and six-months ended June 30, 2003 and 2002.

7.      Loss Per Share

     Basic and diluted loss per share for the three-month and six-month periods ended June 30, 2003 and 2002 are computed using the weighted average common shares outstanding during the period, respectively. Basic and diluted loss per share for the three-month and six month periods ended June 30, 2003 are computed after increasing the net loss by dividends amounting to $69,205 paid to holders of the Series D Preferred Stock.

8.      Litigation

     We are not aware of any litigation matters pending or threatened as of June 30, 2003 that will materially affect our condensed consolidated financial statements. We are sometimes involved in matters of litigation that we consider ordinary routine litigation incidental to our business. Our policy is to accrue during a period, as a charge to operations, amounts related to legal matters if it is probable that a liability has been incurred and the amount of loss can be reasonably estimated, as required by SFAS No. 5, Accounting for Contingencies.

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)
notes to condensed consolidated financial statements
(continued)

June 30, 2003
(unaudited)

9.      Income Taxes

     We did not provide any current or deferred federal or state income tax provision or benefit for the period presented because we have experienced operating losses since our inception. A valuation allowance has been recognized to fully offset the net deferred tax assets as of June 30, 2003 and December 31, 2002 as realization of such assets is uncertain.

10.      Subsequent Events

     On August 13, 2003, we sold 737,040 shares of our common stock at a negotiated purchase price of $4.10 per share for gross cash proceeds of approximately $3.0 million to certain institutional and individual investors. The investors also received five-year warrants to purchase up to 368,520 shares of our common stock at an exercise price of $4.75 per share. A placement agent received warrants to purchase up to a total of 39,304 shares of our common stock at an exercise price of $4.75 per share for its role in the transaction. Offering costs including cash commissions paid to placement agents of this transaction are estimated to be $300,000.

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note Regarding Forward-Looking Statements

     This Quarterly Report on Form 10-Q contains certain words, not limited to, “believes,” “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” or “continues,” that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are based on the beliefs of the Company’s management as well as assumptions made by and information currently available to the Company’s management. Readers should not put undue reliance on these forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Our actual results may differ materially from the results projected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below under “Subsequent Events Affecting Future Results,” “Financial Market Risks,” and “Risk Factors.”

     You should read the following discussion of the financial condition and results of our operations in conjunction with the financial statements and the notes to those statements included elsewhere in this report.

Critical Accounting Polices and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared on a consistent basis in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including cash requirements resulting from estimating: planned research and development activities and general and administrative requirements, the retention of key personnel, certain clinical trial results, maintained market need for our product candidates and other major business assumptions.

     We believe that our most significant accounting policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements are as follows:

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements are prepared on a consistent basis in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and consolidation and elimination entries) considered necessary for a fair presentation have been included. Operating results for the three-months and six-months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in our Amendment Number 2 to the Annual Report on Form 10-K for the year ended December 31, 2002.

     Certain quarterly amounts have been reclassified to conform to the current period presentation. All share and per share information has been restated to affect for the 25-for-1 reverse split of our outstanding common stock that was approved on September 5, 2002 and was effective on September 6, 2002.

Results of Operations

     For the three-months ended June 30, 2003, we incurred a net loss of approximately $1.6 million. We expect to incur significant additional operating losses for at least the next several years unless such operating losses are offset, if at all, by licensing revenues under our agreement with GPC Biotech AG, strategic alliances with other pharmaceutical companies that we are currently seeking or revenues from generic drug sales. The following is unaudited financial information for the three-months and six-months ended June 30, 2003 and 2002:

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)

Results of Operations for the Three-Months Ended June 30, 2003 compared to the Three-Months Ended June 30, 2002

     We had no revenues during the three-months ended June 30, 2003. Revenue for the three-months ended June 30, 2002 resulted from amortization of the licensing fee from the technology out-licensing agreements with Pfizer Inc. entered into during the second and fourth quarter of 2001. During the fourth quarter of 2002, we terminated our relationship with the University of California, Irvine (“UCI”) and in February 2003 we executed a settlement agreement with UCI transferring all future rights to any milestone payments under these agreements to UCI in satisfaction of certain accounts payable due to the Regents of the University of California and certain future obligations.

     Research and development expenses for the three-months ended June 30, 2003 compared to the same period in 2002 decreased due primarily to the termination of our development efforts for Neotrofin, the elimination of our functional genomics subsidiary and the termination of pre-clinical research activities. During the three-months ended June 30, 2002, clinical trails for Neotrofin in the treatment of patients with Alzheimer’s disease, Parkinson’s disease, spinal cord injury and neuropathy were underway. All of these trials were completed during 2002. Our decision to terminate the development of Neotrofin during 2002 resulted in a decrease in outside clinical research site costs, product manufacturing costs and salary and related benefit costs due to a reduction in research and development personnel. In addition, as part of the restructuring in 2002, we eliminated all activities at our functional genomics activities and only incurred costs in the amount of $30,000 during the three-months ended June 30, 2003 related to two lease agreements entered into in 2001. During the three-months ended June 30, 2002, our functional genomics subsidiary incurred $737,000 in expenses. We also terminated our pre-clinical research activities during the fourth quarter of 2002 resulting in a further decrease in salary and related benefit costs due to a decrease in research personnel and research supplies.

