SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934

ALPHARMA INC.
(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12 (g) of the Act: None

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

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

The aggregate market value of the voting stock of the Registrant (Class A Common Stock, $.20 par value) as of March 25, 2002 was $561,500,000.

The number of shares outstanding of each of the Registrant's classes of common stock as of March 25, 2002 was:

Class A Common Stock, $.20 par value - 39,293,180 shares;
Class B Common Stock, $.20 par value - 11,872,897 shares.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 23, 2002 are incorporated by reference into Part III of this report. Other documents incorporated by reference are listed in the Exhibit index.

The Company is a leading global specialty pharmaceutical company that develops, manufactures and markets pharmaceutical products for humans and animals. As a result of the acquisition of the oral solid dose pharmaceutical business of F H Faulding & Co Limited from Mayne Nickless Limited which was completed on December 12, 2001, and in connection with which the Company assumed operational and economic control on October 5, 2001, the Company now offers a comprehensive range of over 800 tablet, capsule, liquid and topical generic human pharmaceutical products. It also manufacturers and markets over 100 animal health products. The Company conducts business in more than 60 countries and has approximately 4,900 employees at 40 sites in 27 countries. For the year ended December 31, 2001, the Company generated revenue and operating income of approximately $975.0 million and $24.4 million, respectively. These figures and all o ther 2001 figures included herein account for the business acquired in the Acquisition beginning December 12, 2001.

A.L. Industrier beneficially owns all of the outstanding shares of the Company''s Class B Common Stock, or approximately 26.8% of the Company''s total common stock outstanding at December 31, 2001. The Class B Common Stock bears the right to elect more than a majority of the Company''s Board of Directors and to cast a majority of the votes in any vote of the Company''s stockholders. Mr. Einar Sissener, Chairman of the Board of the Company and a controlling stockholder of A.L. Industrier, and members of his immediate family, also beneficially own 328,667 shares of the Company''s Class A Common Stock. As a result, A.L. Industrier, and ultimately Mr. Sissener, can control the Company.

On July 12, 2001, the Company entered into an agreement to acquire the generic and proprietary oral solid dose pharmaceuticals business (the ""Acquired Business"") in the U.S. and China of F H Faulding & Co Limited (""Faulding"") from Mayne Nickless Limited (""Mayne"") for a purchase price of $660.0 million in cash (approximately $700.0 million including direct Acquisition related costs and financing costs). On October 5, 2001, in accordance with that agreement, the Company gained operational and economic control of the Acquired Business (subject to certain limitations) from Mayne following Mayne''s successful tender for Faulding''s outstanding common shares and the reconstitution of Faulding''s board of directors. The Company completed the acquisition on December 12, 2001, at which time Mayne transferred legal ownership of the Acquired Business to the Company (the ""Acquisition""). The business that the Company acquired under its agreeme nt with Mayne consists of Purepac Pharmaceutical Co. (""Purepac"") a company specializing in the development, manufacture and marketing of generic oral solid dose pharmaceuticals, and Faulding Laboratories Inc. (""Faulding Labs"") a company specializing in the marketing and distribution of branded pharmaceuticals, both based in the U.S., and Foshan Faulding Pharmaceuticals Co. Ltd. (""Foshan"") a manufacturer and distributor of generic oral pharmaceuticals, based in China.

(i) Senior Credit Facility

• a six year $300.0 million revolving credit facility;
• a six year $175.0 million term A loan; and
• a seven-year $425.0 million term B loan.

The proceeds from the financing described above have been applied toward the Acquisition, payment of certain costs and expenses related to the Acquisition, refinancing of certain outstanding indebtedness of certain subsidiaries of the Company, ongoing working capital and other general corporate requirements of the Company and its subsidiaries after consummation of the Acquisition.

In December, 2001, the Company completed the exchange of 1,483,761 shares of its Class A Common Stock for a portion of its 5.75% convertible subordinated notes due 2005 (""5.75% Notes"") having an approximate principal value of $34.1 million. The exchange resulted in a non-cash pre-tax charge of approximately $7.4 million. In March, 2002, the Company completed an additional exchange of 3,266,850 shares of its Class A Common Stock for a portion of its 5.75% Notes having an approximate principal value of $56.6 million. The exchange resulted in a non-cash pre-tax charge of approximately $21.1 million in the first quarter of 2002. (Collectively, the December and March exchanges, the ""5.75% Notes Exchanges"").

In March, 2002, the Company completed an exchange of 3,433,104 shares of its Class A Common Stock for a portion of its 3% convertible subordinated notes due 2006 having an approximate principal value of $53.4 million (""3% Notes Exchange""). The exchange resulted in a non-cash pre-tax charge of approximately$ 27.0 million in the first quarter of 2002.

To better assure the Company''s continued debt covenant compliance, it has implemented a strategy to de-leverage its balance sheet. Pursuant to this strategy, the Company has undertaken a series of initiatives which includes aggressive expense, capital spending and working capital controls and possible sale of assets. In this regard the Company repaid $65.0 million of its term loans under its senior credit facility and completed the 5.75% Notes Exchanges and 3% Notes Exchange. The Company may also issue additional common stock for cash or in exchange for existing convertible debt

This annual report contains ""forward-looking statements,"" or statements that are based on current expectations, estimates, and projections rather than historical facts. The Company offers forward-looking statements in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may prove, in hindsight, to have been inaccurate because of risks and uncertainties that are difficult to predict. Many of the risks and uncertainties that the Company faces are included under the caption ""Risk Factors"".

The Company operates in the human and animal pharmaceuticals industries. It has three businesses within these industries: Animal Health, U.S. Human Pharmaceuticals and Human Pharmaceuticals International. In January, 2001, the Aquatic Animal Health Division became a part of the Animal Health Division and, for all management and financial purposes and for 2001 and all subsequent periods, will no longer be reported as a separate business segment. This combined segment has now been renamed Animal Health. During the third and fourth quarters of 2001 the human pharmaceutical business segments were realigned. The US Pharmaceutical Division changed its name to U.S. Human Pharmaceuticals. On December 12, 2001, the Purepac and Faulding Labs businesses which were acquired through the Acquisition were placed within this business segment. Additionally, the Fine Chemicals Division, which develops, manufactures and markets active pharmaceutical ingredients (""APIs"") to the pharmaceutical industry for use in finished products was combined with the International Pharmaceuticals Division for management purposes, however, the Fine Chemical and International Pharmaceuticals businesses will remain separate business segments for financial reporting purposes. This combined business has now been renamed Human Pharmaceuticals International. As a result of the Acquisition, Foshan Faulding was added to the Human Pharmaceuticals International business.

For additional financial information concerning the Company''s business segments see Note 22 of the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

The Company''s human pharmaceuticals business is comprised of the U.S. Human Pharmaceuticals and Human Pharmaceuticals International businesses. Each of these businesses are managed by a separate senior management team although the Company has embarked on a long-term strategy which is intended to result in the partial or full combination of these businesses into a single, integrated business. The Company''s human pharmaceutical business had sales of approximately $643.8 million in 2001, before elimination of intercompany sales, with operating profit of approximately $23.7 million.

Generic pharmaceuticals, which are the primary products of the U.S. Human Pharmaceuticals and Human Pharmaceuticals International businesses, are the chemical and therapeutic equivalents of brand-name drugs. Generic pharmaceuticals are required to meet the same governmental quality standards as brand-name drugs and most must receive approval from the appropriate regulatory authority prior to manufacture and sale. A manufacturer cannot produce or market a generic pharmaceutical until all relevant patents (and any additional government-mandated market exclusivity periods) covering the original brand-name product have expired, or until the manufacturer can develop a product which meets the chemical and therapeutic equivalency standards required by applicable law without infringing any valid patents held by the brand-name manufacturer.

As a result of the Acquisition, the Company has expanded its range of products and enhanced its research and development capabilities.

The Company''s Human Pharmaceuticals International business develops, manufactures and markets a broad range of pharmaceuticals for human use and active pharmaceutical ingredients for use in finished dose products. The Company believes that it is one of the largest manufacturers and marketers of generic oral solid dose pharmaceuticals in Europe, with a substantial presence in the United Kingdom, Germany, the Nordic countries and The Netherlands. HPI also has a significant presence in Southeast Asia. HPI benefits from over four decades of experience in the use and development of fermentation and purification technology. Additionally, HPI''s fermentation expertise in the production of bulk antibiotics has a direct technological application to the manufacture of products for the Company''s animal pharmaceuticals business.

Carl-Aake Carlsson will continue managing the combined international human pharmaceutical and fine chemical businesses. Mr. Carlsson managed the international human pharmaceutical businesses prior to the combination.

Product Lines. The Human Pharmaceuticals International business manufactures products using approximately 225 APIs that are sold in approximately 600 different formulations and dosage forms including prescription and over-the-counter tablets, capsules, ointments, creams, liquids, suppositories and injections. HPI markets and sells approximately 10 APIs in 28 formulations.

HPI''s European sales of generic pharmaceuticals in 2001 decreased as generic pharmaceuticals faced pricing weakness in several of the European markets including the United Kingdom and Germany. Additionally, increased competition on high margin products in the UK negatively impacted HPI''s business. HPI''s sales of fine chemical products in 2001 increased. HPI''s product lines include prescription pharmaceuticals, over-the-counter products and fine chemical products.

Acquisitions. In May 1998, the Company acquired Arthur H. Cox and Co. Ltd. (now renamed Alpharma Limited), the third largest generic pharmaceutical manufacturer in the United Kingdom, from Hoechst AG for a purchase price of approximately $198.0 million. Alpharma Limited manufactures and markets tablets, capsules, suppositories, liquids, ointments and creams. Alpharma Limited''s main operations, which consist primarily of a manufacturing plant, warehousing facilities and a sales organization, are located in Barnstaple, England. Alpharma Limited distributes its products to pharmacy retailers and pharmaceuticals wholesalers, primarily in the United Kingdom.

In addition, in November 1998 and April 1999, in substantially smaller transactions, the Company acquired generic pharmaceutical product lines in Germany and France. All of the products purchased in these transactions are manufactured under long-term contracts with third parties.

In June 1999, the Company acquired a leading market presence in the German generic market through the purchase of the Isis group of companies (now renamed Alpharma-ISIS GmbH & Co.) from Schwarz Pharma AG for a purchase price of approximately $153.0 million. Alpharma-ISIS has a substantial marketing organization but no manufacturing operations. All products are manufactured for Alpharma-ISIS by third parties, including a substantial number (including Pentalong™) under a supply agreement with Schwarz Pharma which expires in 2008 (with annual renewal rights upon mutual agreement of the parties). Approximately 80% of Alpharma-ISIS'' sales are of cardiovascular products, the most important of which in terms of sales is the drug Pentalong™.

As a result of the Acquisition, the Company acquired 90% of the ownership of Foshan Faulding. Foshan City owns the other 10% of Foshan Faulding. Foshan Faulding manufactures and distributes generic oral pharmaceutical products in the southern portion of China and plans to expand marketing activities to the Eastern provinces during 2002.

The Company intends to continue the operations of Alpharma Limited, Alpharma-Isis and the smaller German, French and Chinese generic product lines to achieve benefits from leveraging these new activities with the other businesses of HPI. In addition, the Company has integrated the businesses acquired into a pan-European generics business and plans to expand the scope of the acquired operations by adding to the acquired product base certain other pharmaceutical products of the Company. The Company is continuing to review market expansion opportunities in Europe and Asia.

Facilities. The Company maintains eight manufacturing facilities for its HPI products, all of which also house administrative offices and warehouse space. The Company''s plants in Lier, Norway and Barnstaple, England, include many technologically advanced applications for the manufacturing of tablet, liquid and ointment products. The Company''s plant in Copenhagen, Denmark manufactures a limited number of sterile finished pharmaceutical products. In addition to the Lier, Barnstaple and Copenhagen facilities, the Company also operates plants in Vennesla, Norway, for bandages and surgical tape products, and Jakarta, Indonesia, for tablets, ointments and liquids. The Jakarta plant has received regulatory approval to export certain products to Europe. Through Foshan Faulding, the Company also operates a manufacturing plant in Foshan City in the Guangdong Province of China.

In 1998, the Company (i) consolidated its international tablet, ointment and liquid production by transferring its production operations from Copenhagen to the Lier facility and third-party manufacturers and (ii) consolidated its sterile production by transferring its production operations from Norway to the Copenhagen facility and to third-party manufacturers.

The Company manufactures its fine chemical products in its plants in Oslo, Norway, which also manufactures products for the Company''s Animal Health business; Copenhagen, Denmark, which also manufactures finished products for HPI; and Budapest, Hungary. Each plant includes fermentation, specialized recovery and purification equipment. A material upgrade in manufacturing processes and capacity at the Budapest facility is substantially complete. All of these facilities have been approved as a manufacturer of certain sterile and non-sterile bulk antibiotics by the FDA, which allows imports of these products into the U.S. market, and by the health authorities of some European countries. See ""Information Applicable to all Business Segments- Environmental Compliance"" for a discussion of an administrative action related to the Budapest facility.

Competition. Most of the Company''s international finished pharmaceutical products compete with one or more other products that contain the same active ingredient so the Company therefore competes on the basis of price, service and brand. In European countries in recent years, sales of generic pharmaceuticals have been increasing relative to sales of patent-protected pharmaceuticals. Generics are gaining market share because, among other things, governments are attempting to reduce pharmaceutical expenses by enacting regulations that promote the use of generic pharmaceuticals in lieu of more expensive branded formulations. The Company''s international pharmaceutical products also encounter competition from imports of identical products from lower priced markets under EU laws promoting free movement of goods. (See ""Risk Factors""). Additionally, in the United Kingdom and Germany, new legislation is resulting in lower prices and reduction in revenues. In the United Kingdom, the United Kingdom Department of Health is continuing to review proposed legislative changes to the United Kingdom generic pharmaceuticals market, and as part of this review introduced in August 2000 interim maximum pricing legislation for the sale of generic pharmaceuticals in the United Kingdom. These price controls are expected to remain in place until October 2002. This interim pricing legislation as well as competitive factors has resulted in lower prices for the Company''s human generic pharmaceutical products in the United Kingdom and may lead to further price reductions for the Company''s generic human pharmaceuticals products. (See ""Risk Factors""). New legislation was introduced in Germany in January 2002 which re-adjusted the existing fixed price system, requiring price reductions for a large number of the Company''s human generic pharmaceutical products in Germany. Additionally, while the new German law does permit pharmacist substitution of generics for certain branded drugs there are seve ral exceptions to this law which, in the Company''s view, will make it less than fully effective in requiring such substitution on a broad basis. Overall the Company expects this legislation to result in lower prices for the Company''s human generic pharmaceutical products in Germany and a decrease in profitability. (See ""Risk Factors"").

Sales of bulk antibiotic products are made to relatively few large customers. In sales to large and small customers, price, quality and service are the determining factors. The Company believes that its fermentation and purification expertise and established reputation provide it with a competitive advantage in these antibiotic products.

Geographic Markets. The principal geographic markets for HPI''s finished pharmaceutical products are the United Kingdom, Germany, The Netherlands, France, the Nordic and other Western European countries, Indonesia, China and the Middle East. Additionally, HPI sells its fine chemical products in the U.S. For the year ended December 31, 2001, sales in the U.S. of HPI''s fine chemical products represented approximately 13% of HPI''s total revenues with significant additional sales of fine chemical products in Europe, Asia and Latin America.

Sales and Distribution and Customers. Depending on the characteristics of each geographic market, generic products are predominantly marketed under either brand or generic names. Over-the-counter products are typically marketed under brand names with concentration on skin care, pain relief and vitamins. HPI employs a specialized marketing and sales force of approximately 595 persons, 180, 100 and 115 of whom are in Indonesia, China and Germany, respectively, that markets and promotes generic pharmaceuticals to doctors, hospitals, pharmacies and consumers. In each of the Company''s international markets, it uses wholesalers to distribute its generic pharmaceutical products. The Company distributes and sells its fine chemical products in North America and Europe using its own sales force. Sales of the Company''s fine chemical products in other parts of the world are primarily through the use of local agents and distributors.

The U.S. Human Pharmaceuticals business develops, manufactures, markets and distributes generic prescription, specialty branded and over-the-counter pharmaceuticals for human use. With over 200 products USHP is a market leader in generic solid, liquid and topical dosage forms with what the Company believes to be one of the broadest portfolios of these products in the generic pharmaceuticals industry and with what it believes is a substantial presence in generic over-the-counter pharmaceuticals. With approximately 60 over-the-counter products, the Company is increasing its presence as a significant supplier to major retailers. With the addition of Purepac, the Company''s liquid and topical customers can buy a broadened product line from the Company, instead of having to purchase oral solid dose pharmaceuticals from other vendors. The Company expects that this broadened product offering will strengthen its competitive position and increa se its market share in the U.S.

The Company recently announced new management of its U.S. Human Pharmaceuticals business segment. The business segment is now being led by Michael Nestor, the new President of USHP. Michael Nestor was President and Chief Operating Officer of Faulding Pharmaceuticals in the Americas prior to the Acquisition.

Product Lines. USHP manufactures and markets over 200 prescription and over-the-counter generic products, primarily in solid, liquid, cream and ointment, solutions for inhalation, and suppository dosage forms as well as three branded products. USHP manufactures approximately 42 generic prescription products in tablet and capsule form. The Company is the leading U.S. manufacturer of generic pharmaceutical products in liquid form with approximately 80 products. USHP manufactures approximately 36 cough, cold and allergy remedies which constitute a significant portion of its liquid pharmaceuticals business. USHP manufactures approximately 57 cream, lotion and ointment products for topical use.

Facilities. USHP maintains and operates four manufacturing facilities, two research and development centers, four telemarketing facilities and two automated central distribution centers. USHP''s largest manufacturing facility is located in Baltimore, Maryland and is dedicated solely to the manufacture of liquid and nasal spray pharmaceuticals. The Company''s facility in Lincolnton, North Carolina manufactures creams, ointments and suppositories. As a result of the Acquisition, the Company acquired Purepac''s oral solid dose facility in Elizabeth, New Jersey, which manufactures tablets and capsules, and a new facility in Piscataway, New Jersey, which is in the FDA validation process for future manufacturing and which the Company anticipates will be fully functional by mid-2003. As an additional result of the Acquisition, the Company acquired a lease for a distribution center in Memphis, Tennessee, which it operates in addition to the distribution facility USHP already leased in Columbia, Maryland. USHP''s current and projected business needs do not require maintaining both distribution facilities. Therefore, the Company is devising a strategy to consolidate the distribution function in the Maryland facility. This strategy may include closing the Memphis distribution center within the next 12 months.

Competition. Although the Company is a market leader in the U.S. in the manufacture and marketing of specialty human generic pharmaceuticals, it operates in a highly competitive, price sensitive market. The Company competes with other generic pharmaceutical companies and with the generic drug divisions of major international patented drug companies and encounters market entry resistance from patented drug manufacturers. The Company selectively attempts to introduce generic drugs, as it is currently attempting with Gabapentin, earlier than the last expiration date for patents held by the manufacturer holding the patent protection through the process of designing around existing patents or challenging patents believed to be invalid. The Company has encountered vigorous challenges to these activities which has resulted in significant legal costs as it has defended its right to market these products. The Company expects to face further legal costs as it continues to defend such challenges.

Sales and Distribution. The Company has a sales organization with approximately 75 employees dedicated to USHP''s generic and branded pharmaceutical products including direct sales forces and telemarketing operations. The Company maintains a professional direct sales force of approximately 6 professionals to direct market USHP''s generic products and approximately 60 professionals to distribute and direct market USHP''s branded products (which 60 professionals were acquired through the Acquisition). To complement its direct sales force the Company sells USHP products through its use of selected independent sales representatives. In addition, the Company''s advanced telemarketing operation, which employs approximately 70 sales and supervisory personnel, markets and distributes generic products manufactured by third parties and, to a limited extent, USHP. The Company has recently increased the use of its telemarketing operations for the sale of its own products by adding a dedicated facility for this expanded activity. This business also provides certain custom marketing services, such as order processing and distribution, to the pharmaceuticals and certain other industries.

Customers. USHP continues to sell pharmaceutical products to the primary trade classes within the pharmaceutical industry. Warehousing and non-warehousing chains, as well as wholesalers, hospitals, long-term care, managed care and mail order remain key accounts that will be integrated into the advancement of combining all available product portfolios. The Company believes that positioning itself as a provider of many product portfolios and developing strategies that integrate them all will offer increased opportunities with specific accounts to gain market share and enhance margins.

The Company believes that its Animal Health business is a global leader in the development, registration, manufacturing and marketing of pharmaceutical products for food producing animals including poultry, cattle, sheep and swine, and vaccines to protect farmed fish from disease. In 2001, the Company had animal health product sales of approximately $335.3 million, before elimination of intercompany sales, with operating profit of approximately $23.6 million.

AH''s sales and operating income in 2001 was adversely affected as a result of (i) a change in its marketing strategy which decreased the offering of both extended payment terms and price discounts and (ii) declining poultry product sales caused in part by weak conditions in the U.S. poultry market, together with softness in Asian markets. In addition, AH''s blending facility and warehouse in Lowell, Arkansas were closed beginning in late September due to a fire. In December 2001, certain portions of the facility were re-opened for operation.

The Company recently announced new management of its Animal Health business and will immediately begin exploring changes in market strategy in this business. The clear objectives of any new strategy will include: strengthening customer and market focus, stabilizing pricing, and significantly improving working capital management. The development and execution of this strategy will be led by Carol Wrenn, the new President of the Animal Health division. As a first step, the Company has reduced the use of certain U.S. sales incentives in this division. These incentives had the effect of increasing the Company''s level of accounts receivable. While the Company will continue to offer its products to all customers on what it believes to be competitive terms, this action had a negative effect on AH''s sales in the fourth quarter of 2001 and is expected to have a further significant negative impact on sales in the first quarter of 2002 as customers reduce inventories. See ""Risk Factors "".

As an additional part of AH''s new marketing strategy, it is conducting a review of its new product pipeline and an evaluation of its major contractual relationships. The Company believes that certain changes to the existing arrangements may be necessary. Write-offs and other charges against pre-tax income of approximately $12.3 million were recorded in the fourth quarter of 2001 in connection with such matters. Such changes could result in further short term decreases in revenues or operating income.

Product Lines. The Company''s principal animal health business is based on a group of anti-infective pharmaceutical products which are added to the feed and water of livestock and poultry. This market is comprised of three primary pharmaceutical categories: antibiotics, antibacterials and anticoccidials.

• BMD, a bacitracin-based MFA used to prevent or treat diseases, promote growth and improve feed efficiency in poultry, cattle, sheep and swine;
• Albac, a bacitracin-based MFA used to prevent and treat diseases, promote growth and improve feed efficiency in poultry, cattle and swine; and
• Chlormax and Chlormax-combination products, and Aureomycin and Aureomycin-combination products, which are feed-grade antibiotics used in combination with other products to prevent and treat diseases, promote growth and improve feed efficiency in poultry, cattle, and swine.

• Deccox, a MFA used to prevent and control coccidiosis in poultry, sheep, cattle and calves;
• Bovatec and Avatec, MFAs used to prevent and control coccidiosis in cattle, sheep and poultry and to promote growth and improve feed efficiency in cattle;
• Robenz, used to prevent coccidiosis in chickens;
• Rofenaid, used to prevent coccidiosis and diseases in poultry;
• Zoamix, a MFA used to prevent and control coccidiosis in chickens and turkeys; and
• Bio-Cox and Cygro, MFAs used to prevent and control coccidiosis in poultry.

• 3-Nitro, a MFA used to treat disease, promote growth and improve feed efficiency in poultry and swine;
• Histostat, a MFA used to prevent disease in chickens and turkeys; and
• Romet, a MFA used to control disease in trout, salmon and catfish.

In addition to the Company''s antibiotic, antibacterial and anticoccidial pharmaceutical products, it also sells:

• water soluble vitamins, minerals and electrolytes which are used as nutritional supplements for poultry, swine and cattle, and to treat some conditions in baby pigs and calves; and
• injectable and immersion vaccines and treatments for farmed fish, such as Alpha Ject, Alpha Dip and Alpha Therapy.

As is the case for human pharmaceuticals, pharmaceuticals for animals (including animal biologics and vaccines) must be reviewed and receive registration from the FDA, USDA or similar regulatory agencies in other countries. Regulatory approvals for products to be used in food producing animals are complex, due to the possible impact on humans.

Approval must also be granted in the U.S. for the use of a pharmaceutical product in combination with other pharmaceuticals, and this generally requires the cooperation of other manufacturers. To date, the Company has been successful in obtaining the cooperation of third parties to seek combination approval for many of its products. These combination clearances significantly extend the reach and market share of the Company''s products and provide a considerable competitive advantage. Presently, the Company has sponsored a total of approximately 85 combination approvals in the U.S.

Acquisitions. In 1997, the Company acquired the Deccox product line, brand name and certain related assets from Rhone-Poulenc''s Animal Nutrition Division. Deccox is used to prevent and control coccidiosis. Under the agreement pursuant to which Deccox was acquired, Rhone-Poulenc will continue to manufacture the active ingredient for use in Deccox for a period of 15 years.

In 1999, the Company purchased the assets of I.D. Russell Company Laboratories, a manufacturer of a line of soluble antibiotics and vitamins. In addition, in September 1999 the Company acquired exclusive marketing rights to Reporcin, a performance and meat quality improvement product for injectable use in swine pursuant to a technology license and option agreement. Sales of Reporcin are ongoing in some countries, including Mexico and Brazil, which have substantial swine populations. However, the full realization of the potential for Reporcin is dependent upon market acceptance in those two countries and governmental license approvals and market acceptance in numerous other countries, including the U.S.. The agreement requires payments as additional regulatory approvals for the product are obtained in certain markets or payment of a liquidated damages fee for not pursuing licenses in such countries equal to 10% of the product license payment that would otherwise have become due upon receipt of the product license. Total additional payments at December 31, 2001 of approximately $32.0 million are required over the next five years if all seven possible country approvals are received. Under the terms of the agreement, the Company was required to complete an FDA approved production facility for Reporcin. To meet this requirement, the Company purchased a biopharmaceutical production facility in Terre Haute, Indiana in June of 2000 and began preparing the facility for production of Reporcin. Due to a reassessment of the Company''s approach to the US market, the facility, on which the Company has expended $12 million, was not complete at December 31, 2001. While the Company continues to pursue regulatory approval for Reporcin in the US, this reassessment has resulted in changes to or delays in planned activities related to the completion of the Terre Haute facility. However the Company has reviewed the facility for impairment and determined, based on present facts and circumstances, no write- down of the facility is required at December 31, 2001.

In May 2000, the Company purchased the Roche MFA business for approximately $288.0 million. The Roche MFA business consisted of products including Aureomycin, Bovatec, Avatec, Bio-Cox and Cygro. These pharmaceuticals are used to prevent and treat diseases in livestock and poultry. Roche MFA sales in 1999 were approximately $200.0 million with over 50% of these sales in North America and the remainder in Europe, Latin America and Southeast Asia. The Roche MFA acquisition included inventories, five manufacturing and formulation sites in the U.S., global product registrations, licenses, trademarks and associated intellectual property, and certain of the Roche employees, primarily in manufacturing and sales and marketing.

Facilities. The Company produces its Animal Health products in state-of-the-art manufacturing facilities. BMD is produced and blended at the Company''s Chicago Heights, Illinois facility which contains a modern fermentation and recovery plant. Albac is manufactured at the Oslo facility shared with HPI. Soluble antibiotics and vitamins are formulated in AH''s Longmont, Colorado facility and Reporcin is produced at the Company''s plant in Parkville, Australia. Feed grade chlortetracycline is produced at AH''s Hannibal, Missouri and Willow Island, West Virginia facilities in addition to being purchased from foreign suppliers. It is then blended at independent blending facilities. Bio-Cox is blended in AH''s Van Buren, Arkansas facility, and Avatec and Bovatec are blended at its Salisbury, Maryland facility. The 3-Nitro product line and Lasalocid are manufactured using the Company''s technology at separate third party facilities. These contracts require the Company to purcha se minimum yearly quantities on a cost plus basis. The Company is in the process of preparing its Willow Island facility for manufacturing Lasalocid. Decoquinate, the active ingredient used in Deccox, is manufactured in accordance with a fifteen year agreement using the Company''s technology at an unrelated facility. Blending of Deccox is done at the Company''s Lowell, Arkansas plant and a third party facility. Product research and development is done at AH''s Chicago Heights, Willow Island and Oslo facilities, with an experimental farm in Wrightstown, New Jersey. The Company manufactures its fish vaccine products at its Overhalla, Norway facility and third party facilities and utilizes contract manufacturing to provide certain raw materials for vaccine production.

Competition. Some of the Company''s competitors in the animal health industry offer a wide range of products with various therapeutic and production enhancing qualities. Due to the Company''s strong market position in feed additives and its experience in obtaining requisite FDA approvals for combination therapies, the Company believes it enjoys a competitive advantage in commercializing FDA-approved combination medicated animal feed additives.

Geographic Markets. The Company sells a major portion of its animal health products in the U.S. With the addition of the Roche MFA business, AH has expanded its international presence as part of its global strategy. The Company sells its aquatic animal health products in Norway, the United Kingdom, U.S., Chile and other international markets.

Sales and Distribution. The Company''s animal health products in the U.S., Europe, Canada, Mexico, Brazil, Australia and other selected markets are sold through a staff of technically trained sales and service employees. The Company has sales offices in the U.S., Canada, Mexico, Chile, Argentina, Thailand, China, Brazil, France, Belgium, the United Kingdom and Australia. The Company is currently reviewing whether to eliminate certain of AH''s present foreign sales offices. In the remainder of the world, AH''s products are sold primarily through the use of distributors and sales companies. In January 1999, the Company combined its wholly-owned U.S. distribution company with two similar third party distribution businesses to form a joint venture 50% owned by the Company. The joint venture is a regional distributor of animal health products in the Central Southwest and Eastern regions of the U.S. The Company sells its aquatic animal health products through its own technicall y-trained sales staff in Norway, the United Kingdom and Chile and through distributors in other markets.

Customers. Sales are made principally to commercial animal feed manufacturers, wholesalers and integrated cattle, swine and poultry producers. Although AH is not dependent on any one customer, the customer base for animal health products is in a consolidation phase. Therefore, as consolidation continues, the Company may become more dependent on certain individual customers as these customers increase their size and market share. The Company sells its aquatic animal health products to fish farms, usually under a contract which extends for at least one growing season. There are relatively few customers for the Company''s aquatic animal health products and there are relatively few suppliers of the products that the Company sells in this market. Most large customers have veterinarians on their staff and the Company believes that these veterinarians are involved in the evaluation and purchase of AH''s products

Scientific development is important to each of the Company''s business segments. The Company''s research, product development and technical activities in the human pharmaceuticals business within the U.S. and Norway concentrate on the development of generic equivalents of established patented products as well as discovering novel treatment uses of existing drugs. The Company''s research, product development and technical activities also focus on developing proprietary drug delivery systems, patent circumvention development in the U.S. and on improving existing delivery systems, fermentation technology and packaging and manufacturing techniques. The Company''s research and development capabilities have been enhanced and broadened as a result of the Acquisition, strengthening its ability to introduce new products and its expertise in the area of extended release products and the formulation and manufacture of oral solid dose products. In v iew of the substantial funds which are generally required to develop new chemical drug entities, the Company does not anticipate undertaking significant activities in this area.

The Company''s technical development activities for animal pharmaceuticals involve extensive product development and testing for the primary purpose of establishing clinical support for new products and additional uses for variations of existing products and seeking related FDA and other governmental approvals.

Given the Company''s global presence and its focus on research and development, the Company seeks to:

• reduce costs and shorten product development cycles for introduction and approval of similar products across geographic markets through the exchange of knowledge across its global research and development efforts; and
• distribute its research and development, manufacturing and purchasing costs across a global platform.

Generally, research and development activities are conducted on a business segment basis. Accordingly, upon integration of the Company''s three business segments into two segments, research and development will be conducted on a two segment basis. The Company conducts its technical product development activities at its facilities in Oslo, Norway; Baltimore, Maryland; Wrightstown, New Jersey; Willow Island, West Virginia; Chicago Heights, Illinois and Elizabeth, New Jersey, as well as through independent research facilities in the U.S. and Europe. The Company closed its finished product research and development operations in Copenhagen, Denmark in 2001. However, the Copenhagen facility continues to be used for API research and development.

Research and development expenses were approximately $86.7 million, $43.3 million, and $40.2 million in 2001, 2000 and 1999, respectively. The 2001 expenses include a charge for purchased in-process research and development of $37.7 million related to the Acquisition.

The Company believes it has an attractive pipeline of new products which it plans to introduce over the next several years. One of the most potentially significant of these products is USHP''s generic form of Gabapentin. Gabapentin, which was acquired through the Acquisition, is Purepac''s generic version of Neurontin, a drug used to treat epilepsy, which had 2001 brand sales close to $2.0 billion. The Company believes Purepac was the first generic manufacturer to file a Paragraph IV certification challenging the patents protecting Neurontin. As the first entity to file a Paragraph IV certification with respect to the primary continuing Gabapentin patents, the Company may benefit from generic market exclusivity for up to six months subject to receipt of all required FDA approvals and the satisfactory status of the brand company''s litigation challenge at the beginning of the exclusivity period. The Company may not, in all circumstances, be able to control the commencement of the e xclusivity period and therefore can give no assurance that it will benefit from being the first to file the Paragraph IV certification. If the Company gains this exclusivity, based upon the results of similar generic product launches, the Company believes it can reasonably expect a significant initial market share (as much as 25-50% of the brand market) and such initial sales should also assist the Company in retaining a smaller but leading market share after the exclusivity period.

General. The research, development, manufacturing and marketing of the Company''s human pharmaceutical and animal health products are subject to extensive government regulation by either the FDA or the U.S. Department of Agriculture, as well as by the Drug Enforcement Administration, Federal Trade Commission, Consumer Products Safety Commission, and other government agencies and by comparable authorities in the EU, Norway, Indonesia and other countries. Although Norway is not a member of the EU, it is a member of the European Economic Area and, as such, has accepted all EU regulations with respect to pharmaceuticals except in the area of feed antibiotics. Government regulation includes detailed inspection of and controls over testing, manufacturing, safety, efficacy, labeling, storage, record keeping, approval, advertising, promotion, sale and distribution of pharmaceutical products. Non-compliance with applicable requirements can result in civil or criminal fines, recall or seizure of products, total or partial suspension of production and distribution, the Company''s debarment or the debarment of individuals from obtaining new drug approvals or providing services to drug companies in any capacity, refusal of the government to approve new products or to purchase the Company''s products and criminal prosecution. The cost of complying with government regulations substantially increases the cost of producing human pharmaceutical and animal health products.

The evolving and complex nature of regulatory requirements, the broad authority and discretion of the FDA and analogous foreign agencies, and the generally high level of regulatory oversight results in a continuing possibility that from time to time the Company will be adversely affected by regulatory actions despite the Company''s ongoing efforts and commitment to achieve and maintain full compliance with all regulatory requirements. As a result of actions the Company has taken to respond to the progressively more demanding regulatory environment in which the Company operates, the Company has spent, and will continue to spend, significant funds and management time on regulatory compliance.

Product Marketing Authority. In the U.S., the FDA regulatory procedure generally applicable to the Company''s human generic pharmaceutical products depends on whether the branded drug to which the generic version is equivalent or comparable is:

• the subject of an approved New Drug Application, or NDA, which has been reviewed for both safety and effectiveness;
• marketed under a pre-1962 NDA reviewed for safety only;
• marketed without an NDA; or
• marketed pursuant to over-the-counter monograph program.

If the drug to be offered is a generic variation of a branded product that is the subject of an NDA approved for both safety and effectiveness, the generic product must be the subject of an Abbreviated New Drug Application, or ANDA, and be approved by the FDA prior to marketing. Drug products which are generic copies of the other types of branded products generally may be marketed in accordance with either FDA enforcement policies or the over-the-counter drug monograph program and generally are not subject to ANDA filings and approval prior to market introduction at this time. While the Company believes that all of the Company''s current pharmaceutical products are appropriately marketed under the applicable FDA procedure or enforcement policy, the basis for marketing products not covered by approved ANDAs is subject to change or revocation by the FDA.

All applications for regulatory approval of generic drug products subject to ANDA requirements must contain data relating to product formulation, raw material suppliers, stability, manufacturing, packaging, labeling and quality control. ANDAs also must contain bioequivalency data. Each product approval limits manufacturing to a specifically identified site. Supplemental filings to transfer products from one manufacturing site to another also generally require review and approval.

An EU Directive requires that medical products must have a marketing authorization before they are placed on the market in the EU. The criteria upon which grant of an authorization is assessed are quality, safety and efficacy. Demonstration of safety and efficacy in particular requires clinical trials on human subjects and the conduct of such trials is subject to the standards codified in the EU guideline on Good Clinical Practice. In addition, the EU requires that such trials be preceded by adequate pharmacological and toxicological tests in animals, that stability tests are also carried out and that clinical trials should use controls, be carried out double blind and capable of statistical analysis by using specific criteria wherever possible, rather than relying on a large sample size. The working party on the Committee of Proprietary Medicinal Products has also made various recommendations in this area. Analogous governmental and agency approvals are similarly required in othe r countries where the Company conducts business. There can be no assurance that new product approvals will be obtained in a timely manner, if ever. Failure to obtain these approvals, or to obtain them when expected, could have a material adverse effect on the Company''s business, financial condition and results of operations.

The European Union and five non-EU countries have banned the use of four antibiotics to promote growth in food producing animals effective July 1, 1999. While three of these products were not manufactured or sold by us, bacitracin zinc, a feed antibiotic growth promoter for livestock and poultry which is manufactured by us, is included in the ban. The Company is attempting to reverse or limit the EU ban which affects the Company''s Albac product, but there can be no assurance that these efforts will be successful. See ""Risk Factors"".

Legislative bills are introduced in the US Congress from time to time, some of which, if adopted, could have an adverse effect on AH''s business. However, in the past, such bills which could have had a material adverse effect, have not had sufficient support to become law.

Facility Compliance. The Company''s manufacturing operations, in the U.S. and three of the Company''s European facilities that manufacture products for export to the U.S., are required to comply with current Good Manufacturing Practices, better known as cGMP, as interpreted by the FDA regulations. cGMP encompasses all aspects of the production process, including validation and record keeping, and involves changing and evolving standards. Consequently, continuing compliance with cGMP can be a particularly difficult and expensive part of regulatory compliance. There are similar regulations in other countries where the Company has manufacturing operations. The EU requires that before a medicinal product can be manufactured and assembled, each company who carries out such an operation must hold a manufacturer''s license, a product license must be held by the person responsible for the composition of the product, and the manufacture and assembly must be in accordance with the product license and good manufacturing practice.

During 2001 the Company received inspection observations (483 Reports) from the FDA at its USHP facilities in Elizabeth and Baltimore and its Willow Island and Chicago Heights AHD plants. The Elizabeth review resulted in the issuance of a warning letter and the inspection at Baltimore resulted in an allegation from the FDA that the Company was not in compliance with a 1992 Consent Decree requiring general compliance with cGMP. The Company believes that it has taken action satisfactory to the FDA at its Elizabeth plant. As to each of the other plants, the inspections have been more recent and, as a result the Company is still in the process of discussing and implementing actions which it believes will be satisfactory to the FDA. At the Baltimore plant, this action includes a temporary slowdown in production which will have an effect on earnings in the first quarter of 2002. Additionally, the Company is presently engaging in a recall and other similar actions with respect to two of its USHP products. In addition to the charges for these actions taken in the fourth quarter of 2001, further charges are expected in the first quarter of 2002. There can be no assurance that the FDA will not require further actions at an additional cost.

Potential Liability for Current Products. Continuing studies of the proper utilization, safety, and efficacy of pharmaceuticals and other health care products are being conducted by the industry, government agencies and others. These studies, which increasingly employ sophisticated methods and techniques, can question the utilization, safety and efficacy of previously marketed products and in some cases have resulted, and may in the future result, in the discontinuance of their marketing and, in certain countries, give rise to claims for damages from persons who believe they have been injured as a result of their use.

In Europe, certain Directives confer a similar market exclusivity in respect of proprietary medicines, irrespective of any patent protection. Before a generic manufacturer can present an abridged application for a marketing authorization, it must generally wait until the original proprietary drug has been on the market for a certain period, unless they have the consent of the person who submitted the original test data for the first marketing authorization, or can compile an adequate dossier of their own. In the case of high technology products, the period is ten years or in some states for other medicinal products six years, subject to the option for Member States to elect for an exclusivity period of ten years with respect to all products.

In addition to the exclusivity period, it is also possible in the EU to extend the period of patent protection for a product which has a marketing authorization by means of a Supplementary Protection Certificate, or SPC. An SPC comes into force on the expiry of the relevant patent and lasts for a period calculated with reference to the delay between the filing of the patent and the granting of the first marketing authorization for the drug. This period of protection, subject to a maximum of five years, further delays the marketing of generic medicinal products.

The Generic Drug Enforcement Act. The Generic Drug Enforcement Act of 1992, which amended the FDC Act, gives the FDA six ways to penalize companies that engage in wrongdoing in connection with the development or approval of an ANDA. The FDA can:

• permanently or temporarily prohibit wrongdoers from submitting or assisting in the submission of an ANDA;
• temporarily deny approval of, or suspend applications to market, particular generic drugs;
• suspend the distribution of all drugs approved or developed pursuant to ANDAs of such person;
• withdraw approval of an ANDA;
• seek civil penalties against the alleged wrongdoer; and
• under appropriate procedures, significantly delay the approval of any pending ANDA from such person.

The Company has never been the subject of an enforcement action under this statute, but there can be no assurance that restrictions or fines will not be imposed on the Company in the future.

Controlled Substances Act. The Company also manufactures and sells drug products which are ""controlled substances"" as defined in the Controlled Substances Act, which establishes certain security and record keeping requirements administered by the Drug Enforcement Administration, or DEA, a division of the Department of Justice. The Company is licensed by the DEA to manufacture and distribute certain controlled substances. The DEA has a dual mission: law enforcement and regulation. The former deals with the illicit aspects of the control of abusable substances and the equipment and raw materials used in making them. The DEA shares enforcement authority with the Federal Bureau of Investigation, another division of the Department of Justice. The DEA''s regulatory responsibilities are concerned with the control of licensed handlers of controlled substances, and with the substances themselves, equipment and raw materials used in their manufacture and packaging, in order to pre vent such articles from being diverted into illicit channels of commerce. The Company is not under any restrictions for noncompliance with the foregoing regulations, but there can be no assurance that restrictions or fines will not be imposed on the Company in the future.

Health Care Reimbursement. The methods and level of reimbursement for pharmaceutical products under Medicare, Medicaid, and other domestic reimbursement programs are the subject of constant review by state and federal governments and private third party payors like insurance companies. The Company believes that U.S. government agencies will continue to review and assess alternative payment methodologies and reform measures designed to reduce the cost of drugs to the public. As a part of this effort the federal government and several states have commenced administrative or court actions challenging the pricing practices of certain named drug manufacturers. The Company is not a party to any of these actions. Because the outcome of these and other health care reform initiatives is uncertain, the Company cannot predict what impact, if any, they will have on it.

Medicaid legislation requires all pharmaceutical manufacturers to rebate state governments a percentage of the average manufacturer''s selling price based on sales of outpatient drug products reimbursed under state Medicaid programs. The required rebate rate for manufacturers of generic products is currently 11% of the average selling price for each product at the unit level, regardless of package size.

In many countries other than the U.S. in which the Company does business, the initial prices of pharmaceutical preparations for human use are dependent upon governmental approval or clearance under governmental reimbursement schemes. These government programs generally establish prices by reference to either manufacturing costs or the prices of comparable products. Subsequent price increases may also be regulated. In past years, as part of overall programs to reduce health care costs, certain European governments have prohibited price increases and have introduced various systems designed to lower prices. A review of proposed legislative changes to the UK generic pharmaceutical market is currently ongoing and as part of the review an interim maximum pricing legislation for the sale of generic pharmaceuticals in the UK has been introduced. Additionally, in Germany, new legislation was introduced in January, 2002 which adjusted the existing fixed price system, required a reduction o f certain human generic pharmaceutical products. See the sections ""Risk Factors"" and ""Management''s Discussion and Analysis of Financial Condition and Results of Operations"". As a result, affected manufacturers, including the Company, have not always been able to recover cost increases.

In order to control expenditures on pharmaceuticals, most member states in the EU regulate the pricing of such products and in some cases limit the range of different forms of a drug available for prescription by national health services. These controls can result in considerable price differences between member states. There is also a Common External Tariff payable on import of medicinal products into the EU, though exemptions are available in respect of certain products which allow duty free importation. Where there is no tariff suspension in operation in respect of a medicinal product, an application can be made to import the product duty free, but this is subject to review at the European level to establish whether a member state would be able to produce the product in question instead. In addition, some products are subject to a governmental quota which restricts the amount which can be imported duty free.

The Company believes that it is substantially in compliance with all presently applicable federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. The Company is presently engaged in administrative proceedings with respect to soil and aquifer contamination at its Budapest plant. The Company is subject to state administration orders relating to air and waste discharge issues at its Lowell, Arkansas plant, and waste handling, transportation and discharge issues at its Longmont, Colorado plant. The ongoing cost of these administrative orders will not be material. Certain costs incurred at the Budapest facility are subject to reimbursement obligations of the previous owner.

In September 2001, a fire at the Company''s Lowell, Arkansas plant resulted in the release of arsenic into water entering the local water treatment facility, soil surrounding the plant and in soot spread within the plant. Remediation activities are substantially complete and have been performed under the supervision of the Arkansas Department of Environmental Quality. The Company expects to complete this remediation in 2002 with substantially all costs covered by insurance.

Although many major capital projects typically include a component for environmental control, including the Company''s current expansion projects, no material expenditures specifically for environmental control are expected to be made in 2002.

In the third quarter of 2000, the Company discovered that with respect to the Company''s AH operations in Brazil, which reported revenues of approximately $1.8 million, $6.0 million and $13.7 million for the years 1997, 1998, and 1999, respectively, a small number of employees collaborated to circumvent established company policies and controls to create invoices that were either not supported by underlying transactions or for which the recorded sales were inconsistent with the underlying transactions. A full investigation of the matter with the assistance of legal counsel and the Company''s independent auditors was initiated and completed. During the third quarter of 2000, the Company revised all affected periods, comprising all four quarters of 1999 and the first two quarters of 2000. The net reduction in revenue was approximately $7.4 million or about one half of one percent and $.06 in diluted earnings per share or about three percen t over the six quarter period.

On November 5, 2001, the Company announced the completion of the revision of its financial statements for 1998, 1999, 2000 and the first two quarters of 2001. The revision results predominantly from a required modification in recognizing revenue for specific customer orders in the Company''s AH business in 1998, 1999 and 2000 from the time the order was segregated by third party warehouses and billed, to a subsequent period when the order was delivered. This revision resulted in (1) a reduction from previously reported amounts of $4.3 million of revenue in 1998, $16.4 million of revenue in 1999 and $18.7 million of revenue in 2000, (2) a reduction from previously reported amounts of $2.3 million of operating income in 1998, $11.4 million of operating income in 1999 and $9.2 million of operating income in 2000 and (3) an increase in both revenue and operating income in the first half of 2001 of $36.2 million and $21.7 million, respectively, over previously reported amounts. At the en d of 2001, the aggregate increases resulting from the revision approximated the aggregate decreases in 1998 through 2000.

As of December 31, 2001 after giving effect to the Acquisition, the Company had approximately 4,900 employees, including approximately 1,950 in the U.S. and 2,950 outside of the U.S. The Company considers its relationship with its employees to be good. Three U.S. plants are subject to collective bargaining agreements and four of the Company''s major European facilities have works councils and are subject to national labor agreements. The Company believes its relations with all of these employee units is satisfactory.

This report includes certain forward looking statements. Like any company subject to a competitive and changing business environment, the Company cannot guarantee the results predicted in any of the Company''s forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include (but are not limited to) the following:

The success of the Acquisition depends in part on the Company''s ability to integrate the Acquired Business into the Company''s business and to realize the anticipated benefits. The integration process may be disruptive to the Company''s operations and those of the Acquired Business and may cause an interruption of, or a loss of momentum in, the businesses as a result of a number of obstacles such as the:

• loss of key employees or customers;
• failure to maintain the quality of customer service that the Company''s historical businesses or the Acquired Business has historically provided;
• need to coordinate research and development and quality control functions in order to keep the Company''s new product pipeline adequately developed;
• need to comply with governmental regulations;
• resulting diversion of management''s attention from the Company''s day-to-day business to the integration process; and
• unfamiliarity of management with the needs of the Acquired Business.

If the Company is not successful in this integration or if it takes longer than anticipated, the Company''s business could be adversely affected.

As part of the Company''s review of its operations at the time of the Acquisition, the Company appointed a new president of its U.S. Human Pharmaceutical business as well as other senior employees. While the Company believes that the most significant parts of its integration of the Acquisition have been completed, on an ongoing basis the Company reviews its business and may make other senior management changes. These changes may disrupt the Company''s business by diverting the attention of management and displacing resources as it focuses on new initiatives.

The research, development, manufacturing and marketing of the Company''s products are subject to extensive government regulation. Government regulation includes inspection of and controls over testing, manufacturing, safety, efficacy, labeling, record keeping, pricing, sale and distribution of pharmaceutical products.

The U.S. and other governments regularly review manufacturing operations. The Company is presently responding to regulatory observations as a result of these reviews. Failure to adequately address these concerns could have a material adverse effect on the Company.

During 2001 the Company received inspection observations (483 Reports) from the FDA at its USHP facilities in Elizabeth and Baltimore and its Willow Island and Chicago Heights AHD plants. The Elizabeth review resulted in the issuance of a warning letter and the inspection at Baltimore resulted in an allegation from the FDA that the Company was not in compliance with a 1992 Consent Decree requiring general compliance with cGMP. The Company believes that it has taken action satisfactory to the FDA at its Elizabeth plant. As to each of the other plants, the inspections have been more recent and, as a result the Company is still in the process of discussing and implementing actions which it believes will be satisfactory to the FDA. At the Baltimore plant, this action includes a temporary slowdown in production which will have an effect on earnings in the first quarter of 2002. Additionally, the Company is presently engaging in recalls with respect to two of its USHP products. In additio n to the charges for these actions taken in the fourth quarter of 2001, further charges are expected in the first quarter of 2002. There can be no assurance that the FDA will not require further actions at an additional cost.

The Company also has affiliations, license agreements and other arrangements with third parties that depend on regulatory approvals sought by such third parties. The Company''s vendors and third party contract manufacturers are subject to these same regulatory restrictions. If any one of these third parties is found to have violations of a regulatory significance, the Company would be materially negatively impacted as its supply of API and/or product would be threatened. While the Company takes measures to secure back-up suppliers, there can be no assurance that such contingency plans will be able to provide adequate and timely product to eliminate any threat of interruption of supply of the Company''s products to its customers or that these problems will not otherwise materially impact the Company''s business.

Non-compliance with applicable requirements can result in fines, recall or seizure of products, suspension of production or distribution and debarment of individuals or the Company from providing services to drug companies in any capacity or obtaining new drug approvals. Government regulation substantially increases the cost of manufacturing, developing and selling the Company''s products.

The Company has filed, and continues to file, applications to market its products with the FDA and other regulatory agencies both in the U.S. and internationally. The timing of receipt of approvals of these applications can significantly affect the Company''s future revenues and income. This is particularly significant with respect to human pharmaceuticals where the Company is, in certain instances, using procedures, known as ""paragraph IV certification,"" to seek marketing approvals prior to the latest date as to which a third party may claim patent protection, including, among others, with respect to Gabapentin. The use of this strategy may involve lengthy litigation, frequently with substantially larger, well-financed pharmaceutical companies. There can be no assurance that the Company will obtain new product approvals in a timely manner, if ever, through litigation or otherwise. Failure to obtain approvals when expected, or at all, could have a material adverse effect on the Company''s business. The Company also has affiliations, license agreements and other arrangements with companies that depend on regulatory approvals sought by those companies.

The issue of the potential for increased bacterial resistance to certain antibiotics used in certain food producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in these food producing animals. While most of the government activity in this area has involved products other than those that the Company offers for sale, effective July 1, 1999, the European Union and five non-EU countries have banned the use of bacitracin zinc, a feed antibiotic and growth promoter manufactured by the Company and others which has been used in livestock feeds for over 40 years. The EU ban is based upon the ""Precautionary Principle"" which states that a product may be withdrawn from the market based upon a finding of a potential threat of serious or irreversible damage even if such finding is not supported by scientific certainty. The Company''s initial effort to reverse this action by means of a cou rt injunction from the Court of First Instance of the European Court was denied. The Company is continuing to pursue the Company''s efforts in the European Court and based upon what it believes to be highly persuasive scientific evidence with respect to the product the Company is engaged in certain other initiatives to limit the effects of this ban. Although the EU actions negatively impact the Company''s business, they were not material to the Company''s financial position or its results of operations. The discussions concerning resistance to antibiotics used in certain food producing animals have recently become more active in the U.S. Various sources have published reports concerning possible adverse effects of the use of antibiotics in food animals. Some of these reports have asserted that major animal producers, some of whom are the Company''s customers or the end-users of its products, are reducing the use of antibiotics. It is uncertain what actions, if any, the FDA may take in connection with drug resistant bacteria in animal health products. The loss of the U.S. market for, or negative publicity regarding, the Company''s bacitracin-based products would be materially adverse to the Company.

The Company cannot predict whether the present bacitracin zinc ban will be expanded. If either (a) the EU or countries or customers within the EU, act to prevent the importation of meat products from countries that allow the use of bacitracin-based products, or (b) there is an expansion of the ban to additional countries, such as the U.S., where the Company has material sales of bacitracin-based products or (c) there is an increase in public pressure to discontinue the use of antibiotic feed additives, the resultant loss of sales could be material to the Company''s financial condition, cash flows and results of operations. The Company also cannot predict whether this antibiotic resistance concern will result in expanded regulations adversely affecting other antibiotic-based animal health products manufactured by the Company of which it has significant sales.

The Company''s foreign operations are subject to currency exchange fluctuations and restrictions, political instability in some countries, and uncertainty as to the enforceability of, and government control over, commercial rights.

The Company sells products in many countries that are susceptible to significant foreign currency fluctuations. The Company''s products are generally sold for U.S. dollars, which eliminates the direct exposure to currency fluctuations, but increases credit risk if the local currency devalues significantly and it becomes more difficult for customers to purchase U.S. dollars required to pay the Company.

Some of the Company''s foreign operations are being affected by wide currency fluctuations and decreased economic activity in these regions and, in case of Indonesia and Argentina, by social and political unrest. While our present exposure to economic factors in these regions is not material, they are important areas for anticipated future growth.

The United Kingdom Department of Health is currently reviewing proposed legislative changes to the United Kingdom generic pharmaceuticals market, and as part of this review introduced in August 2000 interim maximum pricing legislation for the sale of generic pharmaceuticals in the United Kingdom. These price controls are expected to remain in place at least until October 2002. This interim pricing legislation, as well as competitive factors, has resulted in lower prices for the Company''s human generic pharmaceutical products in the United Kingdom.

The United Kingdom generic pharmaceuticals market in 1999 and the first half of 2000 had historically high prices and volume due to product shortages. These market conditions have not continued through 2001 due to the United Kingdom government''s interim maximum pricing legislation and increased competition. The Company is unable to predict the long-term impact these circumstances will have on the Company''s United Kingdom operations and the pricing and sales of generic pharmaceuticals in the United Kingdom.

In Germany new legislation was introduced in January, 2002 which adjusted the existing fixed price system, requiring price reductions for a large number of human generic pharmaceutical products in Germany including a number of the Company''s products. Additionally, while the new German law does permit pharmacist substitution of generics for certain branded drugs there are several exceptions to this law which, in the Company''s view, will make it less than fully effective in requiring such substitution on a broad basis. Overall the Company expects this legislation to result in lower prices for human generic pharmaceutical products in Germany and this is expected to result in decreased profitability for all industry participants including the Company. The Company is unable to predict the long-term impact these circumstances will have on the Company''s German operations and the pricing and sales of generic pharmaceuticals in Germany.

The Company currently purchases many of its raw materials and other products from single suppliers and many of its products are manufactured at a single facility. Any interruption in the supply of these materials or an adverse event at the facilities which manufacture and blend the Company''s products, could decrease sales of the affected products. In this event, the Company may seek to enter into agreements with third parties to purchase raw materials or products or to lease or purchase new manufacturing facilities. The Company may be unable to find a third party willing or able to provide the necessary products or facilities suitable for manufacturing pharmaceuticals on terms acceptable to the Company. If the Company had to obtain substitute materials or products, the Company would require additional regulatory approvals, as approvals are specific to a single product produced by a specified manufacturer. The use of new facilities similarly would require regulatory approvals. An y significant interruption of supply from the Company''s suppliers or adverse event at any of its manufacturing facilities could have a material adverse effect on the Company''s operations.

The Company''s generic pharmaceuticals business has historically been subject to intense competition. As patents and other bases for market exclusivity expire, prices typically decline as generic competitors, such as the Company, enter the marketplace. Normally, there is a further unit price decline as the number of generic competitors increases. The timing of these price decreases is unpredictable and can result in a significantly curtailed period of profitability for a generic product. In addition, brand-name and patented pharmaceuticals manufacturers frequently take actions to prevent or discourage the use of generic equivalents. These actions may include:

• filing new patents on drugs whose original patent protection is about to expire;
• developing patented controlled-release products or other product improvements; and
• increasing marketing initiatives and filing of additional litigation.

Generic pharmaceuticals market conditions, particularly, in the U.S., were further affected in recent years by a fundamental shift in industry distribution, purchasing and stocking patterns resulting from increased importance of sales to major wholesalers and a concurrent reduction in sales to private label generic distributors. Wholesaler programs generally require lower prices on products sold, lower inventory levels kept at the wholesaler and fewer manufacturers selected to provide products to the wholesaler''s own marketing programs.

The factors which have adversely affected the U.S. generic pharmaceuticals industry may also affect some or all of the markets in which the Company operates internationally. In addition, in Europe the Company is encountering price pressure from parallel imports of identical products from lower priced markets under EU laws of free movement of goods. Parallel imports could lead to lower revenue for the Company. The Company''s international pharmaceuticals business is also affected by general governmental initiatives to reduce drug prices, including price controls or other restrictions on the Company''s industry. Parallel imports, governmental cost containment and other regulatory efforts could cause lower prices in certain markets, including the United Kingdom, Germany and the Nordic countries, where the Company has significant sales.

In all the Company''s businesses, it may become more difficult for the Company to respond to competitive challenges because of the significance of relatively few major customers, such as large wholesalers, animal producers and chain stores, a rapidly changing market and uncertainty of timing of new product approvals.

The bulk antibiotic, international generic human pharmaceutical and animal pharmaceutical industries are highly competitive and many of the Company''s competitors in these areas are substantially larger and have greater financial, technical and marketing resources than the Company possesses. The increased focus on pharmaceutical prices in Europe may lead to increased competition and price pressures for suppliers of all types of pharmaceuticals, including generics. In addition, in certain countries such as France, because of the Company''s size and product mix, the Company may not be able to capitalize on such changes in competition and pricing as fully as the Company''s competitors.

The Company''s commercial success with respect to generic products depends, in part, on the availability of adequate reimbursement from third party health care payors, such as government and private health insurers and managed care organizations. Third party payors are increasingly challenging the pricing of medical products and services and their reimbursement practices may prevent the Company from maintaining the Company''s present product price levels. In addition, the market for the Company''s products may be limited by third party payors who establish lists of approved products and do not provide reimbursement for products not listed. Medicaid legislation requires all pharmaceutical manufacturers to rebate state governments a percentage of the average manufacturer''s selling price on sales of certain prescription drugs reimbursed under the state Medicaid programs. Certain states, such as Michigan and Florida, have adopted measur es to contain further the costs incurred for prescription drugs under their Medicaid programs. These measures include placing certain prescription drugs on a restricted list and negotiating additional discounts in the prices paid for prescription drugs.

The Company seeks to obtain liability insurance to protect it from liability due to accidents, product liability and other claims which arise during the course of doing business. The insurance that the Company obtains to protect itself against these potential liabilities may be inadequate, or such insurance may be unobtainable or prohibitively expensive. The Company must renew some of its insurance policies each year. In recent months the Company has experienced significant increases in its insurance costs. In addition, the Company''s insurance policies may contain exceptions which do not protect it from liabilities it may incur due to products it now manufactures or may manufacture in the future. The Company''s inability to obtain and maintain sufficient insurance coverage on reasonable terms could materially adversely affect the Company''s business, financial condition and results of operations.

The Company recently announced new management of its Animal Health business and immediately began exploring changes in market strategy in this business. The clear objectives of any new strategy will include strengthening customer and market focus, stabilizing pricing, and significantly improving working capital management. As a first step, the Company has reduced the use of certain U.S. sales incentives in this division. These incentives had the effect of increasing the Company''s level of accounts receivable. In addition to previously announced charges in the fourth quarter of 2001, these evolving strategies could require future actions necessitating charges against income including divestitures, decisions to curtail or terminate activities with respect to the development of certain products in its pipeline, the necessity to alter or terminate certain existing contractual arrangements and organizational restructuring.

However, Pfizer has filed several lawsuits challenging the Company''s position that it can introduce the product prior to the expiration of the last to expire of the Pfizer patents. Under the Hatch-Waxman Act, the Company may be able to commence the sale of the product in December of 2002 whether or not the Pfizer litigation has been finally decided. The Company could also wait to commence sales until the receipt of a court decision or any appeal. While the Company has made no decision on this issue, a launch at anytime before a final decision on Pfizer claims would leave the Company exposed to potential material infringement damages if Pfizer were to ultimately prevail in the litigation. In addition, in order to be prepared to take advantage of the six month period of exclusivity, the Company would be required to produce significant amounts of inventory during 2002. In the event that Pfizer prevails in the litigation, or the Company decides to delay its launch to a date significantly after December 2002, this inventory may no longer be commercially saleable which would result in a write-off and a charge against the Company''s income in the relevant period.

As of December 31, 2001, after giving effect to the Acquisition and related financing transactions and the initial actions under the Company''s deleveraging strategy, the Company''s total debt was $1,060.6 million and its total consolidated shareholders'' equity was $891.6 million. The Company''s operating income relative to its level of indebtedness will continue to restrict its operations. Among other things, the Company''s indebtedness and the restrictive covenants contained in the agreements governing its indebtedness:

• require a substantial portion of the Company''s cash flow from operations for the payment of interest on the Company''s debt;
• limit the Company''s ability to use its cash flow, or to obtain additional financing, to fund future working capital, capital expenditures, acquisitions and other general corporate purposes;
• limit the Company''s flexibility to plan for and react to changes and take advantage of opportunities in its business and industry;
• increase the Company''s vulnerability to adverse economic and industry conditions; and
• place the Company at a competitive disadvantage to less leveraged competitors.

In addition, the Company may incur additional debt. Subject to specified limitations, the agreement governing the notes and the Company''s senior credit facilities permit the Company and its subsidiary guarantors to incur substantial additional debt.

The Company''s ability to make payments on and to refinance its debt depends on the Company''s ability to generate cash flow. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company''s control. In addition, the Company''s ability to borrow funds in the future to make payments on its debt will depend on its satisfaction of the financial covenants in the issuer''s senior credit facilities and other debt agreements.. The Company''s business may not generate sufficient cash flow from operations, and future borrowings may not be available to the Company under its senior credit facilities or otherwise, in an amount sufficient to enable the Company to pay its debt or fund other liquidity needs. If the Company is unable to generate sufficient cash, it may need to refinance all or a portion of its debt on or before maturity. The Company may not be able to refinance any of its debt on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance the Company''s debt on favorable terms could have a material adverse effect on its financial condition.

The Company''s outstanding debt instruments contain covenants that restrict the ability of the Company and the guarantors to finance future operations and capital needs and engage in certain other business activities. For example, the Company''s senior credit facilities require it to maintain specified financial ratios and satisfy financial condition tests consisting of a maximum total leverage ratio test, a maximum senior leverage ratio test, a minimum fixed charge coverage ratio test, a minimum interest coverage ratio test and a minimum net worth test.

As of December 31, 2001, the Company was in compliance with each of these ratios and the net worth test, and the de-leveraging activities summarized below will assist the Company in its future compliance. However, events beyond its control, including changes in general economic and business conditions, may affect its ability to satisfy these covenants. The Company might not meet these covenants, and the lenders might not waive any failure to meet these covenants. A breach of any of these covenants, if not cured or waived, could result in a default under the Company''s senior credit facilities and under the agreement governing the notes. If an event of default under the Company''s senior credit facilities occurs, the lenders under these facilities could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. The Company''s senior credit facilities are also subject to early maturity and termination in certain cases.

To better assure the Company''s continued debt covenant compliance, it has implemented a strategy to de-leverage its balance sheet. Pursuant to this strategy, the Company has undertaken a series of initiatives which includes aggressive expense, capital spending and working capital controls and possible sale of assets. The Company may also issue additional common stock for cash or in exchange for existing convertible debt. Additionally, in December, 2001, the Company repaid $65.0 million of the term loans under its senior credit facilities and completed the exchange of its Class A common stock for a portion of its 5.75% convertible subordinated notes due 2005 having an approximate principal value of $34.1 million. In March, 2002, the Company completed additional exchanges of its Class A common stock for a portion of its 5.75% Notes having an approximate principal value of $56.6 million and for a portion of its 3.0% convertible subordinated notes due 2006 having an approximate principal value of $53.4 million.

A.L. Industrier AS, or Industrier, is the beneficial owner of 11,872,897 shares of Alpharma Inc.''s Class B common stock as of December 31, 2001, which represented 100% of the outstanding shares of the Class B Common Stock as of that date. Shares of Class B common stock are convertible into an equal number of shares of Class A common stock. As a result of its ownership of all of the outstanding shares of Class B Common Stock, Industrier controls Alpharma Inc. and is presently entitled to elect two-thirds of the members of its board of directors. As to matters other than the election of directors, each share of Class B common stock is entitled to four votes. Einar Sissener, Chairman of the board of directors of Alpharma Inc., controls a majority of Industrier''s outstanding shares and is Chairman of Industrier. In addition, Mr. Sissener beneficially owns 328,667 shares of Class A common stock.

Industrier has the ability to make decisions affecting the Company''s capital structure including, in some instances, the issuance of additional indebtedness. Industrier may pursue future transactions that could enhance its equity investment while involving risks to the interest of the Company. All contractual arrangements between the Company and Industrier are subject to review by, or ratification of, the audit committee of the Company''s board of directors as to the fairness of the terms and conditions of such arrangements to the Company. The committee consists of one or more directors who are unaffiliated with Industrier.

The Company also engages in various transactions with Industrier from time to time, and conflicts of interest are present with respect to the terms of such transactions.

The following is a list of the names and ages of all of the Company's corporate officers and certain officers of each of the Company's principal operating units, indicating all positions and offices with the Registrant held by each such person and each such person's principal occupation or employment during the past five years.

(1) Owned by Foshan Faulding, of which the Company owns 90%.

A class action lawsuit has been filed in the United States District Court for the District of New Jersey. This class action has been brought on behalf of all persons who acquired the Company''s securities between April 28, 1999 and October 30, 2000. The Company is named as a defendant along with one of its board members, two of its current officers and one of its former officers. The class action complaint alleges that, among other things, the plaintiffs were damaged when they acquired the Company''s securities because, as a result of (1) alleged irregularities in the Company''s animal health business in Brazil, (2) allegedly improper revenue recognition practices and (3) the October 2000 revision of its financial results for 1999 and 2000, the Company''s previously issued financial statements were materially false and misleading, thereby artificially inflating the price of the Company''s securities. The complaint alleges violations of Sections 10(b), 20(a) and Rule 10b-5 of the Securities and Exchange Act of 1934. The plaintiffs seek damages in unspecified amounts. The Company has moved to dismiss the complaint on legal grounds, and discovery is stayed pending the determination of that motion. Based on the Company''s preliminary investigation, the Company believes it has meritorious defenses which it intends to vigorously assert against the class action. Additionally, the Company has filed a claim on its own behalf and on behalf of each of the named individual defendants under its directors'' and officers'' insurance policies and believes that insurance coverage exists to the extent of the policy limits for the costs incurred in defending the claims and any adverse judgment or settlement, subject to the terms, conditions and exclusions of the relevant insurance policy. Based upon the facts as presently known, the Company does not believe that it is likely that the class action will result in liability which will be material to the Company''s financial position. However, because of the early stage of this matter, it is not possible for the Company to conclude that resolution of the lawsuit will not be material to the Company''s financial position or its results of operations or cash flows in the quarter or year in which it occurs.

On August 11, 2000, the Company was named as one of multiple defendants filed in the United States District Court for the District of Arizona by Lemelson Medical, Education & Research Foundation, Limited Partnership, or the Lemelson Partnership, alleging infringement of certain patents in the area of electronic reading devices transferred to the Lemelson Partnership by the late Jerome H. Lemelson. The suit seeks compensatory damages to compensate the Lemelson Partnership for past infringement and further alleges that the Company''s infringement is willful and that damages should be trebled. The Company has counterclaimed that, amongst other things, the Lemelson Partnership patents are invalid, unenforceable or have not been infringed by the Company. While the Company has not completed its analysis of either the validity or applicability of these patents, several of its material manufacturing facilities do use devices and machinery within the general technical area covered by th ese third party patents. In January 2001, the Court ordered a stay pending another ongoing case.

In response to the Company''s submission to the FDA of its ANDA filed under paragraph IV for Gabapentin capsules, the Company was sued on June 11, 1998, by Warner-Lambert Company, which is now owned by Pfizer Inc., in the U.S. District Court for the District of New Jersey for alleged patent infringement under two U.S. patents. In response to the Company''s submission to the FDA of its ANDA filed under paragraph IV for Gabapentin tablets, the Company was sued on December 12, 1999, by Pfizer in the U.S. District Court for the District of New Jersey for alleged patent infringement under the same two U.S. patents. The ANDAs submitted seek FDA approval to market the Company''s Gabapentin capsules and tablets prior to the expiration of Pfizer''s patents. In the Company''s ANDAs, the Company certified to Pfizer and the FDA that its proposed generic Gabapentin capsules and tablets will not infringe the patents and that the patents are believed to be invalid or unenforceable. In the litigation concerning the Company''s Gabapentin capsules, the Company filed a motion for summary judgment of non-infringement of the two patents, which was subsequently denied. The Company filed in the tablet litigation, and renewed in the capsule litigation, the Company''s motion of summary judgment of non-infringement on Pfizer''s patents. These motions are under consideration by the district court. Discovery is complete and the case is awaiting trial. No trial date has been set, but the two cases have been consolidated for trial.

From time to time the Company is involved in certain non-material litigation which is ordinarily found in businesses of this type, including contract, employment matters and product liability actions. Product liability suits represent a continuing risk to pharmaceutical companies. The Company attempts to minimize such risks by strict controls over manufacturing and quality procedures.

Not applicable.

PART II

Market Information

The Company''s Class A Common Stock is listed on the New York Stock Exchange (""NYSE""). Information concerning the 2001 and 2000 sales prices of the Company''s Class A Common Stock is set forth in the table below.

As of December 31, 2001 and March 8, 2002 the Company''s stock closing price was $26.45 and $16.00 respectively.

Holders

As of March 8, 2002, there were 719 holders of record of the Company''s Class A Common Stock and A.L. Industrier held all of the Company''s Class B Common Stock. Record holders of the Class A Common Stock include Cede & Co., a clearing agency which held approximately 98% of the outstanding Class A Common Stock as a nominee.

The Company has declared consecutive quarterly cash dividends on its Class A and Class B Common Stock beginning in the third quarter of 1984. Quarterly dividends per share in 2001 and 2000 were $.045 per quarter or $.18 per year.

     The following is a summary of selected financial data for the Company and its subsidiaries. The data for each of the three years in the period ended December 31, 2001 have been derived from, and all data should be read in conjunction with, the audited consolidated financial statements of the Company, included in Item 8 of this Report. All amounts are in thousands, except per share data.

Income Statement Data

Balance Sheet Data

The Company - Alpharma and consolidated subsidiaries.