     General and administrative expenses for the three-month period ended June 30, 2003 compared to the same period in 2002 decreased due primarily to a lower level of personnel in 2003 when compared to the same period in 2002, a decrease in business activities in our functional genomics business and a decrease in general business expenses as a result of the restructuring and cost-cutting activities undertaken in 2002. The decrease in general and administrative expenses was offset by the idling of the Company’s research facilities which transferred fixed costs related to the facility from research and development expenses in 2002 to general and administrative expenses in 2003.

     Other expenses for the three-month period ended June 30, 2003 primarily include losses on the sale of laboratory equipment not being utilized by the Company. In 2002, other expenses included an impairment provision of $50,000 on a marketable security and interest expense related to the Company’s investing activities.

Results of Operations for the Six-Months Ended June 30, 2003 compared to the Six-Months Ended June 30, 2002

     We had no revenues during the six-months ended June 30, 2003. Revenue for the six-months ended June 30, 2002 resulted from amortization of the licensing fee from the technology out-licensing agreements with Pfizer Inc. entered into during the second and fourth quarter of 2001. During the fourth quarter of 2002, we terminated our relationship with UCI and in February 2003 we executed a settlement agreement with UCI transferring all future rights to any milestone payments under these agreements to UCI for the satisfaction of certain accounts payable due to the Regents of the University of California and certain future obligations.

     Research and development expenses for the six-months ended June 30, 2003 compared to the same period in 2002 decreased due primarily to the termination of our development efforts for Neotrofin, the elimination of our functional genomics subsidiary and the termination of pre-clinical research activities. During the six-months ended June 30, 2002, clinical trails for Neotrofin in the treatment of patients with Alzheimer’s disease, Parkinson’s disease, spinal cord injury and neuropathy were underway. All of these trials were completed during 2002. Our decision to terminate the development of Neotrofin during 2002 resulted in a decrease in outside clinical research site costs, product manufacturing costs and salary and related benefit costs due to a reduction in research and development personnel. In addition, as part of the restructuring in 2002, we eliminated all activities at our functional genomics activities and only

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SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)

incurred costs in the amount of $97,000 during the six-months ended June 30, 2003 related to two lease agreements entered into in 2001. During the six-months ended June 30, 2002, our functional genomics subsidiary incurred $1,917,000 in expenses. We also terminated our pre-clinical research activities during the fourth quarter of 2002 resulting in a further decrease in salary and related benefit costs due to a decrease in research personnel and research supplies.

     General and administrative expenses for the six-month period ended June 30, 2003 compared to the same period in 2002 decreased due primarily to a lower level of personnel in 2003 when compared to the same period in 2002, a decrease in business activities in our functional genomics business and a decrease in general business expenses as a result of the restructuring and cost-cutting activities undertaken in 2002. The decrease in general and administrative expenses was offset by the idling of the Company’s research facilities which transferred fixed costs related to the facility from research and development expenses in 2002 to general and administrative expenses in 2003.

     Other expenses for the six-month period ended June 30, 2003 compared to the same period in 2002 increased due primarily to a decrease in interest income resulting from lower average marketable securities balances and lower interest rates and an increase in losses from the sale of laboratory equipment not being utilized by the Company, offset by an impairment provision of $50,000 on a marketable security in 2002.

Subsequent Events Affecting Future Results

     On August 13, 2003, we sold 737,040 shares of our common stock at a negotiated purchase price of $4.10 per share for gross cash proceeds of approximately $3.0 million to certain institutional and individual investors. The investors also received five-year warrants to purchase up to 368,520 shares of our common stock at an exercise price of $4.75 per share. A placement agent received warrants to purchase up to a total of 39,304 shares of our common stock at an exercise price of $4.75 per share for its role in the transaction. Offering costs including cash commissions paid to placement agents of this transaction are estimated to be $300,000.

Financial Condition

     From inception through June 30, 2003, we financed our operations primarily through sales of securities, borrowings, grants, deferred payment of salaries and other expenses from related parties and payments received from technology out-license agreements.

     At June 30, 2003, we had a net working capital of approximately $2.6 million. Our working capital included cash and cash equivalents of approximately $4.3 million. In comparison, at December 31, 2002, we had positive net working capital of approximately $50,000, which included cash and cash equivalents of approximately $1.5 million and short-term investments of approximately $66,000. The $2.5 million increase in net working capital during the six-month period ended June 30, 2003 is attributable primarily to the sale of our Series D Preferred Stock for net cash proceeds of $5.1 million and sale of shares of our common stock for net cash proceeds of $715,000. These cash inflows were offset by a loss of approximately $3.3 million, less non-cash expenses, and $185,000 to pay capital lease obligations.