     2001, 2000, and 1999 were years which included a number of significant transactions which the company entered into as part of or to finance its acquisition program.

     In addition, in 2001 the Company initiated reorganization, refocus and other actions of approximately $27.0 million intended to improve future operations of its operating segments and in the fourth quarter initiated a deleveraging program to reduce its debt.

2001

·      In July, the Company agreed to acquire the OPB for $660.0 million (approximately $700.0 million including direct acquisition related costs and financing costs). The acquisition closed in December and resulted in significant required charges including a $37.7 million charge for in process research and development.

·      The OPB acquisition was ultimately funded by a $900.0 million Bank Credit Agreement ("2001 Credit Agreement") with a syndicate of banks and a $200.0 million senior subordinated note. Proceeds from the 2001 Credit Agreement were used to repay the prior Bank Credit Agreement. Bridge financing and other bank fees and the repayment of the prior Bank Credit Agreement resulted in additional expenses in 2001.

·      Concurrent with the OPB Acquisition the Company's USPD was combined with the U.S. operations of OPB to form the U.S. Human Pharmaceutical Segment. The combination resulted in approximately $4.8 million in severance charges in 2001.

·      In September, the Company announced the creation of the HPI to be comprised of IPD, FCD and OPB-China. The combination resulted in charges of approximately $4.3 million primarily for severance.

·      In November, the Company's Animal Health Segment announced changes in business practices and a change in existing management. These changes resulted in severance of approximately $1.1 million, charges relating to the exiting of a product line of $10.2 million, and lower sales in the fourth quarter of 2001.

·      In December, the Company exchanged $34.1 million of outstanding subordinated debentures into approximately 1.5 million shares of Class A common stock and recorded a non cash expense of $7.4 million. Additionally, the Company repaid term loans of $65.0 million and recorded an extraordinary charge for early extinguishment of debt ($1.5 million pre-tax, $.9 million after tax).

2000

·      In May, the Company's AHD purchased the Medicated Feed Additive Business of Roche Ltd. ("MFA") for a cash payment of $258.0 million and the issuance of a $30.0 million promissory note to Roche. The acquisition was initially financed under a $225.0 million bridge financing agreement ("Bridge Financing") and existing credit agreements.

·      In May, the Company sold 4.95 million shares of Class A common stock and received proceeds of approximately $185.6 million which were used to repay a portion of the Bridge Financing.

·      In June, the Company signed an amendment to its 1999 Credit Facility and increased the facility by $100.0 million to $400.0 million. Upon the completion of the amendment the Company borrowed the necessary funds and repaid and terminated the Bridge Financing.

·      In August, the Company sold 5.0 million shares of Class A Common stock and received net proceeds of approximately $287.3 million. The proceeds were used to pay down existing line of credit and other short-term debt with the balance being invested in money market instruments.

1999

·      In January, the Company's AHD contributed the distribution business of its Wade Jones subsidiary into a joint venture with two similar third-party distribution businesses. The new entity, WYNCO, which is a regional distributor of animal health products in the Central South West and Eastern regions of the U.S., is 50% owned by the Company.

·      In January, the Company replaced its revolving credit facility and existing domestic short-term credit lines with a $300.0 million syndicated facility ("1999 Credit Facility") which provided for increased borrowing capacity.

·      In April, the Company's IPD purchased a French generic pharmaceutical business for approximately $26.0 million in cash.

·      In June, the Company issued $170.0 million initial principal amount of 3% Convertible Senior Subordinated Notes due 2006.

·      In June, the Company's IPD acquired the Isis Pharma Group, a German generic pharmaceutical business for approximately $153.0 million in cash.

·      In September, the Company's AHD acquired the business of Southern Cross Biotech, an Australian animal health company, and a technology license for approximately $14.0 million in cash and other commitments.

·      In November, the Company sold 2.0 million shares of Class A Common stock and received proceeds of approximately $62.4 million.

·      In November, the Company's AAHD purchased Vetrepharm, an animal and aquatic health distribution company in the United Kingdom for approximately $2.5 million.

Results and comparisons to 2000 and 1999 were previously revised (See Item 1. Business - "Revision of Financial Statements").

     Comparison of year ended December 31, 2001 to year ended December 31, 2000. (All earnings per share amounts are diluted, as applicable.)

     For the year ended December 31, 2001 revenue was $975.0 million, an increase of $74.2 million (8.2%) compared to 2000. Operating income was $24.4 million, an decrease of $99.9 million, compared to 2000.

     The Company recorded a net loss of $37.9 million ($.93 per share) compared to net income of $55.5 million ($1.49 per share). 2001 results include charges and expenses related to the acquisition and financing of the OPB, the repayment of a previous credit agreement, the combination of OPB and USPD to form USHP, the combination of IPD and FCD to form HPI, management actions in the Animal Health segment and other unusual items. The following schedule identifies these charges and expenses and presents a statement of operations for comparison with 2000 excluding identified transactions.

2000 as reported includes charges related to the Roche MFA acquisition which are included in the cost of sales ($1.0 million), selling, general and administrative ($.4 million), and other, net ($4.7 million). Charges, net after tax, were approximately $4.0 million.

A discussion of each of these 2001 identified transactions follows.

OPB Financing

     In July 2001, the Company signed a definitive purchase agreement to acquire the OPB of Faulding Limited from Mayne Nickless Limited ("Mayne") subject to Mayne's completion of a tender offer for Faulding. The Company was required to make a $145.0 million escrow deposit in July. In October the Company obtained management control of OPB, subject to certain limitations. In October to fund the $660.0 million purchase price to Mayne the Company released the $145.0 million escrow, paid an additional $255.0 million and provided a $260.0 million letter of credit. In December the acquisition closed and the letter of credit was funded. The OPB is included in the Company's results from December 12, 2001, the date of acquisition. The identified transactions include the interest expense and letter of credit fees related to the prepayments during the July-December period of $8.4 million and a charge of $2.3 million included in other, net for bank fees primarily for the bridge financing net of interest income on the escrow deposit.

     The new financing required for the OPB resulted in the repayment and termination of the 1999 Credit Facility. The write off of the bank fees related to the early extinguishment of debt ($2.2 million pre-tax, $1.3 million net of tax) are also included with the identified transactions.

Purchase Accounting

     The OPB acquisition closed on December 12, 2001 and in accordance with Statement of Financial Accounting Standards No. 141 "Business Combinations" was accounted for by the purchase method. Required adjustments for purchase accounting included a step-up of finished goods inventory of $7.1 million of which $1.8 million was expensed as the acquired inventory was sold in December 2001. The remaining balance of $5.3 million will be expensed in the first quarter of 2002. The most significant adjustment required by purchase accounting was the valuation and write off of in-process research and development ("IPR&D"). IPR&D was valued at $37.7 million and was written off without a tax benefit (as required) resulting in a reduction of EPS of $.92. IPR&D was valued based on forecasted after tax cash flows for each potential R&D product adjusted for charges for core technology and use of existing assets. The resultant cash flows were discounted at 15.4% and subsequently reduc ed for a risk adjustment factor dependent on the probability of achieving the cash flows and, in certain instances, the favorable outcome of litigation.

Combination of OPB with USPD and Other Acquisition Expenses

     Upon acquisition, the OPB was combined with the USPD to create U.S. Human Pharmaceuticals. The combination resulted in severance of $4.8 million related to USPD employees. In addition, the IPD commenced the closure of its Copenhagen Research Facility resulting in severance of approximately $1.5 million. The Company intends to conduct its oral solid research at the OPB facilities.

     In the first half of 2001 the Company incurred acquisition expenses for professional and consulting services of $3.2 million related to the OPB.

     The combination of the transactions identified with the OPB acquisition resulted in a net loss of $52.4 million or $1.28 per share.

Deleveraging Activities

     The Company significantly increased its debt in connection with the OPB acquisition. The credit facilities entered into in connection with the acquisition of OPB and the refinancing of existing debt contain various financial covenants, operating restrictions and require the repayment of debt on a scheduled basis. The Company is in compliance with all of the terms of the credit facilities and believes it will be able to comply in the future. In order to ensure continued compliance and increase flexibility under the agreements, the Company intends to deleverage at an accelerated pace. Toward this goal, the Company has adopted a comprehensive deleveraging plan, which includes aggressive expense, capital spending and working capital controls and possible sale of assets. The Company will continue to pursue other alternatives to further reduce debt. (See "Liquidity and Capital Resources" for 2002 deleveraging activities).

     In December 2001, the Company exchanged $34.1 million of 5.75% subordinated debentures for approximately 1.5 million shares of Class A common stock and recorded a non-cash expense of $7.4 million. Additionally, in December 2001, the Company repaid term loans of $65.0 million and recorded an extraordinary charge for early extinguishment of debt ($1.5 million pre-tax, $.9 million after tax). The sum of the 2001 deleveraging activities resulted in a loss of approximately $6.8 million ($.17 per share).

Reorganization, Refocus and Other Transactions

Animal Health

     In the fourth quarter 2001 the Company changed management in its Animal Health business. The change in management resulted in severance charges of $1.1 million. New management began a review of current projects and decided to discontinue support of certain projects including the commercialization of the optibreed product. This decision resulted in a charge for disposal of optibreed inventory of $8.7 million.

HPI

     The combination of IPD and FCD resulted in severance charges of $2.8 million.

Other Items

     Other identified transactions which net to $.4 million expense include income of $2.1 million from the settlement of vitamin litigation in the second quarter of 2001 offset by the write off of investments of $2.5 million including an equity position in the company which manufactured the optibreed product.

     The sum of the reorganization, refocus and other transactions is a loss of $7.9 million ($.19 per share).

Results of Operations - 2001 (excluding identified items) vs. 2000

     FCD revenues increased $11.7 million (18.7%) due primarily to increased volume. USHP revenues increased $73.4 million (31.5%) due to increased volume in new and existing products offset in part by lower net pricing. The acquisition of the OPB - US in December 2001 increased revenues by approximately $15.1 million. In connection with the OPB acquisition, the Company noted that certain of OPB's wholesale customers have levels of inventory generally higher than the Company has historically experienced at USPD. OPB management has indicated that these inventory levels are consistent with OPB's historical experience. However, in the event that these customers reduce inventory levels in the future, the Company's revenues could be adversely impacted.

     Animal Health revenues increased $34.4 million (11.4%) due to the timing of the MFA acquisition in May 2000 (i.e. seven months in 2000 versus twelve months in 2001). Offsetting increases due to acquisition timing were lower sales in the second half of 2001 versus 2000 due to a change in marketing strategy which reduced certain sales incentives and extended terms. Also impacting sales in Animal Health are unfavorable conditions in the U.S. Poultry market, a fire at an important Company shipping location and difficult economic conditions in Asia.

Gross Profit

     On a Company-wide basis gross profit declined $19.4 million as reported and excluding identified transactions decreased $8.9 million. As a percentage of sales, gross profit in 2001 as reported was 39.1%, compared to 40.2% excluding identified transactions and 44.5% in 2000. The reduction in gross margin excluding identified transactions represents lower pricing, lower volume and related production inefficiencies as well as F/X effects in IPD offset partially by increases in USPD and FCD due to volume and relatively flat gross profits in AHD. USPD gross profits were negatively impacted by two product recalls which lowered gross profit by approximately $10.0 million in 2001. AHD gross profits were negatively effected in 2000 by the $1.0 million write up and subsequent write off of MFA manufactured inventory.

Operating Income

     Operating income in 2001 decreased by $99.9 million as reported and by $38.3 million excluding identified transactions. The Company believes the change in operating income can be approximated as follows:

     Other, net was $(14.0) million in 2001 compared to $(3.4) million in 2000 and includes the following items:

Extraordinary Items

     In 2001, in accordance with GAAP the Company reported an extraordinary item due to the early extinguishment of debt. The Company repaid all debt remaining on the 1999 Credit Facility and $65.0 million of term debt resulting in a pre-tax loss of $3.7 million and after tax loss of $2.2 million ($.05 per share).

Results of Operations - 2000 vs. 1999

     Comparison of year ended December 31, 2000 to year ended December 31, 1999. (All earnings per share amounts are diluted.)

     For the year ended December 31, 2000 revenue was $900.8 million, an increase of $184.8 million (25.8%) compared to 1999. Operating income was $124.3 million, an increase of $40.4 million, compared to 1999. Net income was $55.5 million ($1.49 per share) compared to a net income $30.0 million ($1.07 per share) in 1999. Results for 2000 include non-recurring charges resulting from the MFA acquisition which reduced net income by $4.0 million ($.09 per share).

Acquisition Program

     The acquisition of MFA, the 1999 acquisitions by IPD and AHD, and the financing required to complete the acquisitions affect most comparisons of 2000 results to 1999.

     The Company has integrated the operations of the 1999 acquisitions and MFA within the respective divisional operations. The MFA acquisition has been integrated to a greater extent because its assets, operations and personnel were immediately absorbed in existing AHD legal entities. As a result the full incremental impact of the acquisitions is impractical to segregate. The Company estimates acquisitions contributed revenues of approximately $180.0 million, in the year ended December 31, 2000.

Revenues

     Revenues increased in the Human Pharmaceuticals business by $43.6 million and in the Animal Pharmaceuticals business by $141.8 million. The aggregate increase in revenues was reduced by approximately $34.0 million due to changes in exchange rates used in translating sales in foreign currencies into the U.S. Dollar, primarily in IPD.

     Changes in revenue and major components of change for each division in the year ended December 31, 2000 compared to December 31, 1999 are as follows:

     Revenues in IPD increased by $6.0 million due primarily to the 1999 acquisitions (approximately $33.0 million) and to a lesser extent higher pricing in the U.K. The increases were offset substantially by effects of currency translation ($30.0 million) and lower volume in certain markets. The pricing in the U.K. market was higher relative to the first half of 1999, but was lower in the second half of 2000 compared to the second half of 1999. U.K. revenues grew in 1999 primarily as a result of higher pricing due in large part to unusual conditions affecting the market which abated during the second quarter of 2000. Effective August 3, 2000 the U.K. government has adopted interim maximum pricing legislation. The government has indicated that it will review the interim legislation within the next 12 to 15 months. Market conditions resulted in certain lower prices commencing in the second quarter of 2000 and further reductions as a result of the adoption of the above noted legislatio n have occurred in the second half of 2000 and are expected to continue in 2001.

     U.S. Pharmaceutical ("USPD") revenues increased $35.7 million due to volume increases in new and existing products offset in part by lower net pricing. Revenues in FCD increased by $1.9 million due mainly to volume increases being partially offset by translation of sales in local currency into the U.S. Dollar.

     AHD revenues increased $144.0 million due to acquisitions primarily MFA ($142.0 million). Offsetting acquisition increases, adverse market and competitive conditions in a number of AHD's main markets caused volume declines and to a lesser extent price reductions in certain ongoing products. AAHD revenues declined due mainly to adverse market conditions and increased competition.

     In addition, AHD gross profits were reduced by a $1.0 million write-up and subsequent write-off upon sale of MFA manufactured inventory. The write-up was required by Generally Accepted Accounting Principles.

Operating Expenses

     Operating expenses increased $31.7 million and represented 30.7% of revenues in 2000 compared to 34.2% in 1999. The dollar increase is primarily attributable to the acquisitions including amortization of related intangibles (primarily MFA and Isis). Other increases included professional and consulting expenses for strategic planning, information technology and acquisitions, and a $.4 million charge for severance of existing AHD employees resulting from the combining of the sales forces of MFA and AHD. Foreign currency translation reduced the dollar amount of the increase by approximately $14.2 million. The percentage reduction is the result of leveraging of incremental MFA sales on the existing AHD business infrastructure.

     Operating income in 2000 increased by $40.4 million. The Company believes the change in operating income can be approximated as follows:

     AHD's $53.7 million net margin improvement is due primarily to the MFA acquisition offset by weakness in base product sales in a number of markets. (due to integration of the MFA business into AHD, a segregation of operating income is not practicable). The increase in operating expense for all divisions is adjusted for the estimated impact of foreign currency translation.

Interest Expense/Other/Taxes

     Interest expense increased in 2000 by $6.0 million due primarily to debt incurred to finance the acquisitions and to a lesser extent, higher interest rates in 2000.

     Other, net was $3.4 million expense in 2000, due primarily to $4.7 million fees incurred as part of the $225.0 million MFA bridge financing and other financing fees. The bridge financing was committed, drawn, repaid and terminated in the second quarter. All fees associated with the interim financing were expensed in the second quarter.

     The year-to-date effective tax rate was 26.7% in 2000 compared to 35.1% in 1999. The primary reason for the lower rate is the acquisition of foreign businesses in recent years and the related restructuring of ownership of legal entities in 2000 which provided a one-time benefit of $2.5 million in 2000 and will allow for movement of funds between the international entities.

Inflation

     The effect of inflation on the Company's operations during 2001, 2000 and 1999 was not significant.

Critical Accounting Policies

The consolidated financial statements are presented on the basis of accounting principles that are generally accepted in the United States of America. All professional accounting standards that are effective as of December 31, 2001, have been taken into consideration in preparing the consolidated financial statements. The Company has chosen to highlight certain policies that it considers critical to the operations of the business and understanding its consolidated financial statements:

Revenue recognition

Revenues are recognized when title to products and risk of loss are transferred to customers. Additional conditions for recognition of revenue are that collection of sales proceeds is reasonably assured and the Company has no further performance obligations.

In the Company's US Human Pharmaceutical business, and to a lesser extent in Human Pharmceuticals - International, sales to certain customers require that the Company remit discounts to either customers or governmental authorities in the form of rebates, chargebacks, or other managed-care reserves. Additionally, sales are generally made with a limited right of return under certain conditions. The Company estimates these rebates, chargebacks, managed care reserves and estimated returns at the time of sale based on the terms of agreements with customers and historical experience. The Company continually monitors the adequacy of procedures used to estimate these reductions by comparison of estimated reductions to actual reductions.

The Company has completed several acquisitions since 1998, which have generated significant amounts of goodwill and intangible assets and related amortization. The values assigned to goodwill and intangibles, as well as their related useful lives, are subject to judgement and estimation by the Company. In addition, upon adoption of SFAS 142, the Company will be required to cease amortization of goodwill and review goodwill annually for impairment.

Goodwill and intangibles related to acquisitions are determined based on purchase price allocations. These allocations, including an assessment of estimated useful lives, have generally been performed by qualified independent appraisers using reasonable valuation methodologies. Valuation of intangible assets is generally based on the estimated cash flows related to those assets, while the value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable assets acquired and liabilities assumed. Useful lives are determined based on the expected future period of benefit of the asset, the assessment of which considers various characteristics of the asset, including historical cash flows.

Long-lived assets, including plant and equipment, goodwill, and other intangible assets are reviewed for impairment when events or circumstances indicate that a dimunition in value may have occurred, based on a comparison of undiscounted future cash flows to the carrying amount of the goodwill or intangible asset. If the carrying amount exceeds undiscounted future cash flows, an impairment charge is recorded based on the difference between the carrying amount of the asset and its fair value.

The assessment of potential impairment for a particular asset or set of assets requires certain judgements and estimates by the Company, including the determination of an event indicating impairment; the future cash flows to be generated by the asset, including the estimated life of the asset and likelihood of alternative courses of action; the risk associated with those cash flows; and the Company's cost of capital or discount rate to be utilized.

Research and Development ("R&D"), Including In-Process R&D ("IPR&D")

The Company's products are subject to regulation by governmental authorities, principally the Food and Drug Administration ("FDA") in the United States and equivalent authorities in international markets. Research and development expenses are charged to the consolidated statement of operations when incurred, as the Company considers that regulatory and other uncertainties inherent in the development of new products preclude it from capitalizing development costs.

With respect to completed acquisitions, acquired products or projects which have achieved technical feasibility, signified by FDA or comparable regulatory body approval, are capitalized as intangible assets because it is probable that the costs will give rise to future economic benefits. Estimates of the values of these intangible assets are subject to the estimation process described in "Goodwill and Intangible Assets" above.

Acquired products or projects which have not achieved technical feasibility (i.e., regulatory approval) are charged to the statement of operations on the date of acquisition. In connection with its acquisitions, the Company generally utilizes independent appraisers in the determination of IPR&D charges. The amount of this charge is determined based on a variety of factors including the estimated future cash flows of the product or project, the likelihood of future benefit from the product or project, and the level of risk associated with future research and development activities related to the product or project.

Inventories are valued at the lower of cost or market. Cost is determined on a first-in, first-out basis for most inventories, with certain US Human Pharmaceutical inventory values on a last-in, first-out basis. The determination of market value to compare to cost involves assessment of numerous factors, including costs to dispose of inventory and estimated selling prices. Reserves are recorded for inventory determined to be damaged, obsolete, or otherwise unsaleable.

The Company also purchases raw materials, and manufactures finished goods, for certain products prior to the product receiving regulatory approval or during a period when the product is subject to litigation. The Company reviews these inventories on a case-by-case basis, and records a write-down of the inventory if it becomes probable that regulatory approval will not be obtained, litigation will be resolved unfavorably, or the inventory's cost will not be recoverable based on other factors.

The Company is subject to litigation in the ordinary course of business, and also to certain other contingencies (see Item 3 of this Form 10-K and Note 16 to the financial statements). The Company records legal fees and other expenses related to litigation and contingencies as incurred. Additionally, the Company assesses, in consultation with its counsel, the need to record liability for litigation and contingencies on a case by case basis. Reserves are recorded when the Company, in consultation with counsel, determines that a loss related to a matter is both probable and reasonably estimable.

The Company applies an asset and liability approach to accounting for income taxes. Deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The recoverability of deferred tax assets is dependent upon the Company's assessment that it is more likely than not that sufficient future taxable income will be generated in the relevant tax jurisdiction to utilize the deferred tax asset. In the event the Company determines that future taxable income will not be sufficient to utilize the deferred tax asset, a valuation allowance is recorded. The Company's valuation allowance principally relates to net operating loss carryforwards in certain state and foreign jurisdictions with little or no history of generating taxable income.

     At December 31, 2001, stockholders' equity was $891.6 million compared to $847.9 million and $343.5 million at December 31, 2000, and 1999, respectively. The ratio of long-term debt to equity was 1.16:1, .59:1, and 1.72:1 at December 31, 2001, 2000 and 1999, respectively. The increase in stockholder' equity in 2001 mainly represents the exchanges of convertible debentures to equity and other equity issuances totaling $113.2 million offset by a net loss of $37.9 million, a negative currency translation adjustment of $24.1 million and dividends of $7.5 million. The increase in stockholders' equity in 2000 primarily reflects the issuance of common stock in 2000 resulting from the $472.8 million equity offerings and net income partially offset by the currency translation adjustment. The increase in long-term debt in 1999 was due primarily to the acquisitions. In 2000 senior debt was paid down with a portion of the proceeds from the equity offerings. In 2001 long term debt increased to finance the OPB acquisition.

     Working capital at December 31, 2001 was $319.0 million compared to $394.0 million and $209.2 million at December 31, 2000 and 1999, respectively. The current ratio was 1.93:1 at December 31, 2001 compared to 2.91:1 and 2.27:1 at December 31, 2000 and 1999, respectively.

     Balance sheet amounts at year end 2001 compared to 2000 are affected by the OPB acquisition which increased amounts and foreign exchange that reduced amounts reported in U.S. dollars. The OPB acquisition increased the balance sheet captions by the following approximate amounts: accounts receivable ($44.9 million), inventory ($59.8 million), property plant and equipment ($111.3 million), intangible assets ($557.1 million), accounts payable ($87.6 million) and non current deferred taxes ($68.4 million).

     Cash flow from operations in 2001 was $119.4 million compared to $33.1 million and $71.6 million in 2000 and 1999, respectively. 2001 cash flow benefited from the non-cash nature of a number of items which contributed to the net loss for the year. The $37.7 million IPR&D charge, the inventory write-offs of $17.8 million, and the $7.4 million charge on exchange of the convertible debentures for Class A common stock are significant non-cash charges. Additionally, the Company reduced accounts receivable balances compared to 2000 by $26.6 million. The change in marketing strategy in AH in the 4^th quarter of 2001 is the main reason for this decline. Cash flow from operations in 2000 was negatively impacted by the structure of the MFA acquisition. The MFA acquisition did not include existing MFA accounts receivable and accordingly, the increase in accounts receivable as sales were made is reflected as reduction in operating cash flow.

     Balance sheet amounts decreased as of December 31, 2001 compared to December 2000 in U.S. Dollars as the functional currencies of the Company's principal foreign subsidiaries, the Norwegian Krone, Danish Krone, the Euro, and British Pound, depreciated versus the U.S. Dollar in 2001 by approximately 1%, 3%, 3% and 1%, respectively. These decreases in balance sheet amounts impact to some degree the above mentioned ratios. The approximate decrease due to currency translation of selected captions was: accounts receivable $4.0 million, inventories $4.9 million, accounts payable and accrued expenses $2.1 million, and total stockholder's equity $24.1 million. The $24.1 million decrease in stockholder's equity represents other comprehensive loss for the year and results from the strengthening of the U.S. Dollar in 2001 against all major functional currencies of the Company's foreign subsidiaries.

     In 2001, the Company's capital expenditures including expenditures for a Company wide ERP system were $85.3 million, and in 2002 the Company plans to spend approximately the same amount. The Company has approved a number of capital projects including the construction of a AHD plant for Lasalocid, and a company-wide information technology project which is expected to require additional capital expenditures of approximately $35.0 million through 2004.

     In September 1999, the Company acquired a technology license and option agreement for the animal health product, REPORCIN. The agreement requires additional payments as additional regulatory approvals for the product are obtained in certain markets. Total additional payments at December 31, 2001 of approximately $32.0 million are required over the next 5 years if all 7 possible country approvals are received. Under the terms of the agreement, the Company was required to complete an FDA approved production facility for Reporcin. To meet that requirement, the Company purchased a biopharmaceutical production facility in Terre Haute, Indiana in June 2000 and began to prepare the facility for production of Reporcin. Due to a reassessment of the Company's approach to the US market, the facility, on which the Company has expended $12 million, was not complete at December 31, 2001. While the Company continues to pursue regulatory approval for Reporcin in the US, this reassessment has re sulted in changes to or delays in planned activities related to the completion of the Terre Haute facility. However, the Company has reviewed the facility for impairment and determined, based on present facts and circumstances, no write-down of the facility is required at December 31, 2001.

     At December 31, 2001, the Company had $14.9 million in cash, available short term lines of credit of approximately $38.0 million and $300.0 million available under its 2001 Credit Facility.

     A portion of the Company's short-term and long-term debt is at variable interest rates. The 2001 Credit Facility requires the Company enter into swaps such that interest is fixed on 50% of its debt. In early 2002, the Company entered into interest rate agreements to fix interest rates for $60.0 million of its variable debt to minimize the impact of future changes in interest rates. The Company's policy is to selectively enter into standard agreements to fix interest rates for existing debt if it is deemed prudent.

     In the fourth quarter of 2001 the Company completed the acquisition of the OPB (See Note 3) and entered into a $900.0 million credit agreement ("Credit Facility") to finance the acquisition and replace its previous credit agreement. The Credit Facility includes restrictive covenants, and the most restrictive of these covenants is the total leverage ratio, which is total debt (as defined) divided by EBITDA (as defined). This requires the calculation of EBITDA, as defined in the credit facility, on a rolling four quarter basis and pro-forma for the acquisition of the OPB. The Company is in compliance with these covenants as of December 31, 2001.

     Continued compliance with these covenants in 2002 is dependent on the Company's EBITDA, and therefore the Company's ability to generate operating income, and also on the Company's ability to reduce the amount of its outstanding debt. The Company has undertaken certain actions in the fourth quarter of 2001 and the first quarter of 2002 to reduce the amount of its outstanding debt as part of an overall deleveraging plan. Under this plan, the Company in December 2001 repaid term debt of $65.0 million and exchanged common shares for $34.1 million of convertible subordinated debt. Additionally, in the first quarter of 2002, the Company exchanged common shares for approximately $109.5 million of convertible subordinated debt.

     Based on the above actions, combined with expected improvement in operating profit in 2002 relative to 2001, the Company fully expects to comply with these covenants throughout 2002. Additionally, the Company believes it has the ability to further reduce operating or capital expenditures, and sufficient access to capital such that debt could be further reduced, if these actions become necessary to comply with the covenants.

Under the terms of certain business and product acquisition agreements, the Company may be required to make additional payments in future years upon the occurrence of specified events. See Note 3 to the financial statements for additional information. Additionally, the Company has entered into certain supply agreements which may require payments under certain circumstances if minimum quantities are not purchased by the Company. See Note 16 for additional information.

Derivative Financial Instruments-Market Risk and Risk Management Policies

     The Company's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. The Company's risk management practice includes the selective use, on a limited basis, of forward foreign currency exchange contracts and interest rate agreements. Such instruments are used for purposes other than trading.

     Foreign currency exchange rate movements create fluctuations in U.S. Dollar reported amounts of foreign subsidiaries whose local currencies are their respective functional currencies. The Company has not used foreign currency derivative instruments to manage translation fluctuations. The Company and its respective subsidiaries primarily use forward foreign exchange contracts to hedge certain cash flows denominated in currencies other than the subsidiary's functional currency. Such cash flows are normally represented by actual receivables and payables and anticipated receivables and payables for which there is a firm commitment.

     At December 31, 2001 the Company had forward foreign exchange contracts with a notional amount of $46.9 million. The fair market value of such contracts has been recognized in the financial statements and is not material. All contracts expire in the first three quarters of 2002. The cash flows expected from the contracts will generally offset the cash flows of related non-functional currency transactions. The change in value of the foreign currency forward contracts resulting from a 10% movement in foreign currency exchange rates would be less than $.5 million and generally would be offset by the change in value of the hedged receivable or payable. Such contracts are not designated hedges for accounting purposes.

     At December 31, 2001 the Company has no interest rate agreements outstanding. In early 2002 the Company entered into interest rate agreements to fix interest rates for $60.0 million of its variable rate debt.

     The Company has adopted SFAS 141 for business combinations initiated after June 30, 2001, including the acquisition of the Oral Pharmaceuticals Business of FH Faulding ("OPB") (see Note 3), and will adopt SFAS 142 on January 1, 2002. The Company is presently evaluating the potential impact of these standards on its financial position and results of operations. However, due to the OPB acquisition and the number of acquisitions completed by the Company in previous years, the adoption of these statements could have a material impact on the financial position and results of operations of the Company. For the year ended December 31, 2001, amortization related to goodwill was approximately $18,500.

     In July, 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company is currently evaluating the effects the new rules may have on its financial statements and expects to adopt SFAS 143 on January 1, 2003.

     During August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets," which provides guidance on the accounting for the impairment or disposal of long-lived assets. For long-lived assets to be held and used, the new rules continue previous guidance to recognize impairment when the undiscounted cash flows will not recover its carrying amount. The impairment to be recognized will continue to be measured as the difference between the carrying amount and fair value of the asset. The computation of fair value now removes goodwill from consideration. Assets that are to be disposed of by sale have adopted the same measurement approach as for those assets to be held and used. Additionally, assets qualifying for discontinued operations treatment have been expanded beyond the former operating segment approach. Long-lived assets to be disposed by other than sale will now recognize impairment at the date of disposal, but will be considered assets to be held and used until that time. The Company is currently evaluating the effects the new rules may have on its financial statements and has adopted SFAS 144 as of January 1, 2002.

Item 8. Financial Statements and Supplementary Data

     See page F-1 of this Report, which includes an index to the consolidated financial statements and financial statement schedule.

     Not applicable.

PART III

     The information as to the Directors of the Registrant set forth under the sub-caption "Board of Directors" appearing under the caption "Election of Directors" of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 23, 2002, which Proxy Statement will be filed on or prior to April 15, 2002, is incorporated by reference into this Report. The information as to the Executive Officers of the Registrant is included in Part I hereof under the caption Item 1A "Executive Officers of the Registrant" in reliance upon General Instruction G to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

     The information to be set forth under the caption "Security Ownership of Certain Beneficial Owners" of the Proxy Statement relating to the Annual Meeting of Stockholders expected to be held on May 23, 2002, is incorporated into this Report by reference. Such Proxy Statement will be filed on or prior to April 15, 2002.

     There are no arrangements known to the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant.

Item 13.    Certain Relationships and Related Transactions

     The information to be set forth under the caption "Certain Related Transactions and Relationships" of the Proxy Statement relating to the Annual Meeting of Stockholders expected to be held on May 23, 2002, is incorporated into this Report by reference. Such Proxy Statement will be filed on or prior to April 15, 2002.

PART IV

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

List of Financial Statements

     See page F-1 of this Report, which includes an index to consolidated financial statements and financial statement schedule.

List of Exhibits (numbered in accordance with Item 601 of Regulation S-K)

2.1     Put and Call Option Agreement, dated July 12, 2001, among Mayne Nickless Limited, Mayne Nickless Health Logistics Pty Limited, Oral Pharmaceuticals Acquisition Corp. and Alpharma Inc., was filed as Exhibit 2.1 to the Company's Form 8-K dated as of July 11, 2001 and is incorporated by reference.

2.1a      Variation Agreement, dated August 17, 2001 among Mayne Nickless Limited, Mayne Nickless Health Logistics Pty Limited, Oral Pharmaceuticals Acquisition Corp. and Alpharma Inc is filed as an Exhibit to this Report.

2.1b     Second Variation Agreement, dated August 30, 2001 among Mayne Nickless Limited, Mayne Nickless Health Logistics Pty Limited, Oral Pharmaceuticals Acquisition Corp. and Alpharma Inc is filed as an Exhibit to this Report.

2.1c     Third Variation Agreement, dated September 17, 2001 among Mayne Nickless Limited, Mayne Nickless Health Logistics Pty Limited, Oral Pharmaceuticals Acquisition Corp. and Alpharma Inc is filed as an Exhibit to this Report.

2.1d     Fourth Variation Agreement, dated September 20, 2001 among Mayne Nickless Limited, Mayne Nickless Health Logistics Pty Limited, Oral Pharmaceuticals Acquisition Corp. and Alpharma Inc. is filed as an Exhibit to this Report.

2.1e      Sixth Variation Agreement, dated December 6, 2001 among Mayne Nickless Limited, Mayne Nickless Health Logistics Pty Limited, Oral Pharmaceuticals Acquisition Corp. and Alpharma Inc is filed as an Exhibit to this Report.

3.1a     Amended and Restated Certificate of Incorporation of the Company, dated September 30, 1994 and filed with the Secretary of State of the State of Delaware on October 3, 1994, was filed as Exhibit 3.1 to the Company's 1994 Annual Report on Form 10-K and is incorporated by reference.

3.1b     Certificate of Amendment of the Certificate of Incorporation of the Company dated September 15, 1995 and filed with the Secretary of State of Delaware on September 15, 1995 was filed as Exhibit 3.1 to the Company's Amendment No. 1 to Form S-3 dated September 21, 1995 (Registration on No. 33-60029) and is incorporated by reference.

3.1c     Certificate of Amendment to the Certificate of Incorporation of the Company dated July 2, 1999 and filed with the Secretary of State of Delaware on July 6, 1999 was filed as Exhibit 3.1 to the Company's June 30, 1999 quarterly report on Form 10-Q/A and is incorporated by reference.

3.1d     Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company effective September 2000 was filed as Exhibit 3.0 to the Company's September 30, 2000 quarterly report on Form 10-Q and is incorporated by reference.

3.2     Amended and Restated By-Laws of the Company, effective as of January 31, 2002, are filed as an Exhibit to this Report.

4.1     Reference is made to Article Fourth of the Amended and Restated Certificate of Incorporation of the Company which is referenced as Exhibit 3.1 to this Report.

4.2     Notes Purchase Agreement among Alpharma Operating Corporation, certain of its subsidiaries as guarantors, Banc of America Bridge LLC, and CIBC Inc., dated December 12, 2001 is filed as an Exhibit to this Report

4.3     Shelf Registration Rights Agreement among Alpharma Operating Corporation, certain of its subsidiaries as guarantors, Banc of America Bridge LLC, and CIBC Inc., dated as of December 12, 2001 is filed as an Exhibit to this Report.

4.3a     Shelf Registration Joinder Agreement among Alpharma Operating Corporation, certain of its subsidiaries as guarantors, Banc of America Bridge LLC, and CIBC Inc., dated as of January 11, 2002 is filed as an Exhibit to this Report.

4.3b     Letter Agreement relating to Shelf Registration Rights Agreement among Alpharma Inc (on behalf of Alpharma Operating Corporation and each of the guarantors), Banc of America Bridge LLC, and CIBC Inc., dated March 12, 2002 is filed as an Exhibit to this Report.

4.4     Indenture, dated as of March 30, 1998, by and among the Company and First Union National Bank, as trustee, with respect to the 5 3/4% Convertible Subordinated Notes due 2005 was filed as Exhibit 4.1 of the Company's Form 8-K dated as of March 30, 1998 and is incorporated by reference.

4.5     Indenture dated as of June 2, 1999, by and between the Registrant and First Union National Bank, as trustee, with respect to the 3% Convertible Senior Subordinated Notes due 2006, was filed as Exhibit 4.1 to the Company's Form 8-K dated as of June 16, 1999 and is incorporated by reference.

     Copies of debt instruments (other than those listed above) for which the related debt does not exceed 10% of consolidated total assets as of December 31, 2001 will be furnished to the Commission upon request.

10.1     $300,000,000 Credit Agreement ("1999 Credit Facility") among Alpharma U.S. Inc. as Borrower, Union Bank of Norway, as agent and arranger, and Den norske Bank AS, as co-arranger, dated January 20, 1999, was filed as Exhibit 10.2 to the Company's 1998 Annual Report on Form 10K and is incorporated by reference.

10.1a     Amendment No. 2 to the 1999 Credit Facility and Amendment No. 3 to Parent Guaranty and Consent dated as of April 19, 2000 between the Company and the Banks that are parties to the original agreement was filed as Exhibit 4.2 to the Company's March 31, 2000 Form 10Q as is incorporated by reference.

10.1b     Form of Consent Amendment No. 3 to the 1999 Credit Facility and Amendment No. 4 to the Parent Guaranty dated as of May 2, 2000 by and among Union bank of Norway, as Agent, First Union National Bank, Den norske Ban ASA, Banque Nationale de Paris Oslo Branch, Landesbank Schlewig-Holstein Girozentrale Copenhagen Branch, and Summit Bank, as Working Capital Agent and Documentation Agent, Alpharma U.S. Inc. and Alpharma Inc. was filed as Exhibit 4.3 to the Company's March 31, 2000 Form 10Q as is incorporated by reference.

10.1c     Amendment No. 4 to the 1999 Credit Facility and Amendment No. 5 to the Parent Guaranty dated June 29, 2000 between the Company and the Banks that are parties to the amended agreement was filed as Exhibit 4.0 to the Company's September 30, 2000 Form 10Q and is incorporated by reference.

10.2     Credit Agreement dated as of October 5, 2001 between the Company and Bank of America N.A. and other Lenders was filed as Exhibit 10.0 to the Company's September 30, 2001 Form 10Q and is incorporated by reference.

10.2a     Subsidiary Guaranty made by certain of the Company's subsidiaries in favor of Bank of America N.A., as Administrative Agent, dated December 26, 2001 is filed as an Exhibit to this Report.

10.3     Employment Agreement between the Company and Michael J. Nestor, dated September 17, 2001, is filed as an Exhibit to this Report.

10.4     Employment Agreement between the Company and Richard J. Cella, dated August 29, 2000, is filed as an Exhibit to this Report.

10.5     Separation Letter Agreement between the Company and Thomas Anderson, dated January 15, 2001, is filed as an Exhibit to this Report.

10.6     Consulting Agreement dated as of January 1, 2001 between I. Roy Cohen and the Company was filed as Exhibit 10.b to the Company's 2000 Annual Report on Form 10-K is incorporated by reference.

10.7     The Company's 1997 Incentive Stock Option and Appreciation Right Plan, as amended was filed as Exhibit 10.1 to the Company's June 30, 1999 quarterly report on Form 10Q/A and is incorporated by reference.

10.8     Employment agreement dated July 30, 1991 between the Company and Jeffrey E. Smith was filed as Exhibit 10.8 to the Company's 1991 Annual Report on Form 10-K and is incorporated by reference.

10.9     Lease Agreement between A.L. Industrier AS, as landlord, and Alpharma AS, as tenant, dated October 3, 1994 was filed as Exhibit 10.10 to the Company's 1994 Annual Report on Form 10-K and is incorporated by reference.

10.10     Administrative Services Agreement between A.L. Industrier AS and Alpharma AS dated October 3, 1994 was filed as Exhibit 10.11 to the Company's 1994 Annual Report on Form 10-K and is incorporated by reference.

10.12     Employment contract dated December 1, 2000 between the Company and Ingrid Wiik was filed as Exhibit 10.14 to the Company's 2000 Annual Report on Form 10-K and is incorporated by reference.

10.13     Alpharma Inc. Executive Bonus Plan, effective January 1, 2001, was filed as Exhibit 10.16 to the Company's 2000 Annual Report on Form 10-K and is incorporated by reference.

10.14    Loan Agreement dated as of December 29, 2000, by and among FS Ascent Investments LLC, Alpharma USPD Inc. and Alpharma Inc., was filed as Exhibit 10.17h to the Company's 2000 Annual Report on Form 10-K and is incorporated by reference.

10.14a    Security Agreement dated as of December 29, 2000, by and between FS Ascent Investments LLC and Alpharma USPD Inc., was filed as Exhibit 10.17i to the Company's 2000 Annual Report on Form 10-K and is incorporated by reference.

10.14b    Supplemental Agreement dated December 29, 2000, by and among FS Ascent Investments LLC, Alpharma USPD Inc., Alpharma Inc., and each of the (lenders) named therein, was filed as Exhibit 10.17j to the Company's 2000 Annual Report on Form 10-K and is incorporated by reference.

10.14c    Termination Agreement dated as of December 29, 2000, by and among Ascent Pediatrics, Inc., Alpharma USPD Inc., Alpharma Inc., State Street Bank and Trust Company and the lenders named therein was filed as Exhibit 10.17k to the Company's 2000 Annual Report on Form 10-K and is incorporated by reference.

10.15     Asset purchase agreement dated as of April 19, 2000 among Roche Vitamins and F. Hoffman La Roche Ltd. (collectively, sellers) and the Company was filed as Exhibit 2.1 to the Company's Form 8-K dated May 5, 2000 and is incorporated by reference.

21     A list of the subsidiaries of the Registrant as of March 1, 2002 is filed as an Exhibit to this Report.

23     Consent of PricewaterhouseCoopers LLP, Independent Accountants, is filed as an Exhibit to this Report.

Undertakings

For purposes of complying with the amendments to the rules governing Registration Statements under the Securities Act of 1933, the undersigned Registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's Registration Statements on Form S-8 (No. 33-60495, effective July 13, 1990) and Form S-3 (File Nos. 333-57501, 333-86037, 333-86153 and 333-70229):

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

SIGNATURES

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

Pursuant to the requirements of the Securities and 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.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Financial statement schedules are omitted for the reason that they are not applicable or the required information is included in the consolidated financial statements or notes thereto.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and
  Board of Directors of
  Alpharma Inc.:

In our opinion, the accompanying consolidated financial statements listed in the index on page F-1 of this Form 10-K present fairly, in all material respects, the consolidated financial position of Alpharma Inc. and Subsidiaries (the "Company" ) as of December 31, 2001 and 2000 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which 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, evid ence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Florham Park, New Jersey
March 27, 2002

ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)

See notes to consolidated financial statements.

ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)

See notes to consolidated financial statements.

ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)