     We devote substantially all of our efforts to research and development. We incurred net losses of approximately $1.6 million during the three month period ended June 30, 2003, and expect to incur substantial losses over the next several years. We have historically funded our operations with funds from public offerings and private placement equity offerings. We will require substantial funds by June 2004, or sooner, in order to continue and complete the research and development activities currently contemplated and to commercialize our proposed products. Our future capital requirements and availability of capital will depend upon many factors, including continued scientific progress in research and development programs, the scope and results of pre-clinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the cost involved in filing, prosecuting and enforcing patent claims, the effect of competing technological developments, the cost of manufacturing scale-up, the cost of commercialization activities, and other factors which may not be within our control.

     We believe over the long-term, profits from our generic business will help to reduce or possibly eliminate our reliance on the need to raise funds through the sale of our securities.

Liquidity

     On August 20, 2002, we announced a shift in our strategic focus from discovery and development of neurology drugs to the in-licensing of oncology drug candidates and the further development of and strategic alliances for these drug candidates and the

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Table of Contents

SPECTRUM PHARMACEUTICALS, INC.
(formerly NeoTherapeutics, Inc.)

development and marketing of generic drugs in the United States. As a result of these changes and the completion of a large Alzheimer’s disease clinical trial, our expense burn rate fell from approximately $7 million per quarter to approximately $1.6 million during the three-month period ended June 30, 2003. The recent and the prospective reduction in the burn rate is principally due to reductions in clinical, research and administrative personnel, the termination of a facility lease for office space used to administer the Alzheimer’s disease clinical trial, the reduction of expenses for the manufacturing of Neotrofin supplies (one of our neurology drug candidates), a reduction in our research and fellowship grant commitments, and the elimination of the research operations of our functional genomics business.

     During the six-month period ended June 30, 2003, we sold 600 shares of our Series D 8% Cumulative Convertible Voting Preferred Stock (“Series D Preferred Stock”) and warrants to purchase up to an aggregate of 2,553,190 shares of our common stock, half at an exercise price of $3.00 and the other half at an exercise price of $3.50 per share, for net cash proceeds of approximately $5.1 million. Additionally, we sold 347,788 shares of our common stock for net cash proceeds of approximately $715,000 and issued warrants to purchase 55,555 shares of our common stock at an exercise price of $3.25 per share. Subsequent to June 30, 2003, we received gross cash proceeds of $3.0 million from the sale of 737,040 shares of our common stock and warrants to purchase 368,520 shares of our common stock at an exercise price of $4.75 per share (for further information see Note 10 – Subsequent Events).

     On September 30, 2002, we entered into a co-development and license agreement with GPC Biotech AG for the development and commercialization of our lead drug candidate, satraplatin. Under the co-development and licensing agreement, Spectrum could receive up to $22 million in license fees and milestone payments. The license fee consists of a total of $4 million; $2 million received upon signing and $1 million in cash and a $1 million equity investment within 30 days after the first dosing of a patient in a registrational study. GPC Biotech has agreed to make additional payments totaling up to $18 million upon achieving agreed upon milestones. However, there can be no assurance that any milestone will be achieved. Furthermore, GPC Biotech has agreed to fully fund development and commercialization expenses for satraplatin. Upon commercial sale of satraplatin, if any, Spectrum will be entitled to receive royalty payments based upon net sales.

     Our common stock is listed on the Nasdaq SmallCap Market. To remain listed on this market, we must meet Nasdaq’s continued listing requirements. Among other requirements, Nasdaq rules require that a SmallCap Market company maintain a minimum stockholders’ equity of $2.5 million or a minimum market value of listed securities of $35 million or a net income from continuing operations (in latest fiscal year or 2 of the last 3 fiscal years) of at least $500,000. As of June 30, 2003, we were in compliance with this standard, however, there is no assurance that we will be able to maintain compliance with any of the continued listing requirements. If we fail to do so, our common stock could be delisted from the Nasdaq SmallCap Market. As an additional condition of its continued listing, the Company must show that it continues to meet the minimum stockholder’s equity and other requirements for continued listing on the Nasdaq SmallCap Market in timely filings of its Form 10-Q reports with the Securities and Exchange Commission for the second and third quarters of 2003. Please see “Risk Factors” under “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for alternatives should our common stock be delisted.

     As shown in the accompanying condensed consolidated financial statements, we continue to incur significant losses and negative cash flow from operations. During the three-month period ended June 30, 2003, we incurred a loss of approximately $1.6 million.

Contractual and Commercial Obligations

Debt and Capital Leases

     Future installments of debt principal on capital lease obligations are as follows: