AKORN INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE YEAR ENDED DECEMBER 31, 2001

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

Commission File Number: 0-13976

AKORN, INC.
(Name of registrant as specified in its charter)

LOUISIANA 72-0717400
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

2500 MILLBROOK DRIVE, BUFFALO GROVE, ILLINOIS 60089
(Address of principal executive offices and zip code)

REGISTRANT'S TELEPHONE NUMBER: (847) 279-6100

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, No Par Value
(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, 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 financial statements included in this Form 10-K are unaudited. See the
"Statement in Lieu of Independent Auditors' Report" included in Item 8.

The aggregate market value of the voting stock held by non-affiliates
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of the Issuer's common stock) of the Issuer as of March
7, 2002 was approximately $47,229,000.

The number of shares of the Issuer's common stock, no par value per share,
outstanding as of March 7, 2002 was 19,555,514.

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FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act.
When used in this document, the words "anticipate," "believe," "estimate" and
"expect" and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements, including statements
regarding the intent, belief or expectations of the Company or its management
are not guarantees of future performance. These statements involve risks and
uncertainties and actual results may differ materially from those in the
forward-looking statements as a result of various factors, including but not
limited to:

- the effects of federal, state and other governmental regulation of the
Company's business;

- the Company's success in developing, manufacturing and acquiring new
products;

- the Company's ability to bring new products to market and the effects of
sales of such products on the Company's financial results;

- the Company's working capital requirements;

- the Company's ability to comply with debt covenants;

- the effects of competition from generic pharmaceuticals and from other
pharmaceutical companies; and

- other factors referred to in this Form 10-K and the Company's other SEC
filings.

See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors That May Affect Future Results". The
Company does not intend to update these forward-looking statements.

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FORM 10-K TABLE OF CONTENTS

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

Akorn, Inc. ("Akorn" or the "Company") manufactures and markets diagnostic
and therapeutic pharmaceuticals in specialty areas such as ophthalmology,
rheumatology, anesthesia and antidotes, among others. The Company also markets
ophthalmic surgical instruments and related products. Customers include
physicians, optometrists, wholesalers, group purchasing organizations and other
pharmaceutical companies. Akorn is a Louisiana corporation founded in 1971 in
Abita Springs, Louisiana. In 1997, the Company relocated its headquarters and
certain operations to Illinois.

Previous to 2001, the Company evaluated its business as two segments,
ophthalmic and injectable. The Company now classifies its operations into three
identifiable business segments, ophthalmic, injectable and contract services.
These three segments are discussed in greater detail below. For information
regarding revenues and gross profit for each of the Company's segments, see Note
M to the consolidated financial statements included in Item 8 of this report.

Ophthalmic Segment. The Company markets an extensive line of diagnostic and
therapeutic ophthalmic pharmaceutical products as well surgical instruments and
related supplies. Diagnostic products, primarily used in the office setting,
include mydriatics and cycloplegics, anesthetics, topical stains, gonioscopic
solutions, angiography dyes and others. Therapeutic products, sold primarily to
wholesalers and other national account customers, include antibiotics,
anti-infectives, steroids, steroid combinations, glaucoma medications,
decongestants/antihistamines and anti-edema medications. Surgical products
include surgical knives and other surgical instruments, balanced salt solution,
post-operative kits, surgical tapes, eye shields, anti-ultraviolet goggles,
facial drape supports and other supplies. Non-pharmaceutical products include
various artificial tear solutions, preservative-free lubricating ointments, lid
cleansers, vitamin supplements and contact lens accessories.

Injectable Segment. The Company markets a line of specialty injectable
pharmaceutical products, including anesthesia and products used in the treatment
of rheumatoid arthritis and pain management. These products are marketed to
wholesalers and other national account customers as well as directly to medical
specialists.

Contract Services Segment. The Company provides contract-manufacturing
services as well as product research and development services to pharmaceutical
and biotechnology companies.

Manufacturing. The Company has two manufacturing facilities located in
Decatur, Illinois and Somerset, New Jersey. See "Item 2. Description of
Property." The Company manufactures a diverse group of sterile pharmaceutical
products, including solutions, ointments and suspensions for its ophthalmic and
injectable segments. The Decatur facilities manufacture product for all three of
the Company's segments. The Somerset facility manufactures product for the
ophthalmic segment. The Company is also in the process of adding freeze-dried
(lyophilized) manufacturing capabilities at its Decatur facility. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results -- Dependence on
Development of Pharmaceutical Products and Manufacturing Capabilities."

Sales and Marketing. While the Company is working to expand its proprietary
product base through internal development and, to a lesser extent, acquisitions,
the majority of current products are non-proprietary. The Company relies on its
efforts in marketing, distribution, development and low cost manufacturing to
maintain and increase market share.

The ophthalmic segment uses a three-tiered sales effort. Outside sales
representatives sell directly to physicians and group practices. In-house sales
(telemarketing) and customer service (catalog sales) sell to optometrists and
other customers. A national accounts group sells to wholesalers, retail chains
and other group purchasing organizations. This national accounts group also
markets the Company's injectable pharmaceutical products, which the Company also
sells through telemarketing and direct mail activities to individual specialty
physicians and hospitals. The contract services segment markets its contract
manufacturing services through direct mail, trade shows and direct industry
contacts.
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The Company records an allowance for estimated product returns. This
allowance is reflected as a reduction of account receivable balances. The
Company evaluates the allowance balance against actual returns processed. Actual
returns processed can vary materially from period to period.

Based on the wholesaler's inventory information, the Company increased its
allowance for potential product returns to $2,232,000 at March 31, 2001 from
$232,000 at December 31, 2000. The provision for the three months ended March
31, 2001 was $2,559,000. The allowance for potential product returns was
$548,000 at December 31, 2001.

Research and Development. As of December 31, 2001, the Company had 17
Abbreviated New Drug Applications ("ANDAs") for generic pharmaceuticals in
various stages of development. The Company filed 7 of these ANDAs and received
approval for 1 ANDA in 2001. See "Government Regulation." The Company expects to
continue to file ANDAs on a regular basis as pharmaceutical products come off
patent allowing the Company to compete by marketing generic equivalents. The
Food and Drug Administration ("FDA") approved the New Drug Application ("NDA")
for Paremyd, on December 5, 2001. This product is to be launched during the
first quarter of 2002.

The Company is developing two new indications for ophthalmic products for
which it currently anticipates filing NDAs in the future. See Note C to the
consolidated financial statements included in Item 8 of this report. One is an
indication for Indocyanine Green ("ICG") to treat age related macular
degeneration ("AMD"). If the Company's developmental efforts are successful, the
Company currently anticipates filing this NDA within the next four years and
estimates the market size for this product to be $350 million annually. The
Company also anticipates filing an NDA supplement within the next three years
for an indication for ICG for intra-ocular staining. The Company estimates the
market for this product to be $10 million annually.

Pre-clinical and clinical trials required in connection with the
development of pharmaceutical products are performed by contract research
organizations under the direction of Company personnel. No assurance can be
given as to whether the Company will file these NDAs, or any ANDAs, when
anticipated, whether the Company will develop marketable products based on these
filings or as to the actual size of the market for any such products. See
"Government Regulation" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors That May Affect Future
Results -- Dependence on Development of Pharmaceutical Products and
Manufacturing Capabilities".

The Company also maintains a business development program that identifies
potential product acquisition or product licensing candidates. The Company has
focused its business development efforts on niche products that complement its
existing product lines and that have few or no competitors in the market. In
2000, the Company entered into an exclusive cross marketing agreement with
Novadaq Technologies, Inc., for cardiac angiography procedures employing ICG.
Under the terms of the agreement, as amended on January 25, 2002, Novadaq will
assume all further costs associated with development of the technology. The
Company, in consideration of foregoing any share of future net profits, will
obtain an equity ownership interest in Novadaq and the right to be the exclusive
supplier of ICG for use in Novadaq's diagnostic procedures.

At December 31, 2001, 14 full-time employees of the Company were involved
in research and development and product licensing.

Research and development costs are expensed as incurred. Such costs
amounted to $2,598,000, $4,132,000 and $2,744,000 for the years ended December
31, 2001, 2000 and 1999, respectively.

Patents and Proprietary Rights. The Company considers the protection of
discoveries in connection with its development activities important to its
business. The Company intends to seek patent protection in the United States and
selected foreign countries where deemed appropriate. As of December 31, 2001,
the Company had received four U.S. patents and had four additional U.S. patent
applications and one international patent application pending. In February of
2002, the Company was notified by the U.S. Patent and trademark Office that U.S.
patent number 6,351,663 titled Methods for diagnosing and treating abnormal
vasculature using fluorescent dye angiography and dye enhanced photocoagulation
had been issued to the Company. This was one of the four U.S. patents on file as
of December 31, 2001. The Company has also
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licensed two U.S. patents from the Johns Hopkins University, Applied Physics
Laboratory ("JHU/APL") for the development and commercialization of AMD
diagnosis and treatment using ICG, which licenses require the Company to conduct
clinical trials, which trials are at the Phase I stage and are ongoing. There
can be no assurances that these clinical trials will be successful. In addition,
a dispute has arisen between the Company and JHU/APL regarding the two patents
licensed for AMD and the Company's performance under the terms of the applicable
License Agreement. See "Legal Proceedings". The patents held by the Company
cover ophthalmic products and processes except for four patents which are
methods patents relating to a currently marketed injectable product. These four
patents are not currently supporting any product or product indication currently
marketed by the Company. There can be no assurance that the Company will obtain
U.S. or foreign patents or, if obtained that they will provide substantial
protection or be of commercial benefit. The Company also relies upon trademarks,
trade secrets, unpatented proprietary know-how and continuing technological
innovation to maintain and develop its competitive position. The Company enters
into confidentiality agreements with certain of its employees pursuant to which
such employees agree to assign to the Company any inventions relating to the
Company's business made by them while in the Company's employ. However, there
can be no assurance that others may not acquire or independently develop similar
technology or, if patents are not issued with respect to products arising from
research, that the Company will be able to maintain information pertinent to
such research as proprietary technology or trade secrets. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors That May Affect Future Results -- Patents and Proprietary
Rights".

Employee Relations. At December 31, 2001, the Company had 310 full-time
employees, of whom 292 were employed by Akorn and 18 by its wholly owned
subsidiary, Akorn (New Jersey), Inc. The Company enjoys good relations with its
employees, none of whom are represented by a collective bargaining agent.

Competition. The marketing and manufacturing of pharmaceutical products is
highly competitive, with many established manufacturers, suppliers and
distributors actively engaged in all phases of the business. Most of the
Company's competitors have substantially greater financial and other resources,
including greater sales volume, larger sales forces and greater manufacturing
capacity. See "Item 7. Management's Discussion and Analysis of
Operations -- Factors That May Affect Future Results -- Competition; Uncertainty
of Technological Change."

The companies that compete with the ophthalmic segment include Alcon
Laboratories, Inc., Allergan Pharmaceuticals, Inc., Ciba Vision and Bausch &
Lomb, Inc. ("B&L"). The ophthalmic segment competes primarily on the basis of
price and service. The ophthalmic segment purchases some ophthalmic products
from B&L, who is in direct competition with the Company in several markets.

The companies that compete with the injectable segment include both generic
and name brand companies such as Abbott Labs, Gensia, American Pharmaceutical
Products, Elkin Sinn and American Regent. The injectable segment competes
primarily on the basis of price.

Competitors in the contract services segment include Cook Imaging,
Chesapeake Biological Laboratories, Ben Venue and Oread Laboratories. The
manufacturing of sterile products must be performed under government mandated
Good Manufacturing Practices.

Suppliers and Customers. No supplier of products accounted for more than
10% of the Company's purchases in 2001, 2000 or 1999. The Company requires a
supply of quality raw materials and components to manufacture and package
pharmaceutical products for itself and for third parties with which it has
contracted. The principal components of the Company's products are active and
inactive pharmaceutical ingredients and certain packaging materials. Many of
these components are available from only a single source and, in the case of
many of the Company's ANDAs and NDAs, only one supplier of raw materials has
been identified. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Future
Results -- Dependence on Supply of Raw Materials and Components".

No single customer accounted for more than 10% of the Company's revenues
during 2001 or 1999. During 2000, the Company realized approximately 12% of its
revenues from one customer. This customer is a distributor of the Company's
products as well as a distributor of a broad range of health care products for

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many companies in the health care sector. This customer is not the end user of
the Company's products. If sales to this customer were to diminish or cease, the
Company believes that the end users of its products would find no difficulty
obtaining the Company's products either directly from the Company or from
another distributor. The accounts receivable balance for this customer was
approximately 22% of gross trade receivables at December 31, 2000.

Government Regulation. Pharmaceutical manufacturers and distributors are
subject to extensive regulation by government agencies, including the FDA, the
Drug Enforcement Agency ("DEA"), the Federal Trade Commission ("FTC") and other
federal, state and local agencies. The federal Food, Drug and Cosmetic Act (the
"FDA Act"), the Controlled Substance Act and other federal statutes and
regulations govern or influence the development, testing, manufacture, labeling,
storage and promotion of products. The FDA inspects drug manufacturers and
storage facilities to determine compliance with its Good Manufacturing Practice
regulations, non-compliance with which can result in fines, recall and seizure
of products, total or partial suspension of production, refusal to approve new
drug applications and criminal prosecution. The FDA also has the authority to
revoke approval of drug products.

With certain exceptions, FDA approval is required before any drug can be
manufactured and marketed. New drugs require the filing of an NDA, including
clinical studies demonstrating the safety and efficacy of the drug. Generic
drugs, which are equivalents of existing brand name drugs, require the filing of
an ANDA, which waives the requirement of conducting clinical studies of safety
and efficacy. Ordinarily, the filing of an ANDA for generic drugs that contain
the same ingredients as drugs already approved for use in the United States
requires data showing that the generic formulation is equivalent to the brand
name drug and that the product is stable in its formulation. The Company has no
control over the time required for the FDA to approve NDA or ANDA filings.

During 2000, the Company received a warning letter as a result of a routine
inspection of its Decatur manufacturing facilities. This letter focused on
general documentation and cleaning validation issues. The Company was
re-inspected in late 2001 and the FDA issued a Form 483 documenting its
findings. The Company responded to these findings on January 4, 2002 and is
awaiting a response from the FDA. The warning letter prevents the FDA from
issuing any approval for new products manufactured at the Decatur facility. The
warning letter does not inhibit the Company's ability to continue manufacturing
products that are currently approved. The warning letter does not impact the
operations at the Somerset facility.

The Company also manufactures and distributes several controlled-drug
substances, the distribution and handling of which are regulated by the DEA.
Failure to comply with DEA regulations can result in fines or seizure of
product. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Future
Results -- Government Regulation".

On March 6, 2002, the Company received a letter from the United States
Attorney's Office, Central District of Illinois, Springfield, Illinois, advising
the Company that the United States Drug Enforcement Administration had referred
a matter to that office for a possible civil legal action for alleged violations
of the Comprehensive Drug Abuse Prevention Control Act of 1970, 21 U.S.C.
sec. 801, et. seq. and regulations promulgated under the Act. The Company is
cooperating fully with the government and anticipates that any action under this
matter will not have a material impact on its financial statements. See "Legal
Proceedings".

The Company does not anticipate any material adverse effect from compliance
with federal, state and local provisions that have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment.

ITEM 2. DESCRIPTION OF PROPERTIES

Since August 1998, the Company's headquarters and certain administrative
offices, as well as a finished goods warehouse, have been located in leased
space at 2500 Millbrook Drive, Buffalo Grove, Illinois. The Company leased
approximately 24,000 square feet until June 2000 at which time it expanded to
the current occupied space of approximately 48,000 square feet. From May 1997 to
August 1998, the Company's headquarters and ophthalmic division offices were
located in approximately 11,000 square feet of leased space

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in Lincolnshire, Illinois. The Company sub-lets portions of the Lincolnshire
space. The Company's former headquarters, consisting of approximately 30,000
square feet located on ten acres of land in Abita Springs, Louisiana, was sold
in February 1999.

The Company owns a 76,000 square foot facility located on 15 acres of land
in Decatur, Illinois. This facility is currently used for packaging,
distribution, warehousing and office space. In addition, the Company owns a
55,000 square-foot manufacturing facility in Decatur, Illinois. The Decatur
facilities support all three of the Company's segments. The Company leases
approximately 7,000 square feet of office and warehousing space in San Clemente,
California, formerly used as a sales office to support the Injectable segment.
The Company successfully sublet this space through the term of the lease when
the San Clemente operations were closed and relocated to Buffalo Grove. The
Company's Akorn (New Jersey) subsidiary also leases approximately 40,000 square
feet of space in Somerset, New Jersey. This space is used for manufacturing,
research and development and administrative activities related to the ophthalmic
segment. The combined space is considered adequate to accommodate growth for the
foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

After the close of business on March 27, 2002, the Company received a
letter informing it that the staff of the Securities and Exchange Commission's
regional office in Denver, Colorado, plans to recommend to the Commission that
it bring an enforcement action for injunctive relief against the Company. Based
on the letter, the Company believes the recommended action would concern the
Company's alleged misstatement, in quarterly and annual Securities and Exchange
Commission filing and earnings press releases, of its income for fiscal year
2000 by allegedly failing to reserve for doubtful accounts receivable and
overstating its accounts receivable balance. The Company has also learned that
certain of its former officers, as well as a current employee have received
similar notifications. The Company disagrees with the staff's proposed
recommendation and allegations; it has been invited to submit its views as to
why an enforcement action should not be brought, and intends to do so. Because
the proposed enforcement action relates to matters in a prior fiscal year, it is
not anticipated that these proceedings will have any material impact on the
Company's Consolidated Balance Sheet as of December 31, 2001 or on the Company's
2002 or future operating results.

The Company is party to a License Agreement with The Johns Hopkins
University, Applied Physics Laboratory ("JHU/APL") effective April 26, 2000, and
amended effective July 15, 2001 (See Note C). Pursuant to the License Agreement,
the Company licensed two patents from JHU/APL for the development and
commercialization of a diagnosis and treatment for age-related macular
degeneration ("AMD") using Indocyanine Green ("ICG"). A dispute has arisen
between the Company and JHU/APL concerning the License Agreement. Specifically,
JHU/APL has challenged the Company's performance under the License Agreement and
alleged that the Company is in breach of the License Agreement. The Company's
has denied JHU/APL's allegations and contends that it has performed in
accordance with the terms of the License Agreement. As a result of the dispute,
on March 29, 2002, the Company commenced a lawsuit in the U.S. District Court
for the Northern District of Illinois, seeking declaratory and other relief
against JHU/APL. On Monday, April 1, 2002, the Company and JHU/APL agreed,
through counsel, to attempt to negotiate a resolution to the present dispute. If
negotiations prove unsuccessful, the Company and JHU/APL will seek to mediate
the dispute. Failing that, the litigation would proceed forward. The Company has
an intangible asset valued at $2,084,500 recorded as a result of the License
Agreement, as amended. Unsuccessful resolution of the dispute could result in a
revaluation of this intangible asset.

On March 6, 2002, the Company received a letter from the United States
Attorney's Office, Central District of Illinois, Springfield, Illinois, advising
the Company that the United States Drug Enforcement Administration had referred
a matter to that office for a possible civil legal action for alleged violations
of the Comprehensive Drug Abuse Prevention Control Act of 1970, 21 U.S.C.
sec. 801, et. seq. and regulations promulgated under the Act. The Company is
cooperating fully with the government and anticipates that any action under this
matter will not have a material impact on its financial statements.

On August 9, 2001, the Company was served with a Complaint which had been
filed on August 8, 2001 in the United States District Court for The Northern
District of Illinois, Eastern Division. The suit named the

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Company as well as Mr. Floyd Benjamin, the former president and chief executive
officer of the Company, and Dr. John N. Kapoor, the Company's current chairman
of the board and then interim chief executive officer as defendants. The suit,
which was filed by Michelle Golumbski, individually, and on behalf of all others
similarly situated, alleged various violations of the federal securities laws in
connection with the Company's public statements and filings with the Securities
and Exchange Commission during the period from February 20, 2001 through May 22,
2001. The plaintiff subsequently voluntarily dismissed her claims against Akorn,
Inc., Mr. Floyd Benjamin and Dr. John N. Kapoor, and, in exchange for the
Company's consent to this voluntary dismissal, also provided, through counsel, a
written statement that the plaintiff would not reassert her claims against any
of the defendants in any subsequent actions. The Company did not provide the
plaintiff with any compensation in consideration for this voluntary dismissal.

On April 4, 2001, the International Court of Arbitration (the "ICA") of the
International Chamber of Commerce notified the Company that Novadaq
Technologies, Inc. ("Novadaq") had filed a Request for Arbitration with the ICA
on April 2, 2001. Akorn and Novadaq had previously entered into an Exclusive
Cross-Marketing Agreement dated July 12, 2000 (the "Agreement"), providing for
their joint development and marketing of certain devices and procedures for use
in fluorescene angiography (the "Products"). Akorn's drug indocyanine green
("ICG") would be used as part of the angiographic procedure. The United States
Food and Drug Administration ("FDA") had requested that the parties undertake
clinical studies prior to obtaining FDA approval. In its Request for
Arbitration, Novadaq asserted that under the terms of the Agreement, Akorn
should be responsible for the costs of performing the requested clinical trials,
which were estimated to cost approximately $4,400,000. Alternatively, Novadaq
sought a declaration that the Agreement should be terminated as a result of
Akorn's alleged breach. Finally, in either event, Novadaq sought unspecified
damages as a result of the alleged failure or delay on Akorn's part in
performing its obligations under the Agreement. In its response, Akorn denied
Novadaq's allegations and alleged that Novadaq had breached the agreement. On
January 25, 2002, the Company and Novadaq reached a settlement of the dispute.
Under terms of a revised agreement entered into as part of the settlement,
Novadaq will assume all further costs associated with development of the
technology. The Company, in consideration of foregoing any share of future net
profits, obtained an equity ownership interest in Novadaq and the right to be
the exclusive supplier of ICG for use in Novadaq's diagnostic procedures. In
addition, Antonio R. Pera, Akorn's President and Chief Operating Officer, was
named to Novadaq's Board of Directors. In conjunction with the revised
agreement, Novadaq and the Company each withdrew their respective arbitration
proceedings.

The Company is a party in legal proceedings and potential claims arising in
the ordinary course of its business. The amount, if any, of ultimate liability
with respect to such matters cannot be determined. Despite the inherent
uncertainties of litigation, management of the Company at this time does not
believe that such proceedings will have a material adverse impact on the
financial condition, results of operations, or cash flows of the Company.

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

No matters were submitted to a vote of security holders during the quarter
ended December 31, 2001.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded on the NASDAQ National Market under
the symbol AKRN. On March 7, 2002, there were approximately 615 holders of
record of the Company's Common Stock. This number does not include shareholders
for which shares are held in a 'nominee' or 'street' name. The closing price of
the Company's Common Stock on March 7, 2002 was $3.94 per share.

High and low bid prices per NASDAQ for the periods indicated were:

The Company did not pay cash dividends in 2001, 2000 or 1999 and does not
expect to pay dividends on our common stock in the foreseeable future. Moreover,
the Company is currently prohibited by its credit agreement with The Northern
Trust Company from making any dividend payment.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial information
for the Company for the years ended December 31, 2001, 2000, 1999, 1998 and
1997. The results for 2001 and 2000 are unaudited. See "Item 8, Statement in
Lieu of Independent Auditors' Report."

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NM -- Not meaningful

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the accompanying consolidated
financial statements. The results for 2001 and 2000 are unaudited. See "Item 8,
Statement in Lieu of Independent Auditors' Report."

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RESULTS OF OPERATIONS

The Company's revenues are derived from sales of diagnostic and therapeutic
pharmaceuticals and surgical instruments by the ophthalmic segment, from sales
of diagnostic and therapeutic pharmaceuticals by the injectable segment and from
contract services revenue. The following table sets forth the percentage
relationships that certain items from the Company's Consolidated Statements of
Income bear to revenues for the years ended December 31, 2001, 2000 and 1999.

SIGNIFICANT ACCOUNTING POLICIES

The Company accrues an estimate of the difference between the gross sales
price of certain products sold to wholesalers and the expected resale prices of
such products under contractual arrangements with third parties such as
hospitals and group purchasing organizations at the time of sale to the
wholesaler. Similarly, the Company records an allowance for rebates related to
contracts and other programs with wholesalers. These allowances are reflected as
a reduction of account receivable balances. The Company evaluates the allowance
balances against actual chargebacks and rebates processed by wholesalers. Actual
chargebacks and rebates processed can vary materially from period to period. The
Company has an increasing number of contracts and other programs with
wholesalers, each incorporating various numbers and types of chargebacks and
rebates. The recorded allowance amount reflects the Company's current estimate
of the chargeback and rebate amounts wholesalers have earned under these various
contracts and programs.

In May 2001, the Company completed an analysis of its March 31, 2001
allowance for chargebacks and rebates and determined that an increase from the
allowance of $3,296,000 at December 31, 2000 was necessary. In performing such
analysis, the Company utilized recently obtained reports of wholesaler's
inventory information, which had not been previously obtained or utilized. Based
on the wholesaler's March 31, 2001 inventories and historical chargeback and
rebate activity, the Company recorded an allowance of $6,961,000, which resulted
in an expense of $12,000,000 for the three months ended March 31, 2001.

During the quarter ended June 30, 2001, the Company further refined its
estimates of the chargeback and rebate liability determining that an additional
$2,250,000 provision needed to be recorded. This additional increase to the
allowance was necessary to reflect the continuing shift of sales to customers
who purchase their products through group purchasing organizations and buying
groups. The Company had previously seen a much greater level of list price
business than is occurring in the current business environment.

The Company records an allowance for estimated product returns. This
allowance is reflected as a reduction of account receivable balances. The
Company evaluates the allowance balance against actual returns processed. Actual
returns processed can vary materially from period to period.

Based on the wholesaler's inventory information, the Company increased its
allowance for potential product returns to $2,232,000 at March 31, 2001 from
$232,000 at December 31, 2000. The provision for the

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three months ended March 31, 2001 was $2,559,000. The allowance for potential
product returns was $548,000 at December 31, 2001.

The Company records an allowance for doubtful accounts, which reflects
trade receivable balances owed to the Company that are believed to be
uncollectible. This allowance is reflected as a reduction of account receivable
balances. The expense related to doubtful accounts is reflected in SG&A
expenses.

Based upon its recent unsuccessful efforts to collect past due balances,
the Company updated its analysis of potentially uncollectible trade receivable
balances and recorded a total bad debt provision for the year of $12,000,000.
The Company recorded $7,520,000 and $4,610,00 in the first and second quarter of
2001, respectively and reduced the allowance $130,000 in the fourth quarter of
2001. As a result, and after the effect of balances written off, the allowance
for doubtful accounts increased to $3,706,000 at December 31, 2001 from $801,000
at December 31, 2000.

The Company records an allowance for discounts and allowances, which
reflects discounts and allowances available to certain customers based on agreed
upon terms of sale. This allowance is reflected as a reduction of account
receivable balances. The Company evaluates the allowance balance against actual
discounts taken.

The Company records an estimate for slow-moving and obsolete inventory
based upon recent historical sales by unit. The Company evaluates the potential
sales of its products over their remaining lives and estimates the amount that
may expire before being sold.

In the fourth quarter of 2000, the Company increased this reserve by
$2,700,000 to account for slow moving and obsolete inventory primarily related
to products purchased from third parties in 1998 and 1999 for which the original
sales forecast overestimated actual demand.

In the first quarter of 2001, based on sales trends and forecasted sales
activity by product, the Company increased its allowance for inventory
obsolescence to $4,583,000. The provision for the three months ended March 31,
2001 was $1,500,000. The allowance for inventory obsolescence was $1,845,000 at
December 31, 2001.

All other increases to the allowances for chargebacks and rebates, returns,
doubtful accounts, discounts and allowances and inventory obsolescence occurred
as part of the normal recording of product sales.

COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2001 AND 2000

Revenues decreased 36.9% for the year ended December 31, 2001 compared to
the prior year. Ophthalmic segment revenues decreased 38.2%, primarily
reflecting the decline in sales in the antibiotic, glaucoma and artificial tear
product lines. The remaining decline in ophthalmic revenues reflects the effect
of increases to the allowance for chargebacks and rebates discussed in Note K to
the Consolidated Financial Statements. The allowances for chargebacks and
rebates and returns are recorded as reductions to gross sales in computing net
sales. Ophthalmic net sales were also negatively impacted by price competition
for some of the Company's higher volume product lines. The reduction in sales
was due to both declines in unit price as well as volume. Injectable segment
revenues decreased 60.9%, primarily due to the increases in the allowances for
chargebacks and rebates and returns, discussed in Note K to the Consolidated
Financial Statements and a sharp reduction in anesthesia and antidote product
sales. The sharp reduction is attributable to excessive wholesaler inventories
that were reduced during the year without compensating purchases made by the
wholesalers. Contract services revenues increased 10.6% compared to the same
period in 2000, primarily due to price increases necessary to cover increasing
production costs.

Consolidated gross profit decreased 75.4% for the year, with gross margins
decreasing from 43.1% to 16.8%. This reflects the effects of the aforementioned
decline in net sales, as well as an increase in the reserve for slow-moving,
unsaleable and obsolete inventory items (See Note K). In addition, the Company
incurred unfavorable manufacturing variances at both the Somerset, NJ facility
and its Decatur, IL facility, which eroded the gross margin percentage. These
variances were the result of reduced activity in the plant, primarily caused by
the previously discussed reduction in sales that resulted from the wholesaler
inventories being reduced without compensating purchases. Management anticipates
that manufacturing variances will decrease

12

in the future as a result of the restructuring program (See Note S) implemented
during 2001. The Company is actively looking into increasing its manufacturing
activity at its Somerset facility either through additional product approvals or
increasing its third-party manufacturing business.

Selling, general and administrative expenses ("SG&A") increased 81.2% for
the year as compared to 2000. The increase primarily reflects a provision for
bad debts of $12,000,000. The provision for bad debts in 2000 was $607,000. SG&A
expenses also increased due to asset impairment charges of $2,132,000 and
restructuring-related charges of $1,117,000 primarily severance and lease costs.
Without these charges, SG&A would have decreased 6.4%, reflecting the results of
the cost cutting and restructuring efforts employed during the year.

Amortization of intangibles decreased 1.6% for the year, reflecting the
exhaustion of certain product intangibles.

Research and Development expenses ("R&D") decreased 37.1%, primarily
reflecting a scaling back of research and development activities. The Company is
focusing on strategic product niches in which it believes it will be able to add
value, primarily in the areas of controlled substances and ophthalmics.

Interest expense increased 47.8% compared to 2000, reflecting higher
interest rates on higher average outstanding debt balances (See Note G)
partially offset by capitalized interest related to the lyophilized
pharmaceuticals manufacturing line expansion.

Net loss for 2001 was $19,611,000, or $1.01 per share, compared to net
income of $2,187,000, or $0.11 per share, for the prior year.

COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2000 AND 1999

Revenues increased 3.6% for the year ended December 31, 2000 compared to
the prior year. Ophthalmic segment revenues decreased 13.1%, primarily due to
sharply reduced sales in generic therapeutic pharmaceuticals for glaucoma and
allergies. The reduction in sales was due to both declines in unit price as well
as volume. Injectable segment revenues increased 20.3%, primarily due to sales
of acquired anesthesia products. Injectable segment sales also benefited from
favorable unit prices due to a continuing shortage of certain distributed
products and increased contract-manufacturing activity. In both segments,
wholesaler-discounting programs unfavorably impacted unit prices. These
discounts take the form of chargebacks and rebates. Chargebacks and rebates are
discussed further in Note K to the Consolidated Financial Statements. This
charge is reflected as a reduction in net sales, primarily ophthalmic.

Consolidated gross profit decreased 13.9% for the year, with gross margins
decreasing from 51.8% to 43.1%. Pricing pressure on ophthalmic generic
pharmaceuticals as well as the disproportionate increase in contract
manufacturing revenues caused the decrease in gross margins. Contract
manufacturing activity commands significantly lower margins than sales of the
Company's other product lines. Margins in 2000 were also reduced by a $4.0
million ($2.7 million in the fourth quarter) increase in the reserve for
slow-moving and obsolete inventory. This increase was primarily related to
products purchased from third parties in 1998 and 1999 for which the original
sales forecast overestimated demand.

Selling, general and administrative expenses ("SG&A") increased 4.0%,
reflecting routine escalations in rental and other contracts, routine
compensation increases, and the increase in leased space in the Buffalo Grove
facility.

Amortization of intangibles decreased 19.1% for the year, reflecting a
patent expiration in the 2nd quarter of 1999.

Research and Development expenses ("R&D") increased 50.6%, primarily
reflecting costs associated with Piroxicam clinical trials and beginning stage
development of the Company's age-related macular degeneration product.

Interest expense increased 24.9%, reflecting higher interest rates on
higher average outstanding debt balances partially offset by capitalized
interest related to major capital projects in 2000.

13

Net income for 2000 was $2,187,000, or $0.11 per diluted share, compared to
$6,670,000, or $0.36 per diluted share, for the prior year. The decrease in
earnings resulted from the above mentioned items.

FINANCIAL CONDITION AND LIQUIDITY

As of December 31, 2001, the Company had cash and cash equivalents of
$5,355,000. The net working capital balance at December 31, 2001 was
$(24,357,000) versus $26,355,000 at December 31, 2000 resulting primarily from
decreases in receivables and inventory and reclassification of the Company's
senior debt obligation as a current liability.

During the year ended December 31, 2001, the Company used $654,000 in cash
for operations. Investing activities, which include the purchase of
product-related intangible assets as well as equipment required $4,126,000 in
cash. Fixed asset purchases related to the lyophilized (freeze-dried)
pharmaceuticals manufacturing line expansion accounted for $2,566,000 of the
$4,126,000 cash used in investing activities and the Company expects to spend an
additional $2,500,000 for such expansion during 2002. Financing activities
provided $9,328,000 in cash primarily through the issuance of $5,000,000
subordinated convertible debentures and a $3,250,000 promissory note.

In 1997 the Company entered into a $15 million revolving credit
arrangement, increased to $25 million in 1998, and subsequently increased to $45
million in 1999, subject to certain financial covenants and certain liens on the
Company's fixed assets. The credit agreement, as amended effective January 1,
2002, requires the Company to maintain certain financial covenants. These
covenants include minimum levels of cash receipts, limitations on capital
expenditures, a $750,000 per quarter limitation on product returns and required
amortization of the loan principal. The agreement also prohibits the Company
from declaring any cash dividends on its common stock and identifies certain
conditions in which the principal and interest on the credit agreement would
become immediately due and payable. These conditions include: (a) an action by
the FDA which results in a partial or total suspension of production or shipment
of products, (b) failure to invite the FDA in for re-inspection of the Decatur
manufacturing facilities by June 1, 2002, (c) failure to make a written
response, within 10 days, to the FDA, with a copy to the lender, to any written
communication received from the FDA after January 1, 2002 that raises any
deficiencies, (d) imposition of fines against the Company in an aggregate amount
greater than $250,000, (e) a cessation in public trading of Akorn stock other
than a cessation of trading generally in the United States securities market,
(f) restatement of or adjustment to the operating results of the Company in an
amount greater than $27,000,000, (g) failure to enter into an engagement letter
with an investment banker for the underwriting of an offering of equity
securities by June 15, 2002, (h) failure to not be party to an engagement letter
at any time after June 15, 2002 or (i) experience any material adverse action
taken by the FDA, the SEC, the DEA or any other Governmental Authority based on
an alleged failure to comply with laws or regulations. Management believes it
will be able to comply with the covenants during 2002. In the event that the
Company is not in compliance with the covenants during 2002 and does not
negotiate amended covenants and/or obtain a waiver thereto, then the debt
holder, at its option, may demand immediate payment of all outstanding amounts
due it. The amended credit agreement requires a minimum payment of $5.6 million,
which relates to an estimated federal tax refund, with the balance of $39.2
million due June 30, 2002. The estimated $5.6 million tax refund must be
remitted within three days of receipt from the Internal Revenue Service. The
Company is also obligated to remit any additional federal tax refunds received
above the estimated $5.6 million. The current credit facility matures on June
30, 2002 at which point the Company will need to re-negotiate or obtain new
financing. Management believes that additional long-term financing will be
needed to finance product development or acquisitions. There are no guarantees
that such financing will be available or available at an acceptable cost. See
Note G to Consolidated Financial Statement for a description of this
indebtedness and other indebtedness of the Company.

On July 12, 2001 the Company entered into a $5,000,000 subordinated debt
transaction with the John N. Kapoor Trust dtd. 9/20/89 (the "Trust"), the sole
trustee and sole beneficiary of which is Dr. John N. Kapoor, the Company's
current CEO and Chairman of the Board of Directors. The transaction is evidenced
by a Convertible Bridge Loan and Warrant Agreement (the "Trust Agreement") in
which the Trust agreed to provide two separate tranches of funding in the
amounts of $3,000,000 ("Tranche A" which was received on
14

July 13) and $2,000,000 ("Tranche B" which was received on August 16). As part
of the consideration provided to the Trust for the subordinated debt, the
Company issued the Trust two warrants which allow the Trust to purchase
1,000,000 shares of common stock at a price of $2.85 per share and another
667,000 shares of common stock at a price of $2.25 per share. The exercise price
for each warrant represented a 25% premium over the share price at the time of
the Trust's commitment to provide the subordinated debt.

Under the terms of the Trust Agreement, the subordinated debt will bear
interest at prime plus 3%, which is the same rate the Company pays on its senior
debt. Interest will not be paid to the Trust, but will instead accrue as
required by the terms of a subordination agreement which was entered into
between the Trust and the Company's senior lenders. The convertible feature of
the Trust Agreement, as amended, allows for conversion of the subordinated debt
plus interest into common stock of the Company, at a price of $2.28 per share of
common stock for Tranche A and $1.80 per share of common stock for Tranche B.

The Company, in accordance with Accounting Principles Board ("APB") Opinion
No. 14, recorded the subordinated debt transaction such that the convertible
debt and warrants have been assigned independent values. The fair value of the
warrants was estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions: (i) dividend yield of 0%, (ii)
expected volatility of 79%, (iii) risk free rate of 4.75%, and (iv) expected
life of 5 years. As a result, the Company assigned a value of $1,516,000 to the
warrants and recorded this amount as additional paid in capital. The remaining
$3,484,000 was recorded as long-term debt. The resultant bond discount,
equivalent to the value assigned to the warrants, will be amortized and charged
to interest expense over the life of the subordinated debt.

In December 2001, the Company entered into a $3,250,000 five-year loan with
NeoPharm, Inc. ("NeoPharm") to fund Akorn's efforts to complete its
lyophilization facility located in Decatur, Illinois. Under the terms of the
Promissory Note, dated December 20, 2001, interest will accrue at the initial
rate of 3.6% and will be reset quarterly based upon NeoPharm's average return on
its cash and readily tradable long and short-term securities during the previous
calendar quarter. The principal and accrued interest is due and payable on or
before maturity on December 20, 2006. The note provides that Akorn will use the
proceeds of the loan solely to validate and complete the lyophilization facility
located in Decatur, Illinois and to address the issues set forth in the Form 483
and warning letter received from the FDA. The Promissory Note is subordinated to
Akorn's senior debt owed to The Northern Trust Company but is senior to Akorn's
subordinated debt owed to the Trust. The note was executed in conjunction with a
Processing Agreement that provides NeoPharm, Inc. with the option of securing at
least 15% of the capacity of Akorn's lyophilization facility each year. Dr. John
N. Kapoor, the Company's chairman and chief executive officer is also chairman
of NeoPharm and holds a substantial stock position in that company as well as in
the Company.

Commensurate with the completion of the Promissory Note between the Company
and NeoPharm, the Company entered into an agreement with the Trust, which
amended the Trust Agreement. The amendment extended the Trust Agreement to
terminate concurrently with the Promissory Note on December 20, 2006. The
amendment also made it possible for the Trust to convert the interest accrued on
the $3,000,000 tranche into common stock of the Company. Previously, the Trust
could only convert the interest accrued on the $2,000,000 tranche. The change
related to the convertibility of the interest accrued on the $3,000,000 tranche
requires that shareholder approval be received by August 31, 2002.

15

SELECTED QUARTERLY DATA
In Thousands, Except Per Share Amounts
(Unaudited)

FACTORS THAT MAY AFFECT FUTURE RESULTS

Financial Risk Factors

A small number of wholesale drug distributors accounts for a large portion
of the Company's revenues. In 2001, sales to five wholesale drug distributors
accounted for 42% of total gross sales and approximately 47% of gross trade
receivables as of December 31, 2001. The loss of one or more of these customers,
a change in purchasing patterns, an increase in returns of the Company's
products, delays in purchasing products and delays in payment for products by
one or more distributors could have a material negative impact on the Company's
revenue and results of operations and may lead to a violation of debt covenants.

At December 31, 2001, the Company had total outstanding indebtedness of
$53,933,000, or 71% of total capitalization. This significant debt load could
limit the Company's operating flexibility as a result of restrictive covenants
placed on the Company by its lenders. Further, the current debt levels could
require usage of a large portion of the cash flow from operations for debt
payments that would reduce the availability of cash flow to fund operations,
product acquisitions, expansion of the Company's sales force, facilities
improvements and research and development activities. On several past occasions,
the Company has been out of compliance with a number of the financial and other
covenants contained in the documents, which govern its debt. To date, the
Company has been able to either renegotiate the terms of such covenants or
obtain waivers of such non-compliance. See "Financial Condition and Liquidity".
No assurance can be given, however, that, if the Company was to fail to comply
in the future with its existing covenants that the Company's lenders would be
willing to either further negotiate the terms of such covenants or waive the
Company's compliance with the covenants. Under the terms of the Company's loan
documents, the Company's lenders would have the right to declare a default under
the loan documents and to thereupon pursue any and all of the remedies available
to them under the loan documents, including, but not limited to, foreclosure on
substantially all of the Company's assets. While the Company believes that it
will be able to fully satisfy all of the terms and conditions set forth in its
loan documents, future events could make such performance more difficult or
impossible.

The Company may need additional funds to operate and grow its business. The
Company may seek additional funds through public and private financing,
including equity and debt offerings. Adequate funds through the financial
markets or from other sources, may not be available when needed or on terms
favorable to the Company or its stockholders. Insufficient funds could cause the
Company to delay, scale back, or

16

abandon some or all of its product acquisition, licensing opportunities,
marketing, product development, research and development and manufacturing
opportunities.

The Company is party to a License Agreement with The Johns Hopkins
University, Applied Physics Laboratory ("JHU/APL") effective April 26, 2000, and
amended effective July 15, 2001 (See Note C). A dispute (see "Legal
Proceedings") has arisen between the Company and JHU/APL concerning the License
Agreement. The Company has an intangible asset valued at $2,084,500 recorded as
a result of the License Agreement, as amended. Unsuccessful resolution of the
dispute could result in a revaluation of this intangible asset.

Government Regulation

Federal and state statutes and government agencies regulate virtually all
aspects of the Company's business. The development, testing, manufacturing,
processing, quality, safety, efficacy, packaging, labeling, record-keeping,
distribution, storage and advertising of the Company's products, and disposal of
waste products arising from such activities, are subject to regulation by one or
more federal agencies. These agencies include the Food and Drug Administration
("FDA"), the Drug Enforcement Agency ("DEA"), the Federal Trade Commission
("FTC"), the Consumer Product Safety Commission, the Occupational Safety and
Health Administration ("OSHA") and the U.S. Environmental Protection Agency
("EPA"). Similar state and local agencies also regulate these activities.
Failure to comply with applicable statutes and government regulations could have
a material adverse effect on the Company's business, financial condition and
results of operations.

All pharmaceutical manufacturers, including the Company, are subject to
regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act ("FDC Act"). Under the FDC Act, the federal government has
extensive administrative and judicial enforcement powers over the activities of
pharmaceutical manufacturers to ensure compliance with FDA regulations. Those
powers include, but are not limited to, the authority to initiate court action
to seize unapproved or non-complying products, to enjoin non-complying
activities, to halt manufacturing operations that are not in compliance with
current good manufacturing practices ("cGMP"), to recall products which present
a health risk, and to seek civil monetary and criminal penalties. Other
enforcement activities include refusal to approve product applications or the
withdrawal of previously approved applications. Any such enforcement activities,
including the restriction or prohibition on sales of products marketed by the
Company or the halting of manufacturing operations of the Company, could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, product recalls may be issued at the
discretion of the Company, the FDA or other government agencies having
regulatory authority for pharmaceutical product sales. Recalls may occur due to
disputed labeling claims, manufacturing issues, quality defects or other
reasons. No assurance can be given that recalls of the Company's pharmaceutical
products will not occur in the future. Any product recall could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, product recalls, in certain circumstances, could constitute
an event of default under the provision of the Company's senior debt.

All "new drugs" must be the subject of an FDA-approved new drug application
("NDA") before they may be marketed in the United States. Certain prescription
drugs are not currently required to be the subject of an approved NDA but,
rather, may be marketed pursuant to an FDA regulatory enforcement policy
permitting continued marketing of those drugs until the FDA determines whether
they are safe and effective. All generic equivalents to previously approved
drugs or new dosage forms of existing drugs must be the subject of an
FDA-approved abbreviated new drug application ("ANDA") before they may be
marketed in the United States. The FDA has the authority to withdraw existing
NDA and ANDA approvals and to review the regulatory status of products marketed
under the enforcement policy. The FDA may require an approved NDA or ANDA for
any drug product marketed under the enforcement policy if new information
reveals questions about the drug's safety or efficacy. All drugs must be
manufactured in conformity with cGMP and drugs subject to an approved NDA or
ANDA must be manufactured, processed, packaged, held, and labeled in accordance
with information contained in the NDA or ANDA.

17

The Company and its third-party manufacturers are subject to periodic
inspection by the FDA to assure such compliance. The FDA imposes additional
stringent requirements on the manufacture of sterile pharmaceutical products to
ensure the sterilization processes and related control procedures consistently
produce a sterile product. Additional sterile manufacturing requirements include
the submission for expert review of detailed documentation for sterilization
process validation in drug applications beyond those required for general
manufacturing process validation. Various sterilization process requirements are
the subject of detailed FDA guidelines, including requirements for the
maintenance of microbiological control and quality stability. Pharmaceutical
products must be distributed, sampled and promoted in accordance with FDA
requirements. The FDA also regulates drug labeling and the advertising of
prescription drugs. A finding by a governmental agency or court that the Company
is not in compliance could have a material adverse effect on the Company's
business, financial condition and results of operations.

During 2000, the Company received a warning letter as a result of a routine
inspection of its Decatur manufacturing facilities. This letter focused on
general documentation and cleaning validation issues. The Company was
re-inspected in late 2001 and the FDA issued a Form 483 documenting their
findings. The Company responded to these findings on January 4, 2002 and is
awaiting a response from the FDA. The warning letter prevents the FDA from
issuing any approval for new products manufactured at the Decatur facility. The
warning letter does not inhibit the Company's ability to continue manufacturing
products that are currently approved. The warning letter does not impact the
operations at the Somerset facility.

While the Company believes that all of its current pharmaceuticals are
lawfully marketed in the United States under current FDA enforcement policies or
have received the requisite agency approvals for manufacture and sale, such
marketing authority is subject to withdrawal by the FDA. In addition,
modifications or enhancements of approved products are in many circumstances
subject to additional FDA approvals which may or may not be granted and which
may be subject to a lengthy application process. Any change in the FDA's
enforcement policy or any decision by the FDA to require an approved NDA or ANDA
for a Company product not currently subject to the approved NDA or ANDA
requirements or any delay in the FDA approving an NDA or ANDA for a Company
product could have a material adverse effect on the Company's business,
financial condition and results of operations.

A number of products marketed by the Company are "grandfathered" drugs that
are permitted to be manufactured and marketed without FDA-issued ANDAs or NDAs
on the basis of their having been marketed prior to enactment of relevant
sections of the FDC Act. The regulatory status of these products is subject to
change and/or challenge by the FDA, which could establish new standards and
limitations for manufacturing and marketing such products, or challenge the
evidence of prior manufacturing and marketing upon which grandfathering status
is based. The Company is not aware of any current efforts by the FDA to change
the status of any of its "grandfathered" products, but there can be no assurance
that such initiatives will not occur in the future. Any such change in the
status of the Company's "grandfathered" products could have a material adverse
effect on the Company's business, financial condition and results of operations.

The Company also manufactures and sells drugs which are "controlled
substances" as defined in the federal Controlled Substances Act and similar
state laws, which establishes, among other things, certain licensing, security
and record keeping requirements administered by the DEA and similar state
agencies, as well as quotas for the manufacture, purchase and sale of controlled
substances. The DEA could limit or reduce the amount of controlled substances
which the Company is permitted to manufacture and market. The Company has not
experienced sanctions or fines for non-compliance with the foregoing
regulations, but no assurance can be given that any such sanctions or fines
would not have a material adverse effect on the Company's business, financial
condition and results of operations.

On March 6, 2002, the Company received a letter from the United States
Attorney's Office, Central District of Illinois, Springfield, Illinois, advising
the Company that the United States Drug Enforcement Administration had referred
a matter to that office for a possible civil legal action for alleged violations
of the Comprehensive Drug Abuse Prevention Control Act of 1970, 21 U.S.C. sec.
801, et. seq. and regulations promulgated under the Act. The Company is
cooperating fully with the government and anticipates that any action under this
matter will not have a material impact on its financial statements.

18

The Company cannot determine what effect changes in regulations or statutes
or legal interpretation, when and if promulgated or enacted, may have on its
business in the future. Changes could, among other things, require changes to
manufacturing methods, expanded or different labeling, the recall, replacement
or discontinuation of certain products, additional record keeping and expanded
documentation of the properties of certain products and scientific
substantiation. Such changes or new legislation could have a material adverse
effect on the Company's business, financial condition and results of operations.

Dependence on Development of Pharmaceutical Products and Manufacturing
Capabilities

The Company's strategy for growth is dependent upon its ability to develop
products that can be promoted through current marketing and distributions
channels and, when appropriate, the enhancement of such marketing and
distribution channels. The Company currently has 17 ANDAs in various stages of
development and anticipates filing two NDAs at some point in the future. See
"Item 1. Description of Business -- Research and Development." The Company may
not meet its anticipated time schedule for the filing of ANDAs and NDAs or may
decide not to pursue ANDAs or NDAs that it has submitted or anticipates
submitting. The internal development of new pharmaceutical products by the
Company is dependent upon the research and development capabilities of the
Company's personnel and its infrastructure. There can be no assurance that the
Company will successfully develop new pharmaceutical products or, if developed,
successfully integrate new products into its existing product lines. In
addition, there can be no assurance that the Company will receive all necessary
approvals from the FDA or that such approvals will not involve delays, which
adversely affect the marketing and sale of the Company's products. Until such
time as the Company receives clearance from the Form 483 and warning letter
received from the FDA, the Company will not receive approval from the FDA to
manufacture any new NDA products at its Decatur facility. The Company's failure
to develop new products or receive FDA approval of ANDAs or NDAs, or address the
issues raised in the Form 483 and warning letter received from the FDA, could
have a material adverse effect on the Company's business, financial condition
and results of operations. Another part of the Company's growth strategy is to
develop the capability to manufacture lyophilized (freeze-dried) pharmaceutical
products. While the Company has devoted resources to developing these
capabilities, it may not be successful in developing these capabilities, or the
Company may not realize the anticipated benefits from developing these
capabilities.

Generic Substitution

The Company's branded pharmaceutical products are subject to competition
from generic equivalents and alternative therapies. Generic pharmaceuticals are
the chemical and therapeutic equivalents of brand-name pharmaceuticals and
represent an increasing proportion of pharmaceuticals dispensed in the United
States. There is no proprietary protection for most of the branded
pharmaceutical products sold by the Company and generic and other substitutes
for most of its branded pharmaceutical products are sold by other pharmaceutical
companies. In addition, governmental and cost-containment pressures regarding
the dispensing of generic equivalents will likely result in generic substitution
and competition generally for the Company's branded pharmaceutical products.
Although the Company attempts to mitigate the effect of this substitution
through, among other things, creation of strong brand-name recognition and
product-line extensions for its branded pharmaceutical products, there can be no
assurance that the Company will be successful in these efforts. Increased
competition in the sale of generic pharmaceutical products could have a material
adverse effect on the Company's business, financial condition and results of
operations. Generic substitution is regulated by the federal and state
governments, as is reimbursement for generic drug dispensing. There can be no
assurance that substitution will be permitted for newly approved generic drugs
or that such products will be subject to government reimbursement.

Dependence on Generic and Off-Patent Pharmaceutical Products

The success of the Company depends, in part, on its ability to anticipate
which branded pharmaceuticals are about to come off patent and thus permit the
Company to develop, manufacture and market equivalent generic pharmaceutical
products. Generic pharmaceuticals must meet the same quality standards as
branded

19

pharmaceuticals, even though these equivalent pharmaceuticals are sold at prices
that are significantly lower than that of branded pharmaceuticals. In addition,
generic products that third parties develop may render the Company's generic
products noncompetitive or obsolete. Although the Company has successfully
brought generic pharmaceutical products to market in a timely manner in the
past, there can be no assurance that the Company will be able to consistently
bring these products to market quickly and efficiently in the future. An
increase in competition in the sale of generic pharmaceutical products or the
Company's failure to bring such products to market before its competitors could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Risks and Expense of Legal Proceedings

The Company is currently involved in several pending or threatened legal
actions with both private parties and certain government agencies. See "Legal
Proceedings". While the Company believes that its positions in these various
matters are meritorious, to the extent that the Company's personnel must spend
time and the Company must expend resources to pursue or contest these various
matters, or any additional matters that may be asserted from the time to time in
the future, this represents time and money that is not available for other
actions that the Company might otherwise pursue which could be beneficial to the
Company's future. In addition, to the extent that the Company is unsuccessful in
any legal proceedings, the consequences could have a negative impact on the
Company or its operations. These consequences could include, but not be limited
to, fines, penalties, injunctions, the loss of patent or other rights, the need
to write down or off the value of assets (which could negatively impact the
Company's earnings) and a wide variety of other potential remedies or actions
that could be taken against the Company. While the Company will continue to
vigorously pursue its rights in all such matters, no assurance can be given that
the Company will be successful in any of these proceedings or, even if
successful, that the Company would be able to recoup any of the moneys expended
in pursuing such matters.

Competition; Uncertainty of Technological Change

The Company competes with other pharmaceutical companies, including major
pharmaceutical companies with financial resources substantially greater than
those of the Company, in developing, acquiring, manufacturing and marketing
pharmaceutical products. The selling prices of pharmaceutical products typically
decline as competition increases. Further, other products now in use, under
development or acquired by other pharmaceutical companies, may be more effective
or offered at lower prices than the Company's current or future products. The
industry is characterized by rapid technological change that may render the
Company's products obsolete, and competitors may develop their products more
rapidly than the Company. Competitors may also be able to complete the
regulatory process sooner, and therefore, may begin to market their products in
advance of the Company's products. The Company believes that competition in
sales of its products is based primarily on price, service, availability and
product efficacy. There can be no assurance that: (i) the Company will be able
to develop or acquire commercially attractive pharmaceutical products; (ii)
additional competitors will not enter the market; or (iii) competition from
other pharmaceutical companies will not have a material adverse effect on the
Company's business, financial condition and results of operations.

Dependence on Supply of Raw Materials and Components

The Company requires a supply of quality raw materials and components to
manufacture and package pharmaceutical products for itself and for third parties
with which it has contracted. The principal components of the Company's products
are active and inactive pharmaceutical ingredients and certain packaging
materials. Many of these components are available from only a single source and,
in the case of many of the Company's ANDAs and NDAs, only one supplier of raw
materials has been identified. Because FDA approval of drugs requires
manufacturers to specify their proposed suppliers of active ingredients and
certain packaging materials in their applications, FDA approval of any new
supplier would be required if active ingredients or such packaging materials
were no longer available from the specified supplier. The qualification of a new
supplier could delay the Company's development and marketing efforts. If for any
reason the Company is unable to obtain sufficient quantities of any of the raw
materials or components required to

20

produce and package its products, it may not be able to manufacture its products
as planned, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

Dependence on Third-Party Manufacturers

The Company derives a significant portion of its revenues from the sale of
products manufactured by third parties, including its competitors in some
instances. There can be no assurance that the Company's dependence on third
parties for the manufacture of such products will not adversely affect the
Company's profit margins or its ability to develop and deliver its products on a
timely and competitive basis. If for any reason the Company is unable to obtain
or retain third-party manufacturers on commercially acceptable terms, it may not
be able to distribute certain of its products as planned. No assurance can be
made that the manufacturers utilized by the Company will be able to provide the
Company with sufficient quantities of its products or that the products supplied
to the Company will meet the Company's specifications. Any delays or
difficulties with third-party manufacturers could adversely affect the marketing
and distribution of certain of the Company's products, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Product Liability

The Company faces exposure to product liability claims in the event that
the use of its technologies or products or those it licenses from third parties
is alleged to have resulted in adverse effects in users thereof. Receipt of
regulatory approval for commercial sale of such products does not mitigate such
product liability risks. While the Company has taken, and will continue to take,
what it believes are appropriate precautions, there can be no assurance that it
will avoid significant product liability exposure. In addition, future product
labeling may include disclosure of additional adverse effects, precautions and
contraindications, which may adversely impact sales of such products. The
Company currently has product liability insurance in the amount of $10.0 million
for aggregate annual claims with a $50,000 deductible per incident and a
$250,000 aggregate annual deductible. However, there can be no assurance that
such insurance coverage will be sufficient to fully cover potential claims.
Additionally, there can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim would not have a material adverse effect on the Company's
business, financial condition and results of operations.

Acquisition and Licensing of Pharmaceutical Products

The Company may purchase or license pharmaceutical product lines of other
pharmaceutical or biotechnology companies. Other companies, including those with
substantially greater financial, marketing and other resources, compete with the
Company for the right to acquire or license such products. Were the Company to
elect to pursue this strategy, its success would depend, in part, on its ability
to identify potential products that meet the Company's criteria, including
possessing a recognizable brand name or being complementary to the Company's
existing product lines. There can be no assurance that the Company would have
success in identifying potential product acquisitions or licensing opportunities
or that, if identified, it would complete such product acquisitions or obtain
such licenses on acceptable terms or that it would obtain the necessary
financing, or that it could successfully integrate any acquired or licensed
products into its existing product lines. The inability to complete acquisitions
of, or obtain licenses for, pharmaceutical products could have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, there can be no assurance that the Company, once it has
obtained rights to a pharmaceutical product and committed to payment terms, will
be able to generate sales sufficient to create a profit or otherwise avoid a
loss. Any inability to generate such sufficient sales or any subsequent
reduction of sales could have a material adverse effect on the Company's
business, financial condition and result of operations.

Patents and Proprietary Rights

The patent position of competitors in the pharmaceutical industry generally
is highly uncertain, involves complex legal and factual questions, and is the
subject of much litigation. There can be no assurance that any patent
applications relating to the Company's potential products or processes will
result in patents being
21

issued, or that the resulting patents, if any, will provide protection against
competitors who: (i) successfully challenge the Company's patents; (ii) obtain
patents that may have an adverse effect on the Company's ability to conduct
business; or (iii) are able to circumvent the Company's patent position. It is
possible that other parties have conducted or are conducting research and could
make discoveries of pharmaceutical formulations or processes that would precede
any discoveries made by the Company, which could prevent the Company from
obtaining patent protection for these discoveries or marketing products
developed therefrom. Consequently, there can be no assurance that others will
not independently develop pharmaceutical products similar to or obsoleting those
that the Company is planning to develop, or duplicate any of the Company's
products. The inability of the Company to obtain patents for its products and
processes or the ability of competitors to circumvent or obsolete the Company's
patents could have a material adverse effect on the Company's business,
financial condition and results of operations.

Exercise of Warrants, Conversion of Subordinated Debt, May have Dilutive
Effect

Under terms of a $5,000,000 subordinated debt transaction, which the
Company entered into with the John N. Kapoor trust dtd. 9/20/89 (the "Trust"),
the sole trustee and sole beneficiary of which is Dr. John N. Kapoor, the
Company's current CEO and Chairman of the Board of Directors, the Trust agreed
to provide the Company with $5,000,000 of subordinated debt in two separate
tranches of $3,000,000 ("Tranche A") and $2,000,000 ("Tranche B"). In return for
providing the subordinated debt, the Trust was granted Warrants to purchase
1,000,000 shares of common stock, at a purchase price of $2.85 per share for
Tranche A and 667,000 shares of common stock, at a purchase price of $2.25 per
share, for Tranche B. In addition, Tranche A, plus the interest on Tranche A, is
convertible into common stock of the Company at a price of $2.28 per share, and
Tranche B, plus the interest on Tranche B, is convertible into common stock of
the Company at a price of $1.80 per share. If the price per share of the
Company's common stock at the time of exercise of the Warrants or conversion of
the subordinated debt is in excess of the various Warrant exercise or conversion
prices, exercise of the Warrants and conversion of the subordinated debt would
have a dilutive effect on the Company's common stock. The amount of such
dilution, however, cannot currently be determined as it would depend on the
amount disparity between the stock price and the price at which the warrants
were exercised or the subordinated debt was converted at the time of exercise or
conversion.

Need to Attract and Retain Key Personnel in Highly Competitive Marketplace

The Company's performance depends, to a large extent, on the continued
service of its key research and development personnel, other technical
employees, managers and sales personnel and its ability to continue to attract
and retain such personnel. Competition for such personnel is intense,
particularly for highly motivated and experienced research and development and
other technical personnel. The Company is facing increasing competition from
companies with greater financial resources for such personnel. There can be no
assurance that the Company will be able to attract and retain sufficient numbers
of highly-skilled personnel in the future, and the inability to do so could have
a material adverse effect on the Company's business, operating results and
financial condition and results of operations.

Dependence on Key Executive Officers

The Company's success will depend, in part, on its ability to attract and
retain key executive officers. The inability to find or the loss of one or more
of the Company's key executive officers could have a material adverse effect on
the Company's business, financial condition and results of operations.

Quarterly Fluctuation of Results; Possible Volatility of Stock Price

The Company's results of operations may vary from quarter to quarter due to
a variety of factors including the timing of the development and marketing of
new pharmaceutical products, the failure to develop such products, delays in
obtaining government approvals, including FDA approval of NDAs or ANDAs for
Company products, expenditures to comply with governmental requirements for
manufacturing facilities, expenditures incurred to acquire and promote
pharmaceutical products, changes in the Company's customer base, a customer's
termination of a substantial account, the availability and cost of raw
materials, interruptions
22

in supply by third-party manufacturers, the introduction of new products or
technological innovations by the Company's competitors, loss of key personnel,
changes in the mix of products sold by the Company, changes in sales and
marketing expenditures, competitive pricing pressures and the Company's ability
to meet its financial covenants. There can be no assurance that the Company will
be successful in maintaining or improving its profitability or avoiding losses
in any future period. Such fluctuations may result in volatility in the price of
the Company's Common Stock.

Relationships with Other Entities; Conflicts of Interest

Mr. John N. Kapoor, Ph.D., the Company's Chairman of the Board and Chief
Executive Officer is affiliated with EJ Financial Enterprises, Inc., a health
care consulting investment company ("EJ Financial"). EJ Financial is involved in
the management of health care companies in various fields, and Dr. Kapoor is
involved in various capacities with the management and operation of these
companies. The John N. Kapoor Trust, the beneficiary and sole trustee of which
is Dr. Kapoor, is a principal shareholder of each of these companies. As a
result, Dr. Kapoor does not devote his full time to the business of the Company.
Although such companies do not currently compete directly with the Company,
certain companies with which EJ Financial is involved are in the pharmaceutical
business. Discoveries made by one or more of these companies could render the
Company's products less competitive or obsolete. In addition, one of these
companies, NeoPharm, Inc. of which Dr. Kapoor is Chairman and a major
stockholder, recently entered into a loan agreement with the Company. Further,
Dr. Kapoor has loaned the Company $5,000,000 with the result that he has become
a major creditor of the Company as well as a major stockholder. See "Financial
Condition and Liquidity". Potential conflicts of interest could have a material
adverse effect on the Company's business, financial condition and results of
operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivatives Instruments and Hedging Activities." SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS No. 137 and No. 138, was effective for the Company's
fiscal 2001 financial statements and was adopted by the Company on January 1,
2001. Adoption of these standards did not have a material effect on the
Company's financial position or results of operations.

In July 2001, the FASB approved three statements, SFAS 141, "Business
Combinations," SFAS 142, "Goodwill and Other Intangible Assets," and SFAS 143,
"Accounting for Asset Retirement Obligations."

SFAS 141 supercedes APB Opinion No. 16, "Business Combinations," and
eliminates the pooling-of-interests method of accounting for business
combinations, thus requiring all business combinations be accounted for using
the purchase method. In addition, in applying the purchase method, SFAS 141
changes the criteria for recognizing intangible assets apart from goodwill. The
following criteria is to be considered in determining the recognition of the
intangible assets: (1) the intangible asset arises from contractual or other
legal rights, or (2) the intangible asset is separable or dividable from the
acquired entity and capable of being sold, transferred, licensed, rented, or
exchanged. The requirements of SFAS 141 are effective for all business
combinations completed after June 30, 2001. The adoption of this new standard
did not have a material impact on the Company's financial statements.

SFAS 142 supercedes APB Opinion No. 17, "Intangible Assets," and requires
goodwill and other intangible assets that have an indefinite useful life to no
longer be amortized; however, these assets must be reviewed at least annually
for impairment. The Company has adopted SFAS 142 as of January 1, 2002. The
Company is currently evaluating the impact of this new standard on the Company's
financial statements.

SFAS 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
23

liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Company has adopted SFAS 143 as of
January 1, 2002. The adoption of this new standard did not have a material
impact on the Company's financial statements.

In August 2001, the FASB issued SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This statement also
supercedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 is effective January 1, 2002.
The adoption of this new standard did not have a material impact on the
Company's financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk associated with changes in interest
rates. The Company's interest rate exposure involves three debt instruments. The
credit agreement with The Northern Trust Company and the subordinated
convertible debentures issued to the John N. Kapoor Trust bear the same interest
rate, which fluctuates at Prime plus 300 basis points. The promissory note
issued to NeoPharm, Inc. ("NeoPharm") bears interest at an initial rate of 3.6%
and will be reset quarterly based upon NeoPharm's average return on its cash and
readily tradable long and short-term securities during the previous calendar
quarter. All of the Company's remaining long-term debt is at fixed interest
rates. The Company believes that reasonably possible near-term changes in
interest rates would not have a material effect on the Company's financial
position, results of operations and cash flows.

The Company's financial instruments consist mainly of cash, accounts
receivable, accounts payable and debt. The carrying amounts of these
instruments, except debt, approximate fair value due to their short-term nature.
The estimated fair value of the Company's debt instruments is based upon rates
currently available to the Company for debt with similar terms and remaining
maturities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are included in Part II, Item 8 of this
Form 10-K.

Statement in Lieu of Independent Auditors' Report........... 25
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... 26
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... 27
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2001, 2000 and 1999.............. 28
Consolidated Statements of Cash Flow for the years ended
December 31, 2001, 2000 and 1999.......................... 29
Notes to Consolidated Financial Statements.................. 30

24

STATEMENT IN LIEU OF INDEPENDENT AUDITORS' REPORT

The SEC has informed the Company of a proposed enforcement action (See
"Item 3. Legal Proceedings"), which has alleged the Company's accounts
receivable were overstated as of December 31, 2000. If the enforcement action is
ultimately brought to bear, it is possible that the Company would have to
restate its 2000 and 2001 financial statements. Because of this uncertainty,
Deloitte & Touche LLP, the Company's auditors, are unwilling to give an opinion
on the Company's consolidated financial statements and notes thereto for
December 31, 2001 and 2000 and the years then ended until this matter is
resolved, and as a result these financial statements and notes are unaudited.
However, management believes that, subject to the resolution of the
above-mentioned matter, the unaudited consolidated financial statements and
notes to consolidated financial statements as of these dates and for these
periods contain all the information and necessary adjustments for a fair
presentation of these financial statements and footnotes. Because the proposed
enforcement action relates to matters in a prior fiscal year, it is not
anticipated that these proceedings will have any material impact on the
Company's Consolidated Balance Sheet as of December 31, 2001 or on the Company's
2002 or future operating results.

25

AKORN, INC.

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
(UNAUDITED)

See notes to consolidated financial statements.

26

AKORN, INC.

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

See notes to consolidated financial statements.

27

AKORN, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)

See notes to consolidated financial statements.

28

AKORN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLARS IN THOUSANDS)
(UNAUDITED)

See notes to consolidated financial statements.

29

AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation: The accompanying consolidated financial statements include
the accounts of Akorn, Inc. and its wholly owned subsidiary, Akorn (New Jersey),
Inc. (collectively, the "Company"). Intercompany transactions and balances have
been eliminated in consolidation. During 2000, the Company dissolved the
inactive subsidiaries Compass Vision, Inc., Spectrum Scientific Pharmaceuticals,
Inc. and Walnut Pharmaceuticals, Inc. The dissolution of these subsidiaries did
not have a material impact on the balances and activities of the Company.

Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from those
estimates. Significant estimates and assumptions relate to the allowance for
uncollectibles, the allowance for chargebacks and rebates, the reserve for
slow-moving and obsolete inventory, the reserve for returned goods, the carrying
value of intangible assets and the carrying value of deferred tax assets.

Revenue Recognition: The Company recognizes sales upon the shipment of
goods, provided that all obligations of the Company have been fulfilled and
collection of the related receivable is probable. Provision is made at the time
of sale for estimated product returns. Royalty revenue is recognized when earned
and is based on net sales figures that often include deductions for costs of
unsaleable returns.

Cash Equivalents: The Company considers all highly liquid investments with
a maturity of three months or less, when purchased, to be cash equivalents.

Inventory: Inventory is stated at the lower of cost (average cost method)
or market (see Note E). Provision is made for slow-moving, unsalable or obsolete
items.

Intangibles: Intangibles consist primarily of product licensing and other
such costs that are capitalized and amortized on the straight-line method over
the lives of the related license periods or the estimated life of the acquired
product, which range from 17 months to 18 years. Accumulated amortization at
December 31, 2001 and 2000 was $7,132,000 and $5,954,000, respectively. The
Company annually assesses the impairment of intangibles based on several
factors, including estimated fair market value and anticipated cash flows.

Property, Plant and Equipment: Property, plant and equipment is stated at
cost, less accumulated depreciation. Depreciation is provided using the
straight-line method in amounts considered sufficient to amortize the cost of
the assets to operations over their estimated service lives. The average
estimated service lives of buildings, leasehold improvements, furniture and
equipment, and automobiles are approximately 30, 10, 8, and 5 years,
respectively.

Allowance for Chargebacks and Rebates: The Company accrues an estimate of
the difference between the gross sales price of certain products sold to
wholesalers and the expected resale prices of such products under contractual
arrangements with third parties, such as hospitals and group purchasing
organizations at the time of sale. As part of the Company's sales terms to
wholesale customers, it agrees to reimburse wholesalers for such differentials
between wholesale prices and contract prices. Because this allowance relates to
amounts not yet collected from the wholesalers, this allowance is recorded as a
reduction of the account receivable balance. Similarly, the Company records an
allowance for rebates related to contracts and other programs with wholesalers.
The balance for these allowances was $4,190,000 and $3,296,000 as of December
31, 2001 and 2000, respectively.

Income Taxes: The Company files a consolidated federal income tax return
with its subsidiary. Deferred income taxes are provided in the financial
statements to account for the tax effects of temporary differences
30

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

resulting from reporting revenues and expenses for income tax purposes in
periods different from those used for financial reporting purposes. The Company
records a valuation allowance to reduce the deferred tax assets to the amount
that is more likely than not to be realized.

Fair Value of Financial Instruments: The Company's financial instruments
include cash, accounts receivable, accounts payable and term debt. The fair
values of cash, accounts receivable and accounts payable approximate fair value
because of the short maturity of these instruments. The carrying amounts of the
Company's bank borrowings under its credit facility approximate fair value
because the interest rates are reset periodically to reflect current market
rates.

Net Income Per Common Share: Basic net income per common share is based
upon weighted average common shares outstanding. Diluted net income per common
share is based upon the weighted average number of common shares outstanding,
including the dilutive effect of stock options, warrants and convertible debt
using the treasury stock method.

The following table shows basic and diluted earnings per share computations
for the years ended December 31, 2001, 2000 and 1999 (in thousands, except per
share information):

- ---------------
(1) For fiscal 2001, debt and interest convertible into 2,519 shares of common
stock was excluded from the computation of diluted earnings per share, as
the inclusion of such shares would be antidilutive.

(2) For fiscal 2001, warrants to purchase 1,667 shares of common stock were
excluded from the computation of diluted earnings per share, as the
inclusion of such shares would be antidilutive.

(3) For fiscal 2001 and 2000, options to purchase 3,226 and 145 shares of common
stock, respectively, were excluded from the computation of diluted earnings
per share as the inclusion of such shares would be antidilutive.

NOTE B -- NONCASH TRANSACTIONS

In July 2001, the Company amended a license agreement with The Johns
Hopkins University Applied Physics Laboratory (See Note C). As part of that
amendment, the Company delivered research and development equipment in lieu of a
$100,000 payment. The Company recorded a gain of $51,000 upon transference of
the equipment.

31

NOTE B -- NONCASH TRANSACTIONS -- (CONTINUED)

In August 1999, a former employee exercised options for 23,352 shares of
the Company's common stock. The individual tendered approximately 8,800 shares
of the Company's outstanding stock as consideration for the option exercise,
which was recorded as treasury stock. The net effect of this transaction was to
increase common stock and paid in capital by $35,028 and increase treasury stock
by $35,028.

NOTE C -- PRODUCT AND OTHER ACQUISITIONS

In April 2000, the Company entered into a worldwide license agreement with
The Johns Hopkins University Applied Physics Laboratory. This license provides
the Company exclusive rights to two patents covering the methodology and
instrumentation for a method of treating age-related macular degeneration. Upon
signing the agreement, the Company made an initial payment under the agreement
of $1,484,500. In July 2001, this license agreement was amended such that the
Company relinquished the international rights to the two patents in exchange for
a reduced financial obligation. The Company retained the exclusive rights in the
U.S. Future payments of $600,000 were required under terms of the amendment. As
of December 31, 2001, $300,000 remains due under the terms of the agreement and
was payable on or before March 31, 2002. The Company did not make the remaining
$300,000 payment on or before March 31,2002 and is currently attempting to
negotiate a resolution to a dispute that has arisen over the license agreement.
See Note T for further discussion.

In March 1999, the Company purchased the Paredrine NDA and trade name from
Pharmics for $62,500 in cash. The acquisition cost has been allocated to
intangibles and will be amortized over 15 years.

In February 1999, the Company paid $400,000 to Eastman Kodak to license IC
Green raw material manufacturing processes. The acquisition cost has been
allocated to intangibles and will be amortized over 15 years.

NOTE D -- ALLOWANCE FOR UNCOLLECTIBLES

The activity in the allowance for uncollectibles for the periods indicated
is as follows (in thousands):

NOTE E -- INVENTORY

The components of inventory are as follows (in thousands):

Inventory at December 31, 2001 and 2000 is reported net of reserves for
slow-moving, unsalable and obsolete items of $1,845,000 and $3,171,000,
respectively.

32

NOTE F -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (in thousands):

Construction in progress represents capital expenditures principally
related to the Company's lyophilization project that will enable the Company to
perform processes in-house, which are currently being performed by a
sub-contractor.

NOTE G -- FINANCING ARRANGEMENTS

The Company's long-term debt consists of (in thousands):

Maturities of debt are as follows (in thousands):

Year ending December 31:
2002........................................................ 45,072
2003........................................................ 293
2004........................................................ 316
2005........................................................ 340
2006........................................................ 8,616
Thereafter.................................................. 602
-------
Total............................................. $55,239
=======

33

NOTE G -- FINANCING ARRANGEMENTS -- (CONTINUED)

In December 1997, the Company entered into a $15,000,000 revolving credit
agreement with The Northern Trust Company, which was increased to $25,000,000 on
June 30, 1998 and to $45,000,000 on December 28, 1999. This Amended and Restated
Credit Agreement (the "Credit Agreement") is secured by substantially all of the
assets of the Company and its subsidiaries and contains a number or restrictive
covenants. The covenants include, among other things, minimum levels of net
worth, net income and monthly EBITDA and a minimum borrowing base (as defined)
and a limitation on capital expenditures. There were outstanding borrowings of
$44,800,000 and $44,400,000 at December 31, 2001 and 2000, respectively. The
interest rate as of December 31, 2001 was 7.75%.

On April 16, 2001 the revolving credit agreement was amended (the "2001
Amendment") and included, among other things, extension of the term of the
agreement, establishment of a payment schedule, revision of the method by which
the interest rate will be determined, and the amendment and addition of certain
covenants. The 2001 Amendment also required the Company to obtain subordinated
debt of $3 million by May 15, 2001 and waived certain covenant violations
through March 31, 2001. The 2001 Amendment required payments throughout 2001
totaling $7.5 million, with the balance of $37.5 million due January 1, 2002.
The method used to calculate interest was changed to the prime rate plus 300
basis points. Previously, the interest rate was computed at the federal funds
rate or LIBOR plus an applicable percentage, depending on certain financial
ratios.

On July 12, 2001 the Company entered into a Forbearance Agreement (the
"Agreement") with its senior lenders under which the lenders agreed to forbear
from taking action against the Company to enforce their rights under the
currently existing Amended and Restated Credit Agreement until January 2, 2002.
As part of the Agreement, the Company acknowledged the existence of certain
events of default. These events included a default on a $1.3 million principal
payment, failure to timely make monthly interest payments due on May 31, 2001
and June 30, 2001 (these interest payments were subsequently made on July 27,
2001) and failure to receive $3.0 million of cash proceeds of subordinated debt
by May 15, 2001 (these proceeds were subsequently received on July 13, 2001).

The Company received two extensions, which extended the Agreement to
February 1, 2002 and March 15, 2002, respectively. Both of these extensions
carried the same reporting requirements and covenants while establishing new
cash receipts covenants for the months of January and February in 2002.

On April 12, 2002, in lieu of further extending the Agreement, the Company
entered into an amendment to the Credit Agreement (the "2002 Amendment"),
effective January 1, 2002. The 2002 Amendment included, among other things,
extension of the term of the agreement, establishment of a payment schedule and
the amendment and addition of certain covenants. The new covenants include
minimum levels of cash receipts, limitations on capital expenditures, a $750,000
per quarter limitation on product returns and required amortization of the loan
principal. The agreement also prohibits the Company from declaring any cash
dividends on its common stock and identifies certain conditions in which the
principal and interest on the credit agreement would become immediately due and
payable. These conditions include: (a) an action by the FDA which results in a
partial or total suspension of production or shipment of products, (b) failure
to invite the FDA in for re-inspection of the Decatur manufacturing facilities
by June 1, 2002, (c) failure to make a written response, within 10 days, to the
FDA, with a copy to the lender, to any written communication received from the
FDA after January 1, 2002 that raises any deficiencies, (d) imposition of fines
against the Company in an aggregate amount greater than $250,000, (e) a
cessation in public trading of Akorn stock other than a cessation of trading
generally in the United States securities market, (f) restatement of or
adjustment to the operating results of the Company in an amount greater than
$27,000,000, (g) failure to enter into an engagement letter with an investment
banker for the underwriting of an offering of equity securities by June 15,
2002, (h) failure to not be party to an engagement letter at any time after June
15, 2002 or (i) experience any material adverse action taken by the FDA, the
SEC, the DEA or any other Governmental Authority based on an alleged failure to
comply with laws or regulations. Management believes it will be able to comply
with the covenants during 2002. In the event that the Company is not in
compliance with the covenants during 2002 and does not negotiate amended
covenants and/or obtain a waiver thereto,

34

NOTE G -- FINANCING ARRANGEMENTS -- (CONTINUED)

then the debt holder, at its option, may demand immediate payment of all
outstanding amounts due it. The amended credit agreement requires a minimum
payment of $5.6 million, which relates to an estimated federal tax refund, with
the balance of $39.2 million due June 30, 2002. The estimated $5.6 million tax
refund must be remitted within three days of receipt from the Internal Revenue
Service. The Company is also obligated to remit any additional federal tax
refunds received above the estimated $5.6 million. The current credit facility
matures on June 30, 2002.

On July 12, 2001 as required under the terms of the Agreement, the Company
entered into a $5,000,000 subordinated debt transaction with the John N. Kapoor
Trust dtd. 9/20/89 (the "Trust"), the sole trustee and sole beneficiary of which
is Dr. John N. Kapoor, the Company's current CEO and Chairman of the Board of
Directors. The transaction is evidenced by a Convertible Bridge Loan and Warrant
Agreement (the "Trust Agreement") in which the Trust agreed to provide two
separate tranches of funding in the amounts of $3,000,000 ("Tranche A" which was
received on July 13) and $2,000,000 ("Tranche B" which was received on August
16). As part of the consideration provided to the Trust for the subordinated
debt, the Company issued the Trust two warrants which allow the Trust to
purchase 1,000,000 shares of common stock at a price of $2.85 per share and
another 667,000 shares of common stock at a price of $2.25 per share. The
exercise price for each warrant represented a 25% premium over the share price
at the time of the Trust's commitment to provide the subordinated debt.

Under the terms of the Trust Agreement, the subordinated debt will bear
interest at prime plus 3%, which is the same rate the Company pays on its senior
debt. Interest will not be paid to the Trust, but will instead accrue as
required by the terms of a subordination agreement which was entered into
between the Trust and the Company's senior lenders. The convertible feature of
the Trust Agreement, as amended, allows for conversion of the subordinated debt
plus interest into common stock of the Company, at a price of $2.28 per share of
common stock for Tranche A and $1.80 per share of common stock for Tranche B.

The Company, in accordance with Accounting Principles Board ("APB") Opinion
No. 14, recorded the subordinated debt transaction such that the convertible
debt and warrants have been assigned independent values. The fair value of the
warrants was estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions: (i) dividend yield of 0%, (ii)
expected volatility of 79%, (iii) risk free rate of 4.75%, and (iv) expected
life of 5 years. As a result, the Company assigned a value of $1,516,000 to the
warrants and recorded this amount as additional paid in capital. The remaining
$3,484,000 was recorded as long-term debt. The resultant bond discount,
equivalent to the value assigned to the warrants, will be amortized and charged
to interest expense over the life of the subordinated debt.

As of December 31, 2001, there was no available credit under the Amended
and Restated Credit Agreement. Future working capital needs will be highly
dependent upon the Company's ability to improve gross margins, control expenses
and collect its past due receivables. Management believes that existing cash,
cash flow from operations and the subordinated debt proceeds will be sufficient
to meet the cash needs of the business for the next twelve months, but that
additional funding will be needed to refund the current bank debt. If available
funds, cash generated from operations and subordinated debt proceeds are
insufficient to meet immediate liquidity requirements, further financing and/or
reductions of existing operations will be required. There are no guarantees that
such financing will be available or available on acceptable terms. Further, such
additional financing may require the granting of rights, preferences or
privileges senior to those rights of the common stock and existing stockholders
may experience substantial dilution of their ownership interests. The Company
will need to refinance or extend the maturity of the bank credit agreement, as
it does not anticipate sufficient cash to make the June 30, 2002 scheduled
payment.

In December 2001, the Company entered into a $3,250,000 five-year loan with
NeoPharm, Inc. ("NeoPharm") to fund Akorn's efforts to complete its
lyophilization facility located in Decatur, Illinois. Under the terms of the
Promissory Note, dated December 20, 2001, interest will accrue at the initial
rate of 3.6% and will be reset quarterly based upon NeoPharm's average return on
its cash and readily tradable long and short-term securities during the previous
calendar quarter. The principal and accrued interest is due and

35

NOTE G -- FINANCING ARRANGEMENTS -- (CONTINUED)

payable on or before maturity on December 20, 2006. The note provides that Akorn
will use the proceeds of the loan solely to validate and complete the
lyophilization facility located in Decatur, Illinois. The Promissory Note is
subordinated to Akorn's senior debt owed to The Northern Trust Company but is
senior to Akorn's subordinated debt owed to the Trust. The note was executed in
conjunction with a Processing Agreement that provides NeoPharm, Inc. with the
option of securing at least 15% of the capacity of Akorn's lyophilization
facility each year. Dr. John N. Kapoor, the Company's chairman and chief
executive officer is also chairman of NeoPharm and holds a substantial stock
position in that company as well as in the Company.

Commensurate with the completion of the Promissory Note between the Company
and NeoPharm, the Company entered into an agreement with the Trust, which
amended the Trust Agreement. The amendment extended the Trust Agreement to
terminate concurrently with the Promissory Note on December 20, 2006. The
amendment also made it possible for the Trust to convert the interest accrued on
the $3,000,000 tranche into common stock of the Company. Previously, the Trust
could only convert the interest accrued on the $2,000,000 tranche. The change
related to the convertibility of the interest accrued on the $3,000,000 tranche
requires that shareholder approval be received by August 31, 2002.

In June 1998, the Company entered into a $3,000,000 mortgage agreement with
Standard Mortgage Investors, LLC of which there were outstanding borrowings of
$2,189,000 and $2,442,000 at December 31, 2001 and 2000, respectively. The
principal balance is paid over 10 years, with the final payment due in June
2007. The mortgage note bears an interest rate of 7.375% and is secured by the
real property located in Decatur, Illinois.

The fair value of the debt obligations approximated the recorded value as
of December 31, 2001. The promissory note between the Company and NeoPharm, Inc.
earns interest at a rate that is lower than the Company's current borrowing rate
with its senior lenders. Accordingly, the computed fair value of the debt, which
the Company estimates to be approximately $2,650,000 would be lower than the
current carrying value of $3,250,000. However, the Company believes that
settlement at any computed fair value less than the current carrying value would
not be possible nor prudent due to the nature of the agreement and the purposes
for which the debt was secured. The Company is currently using the proceeds of
the debt to complete the lyophilization facility at its Decatur location as well
as address other necessary capital expenditures.

NOTE H -- LEASING ARRANGEMENTS

The Company leased certain equipment under capital leasing arrangements
that expired in 2000. Property, plant and equipment includes the following
amounts relating to such capital leases (in thousands):

Depreciation expense provided on these assets was $109,000 and $157,000 for
the years ended December 31, 2000 and 1999, respectively.

The Company leases real and personal property in the normal course of
business under various operating leases, including non-cancelable and
month-to-month agreements. Payments under these leases were $1,841,000,
$1,159,000 and $906,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.

36

NOTE H -- LEASING ARRANGEMENTS -- (CONTINUED)

The following is a schedule, by year, of future minimum rental payments
required under non-cancelable operating leases (in thousands):

Years ended December 31,
2002........................................................ $1,749
2003........................................................ 1,219
2004........................................................ 1,149
2005........................................................ 1,145
2006........................................................ 1,129
2007........................................................ 1,127
2008........................................................ 331
------
Total Minimum Payments Required............................. $7,849
======

The Company currently sub-lets portions of its leased space. Rental income
under these sub-leases was $56,000, $227,000 and $211,000 in 2001, 2000 and
1999, respectively.

NOTE I -- STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN

Under the 1988 Incentive Compensation Program (the "Incentive Program") any
officer or key employee of the Company is eligible to receive options as
designated by the Company's Board of Directors. As of December 31, 2001,
6,500,000 shares of the Company's Common Stock are reserved for issuance under
the Incentive Program. The exercise price of the options granted under the
Incentive Program may not be less than 50 percent of the fair market value of
the shares subject to the option on the date of grant, as determined by the
Board of Directors. All options granted under the Incentive Program during the
years ended December 31, 2001, 2000 and 1999 have exercise prices equivalent to
the market value of the Company's Common Stock on the date of grant. Options
granted under the Incentive Program generally vest over a period of three years
and expire within a period of five years.

Under the 1991 Stock Option Plan for Directors (the "Directors' Plan")
persons elected as directors of the Company are granted nonqualified options at
the fair market value of the shares subject to option on the date of the grant.
As of December 31, 2001, 500,000 shares of the Company's Common Stock are
reserved for issuance under the Directors' Plan. Options granted under the
Directors' Plan vest immediately and expire five years from the date of grant.

A summary of the status of the Company's stock options as of December 31,
2001, 2000 and 1999 and changes during the years ended December 31, 2001, 2000
and 1999 is presented below (shares in thousands):

37

NOTE I -- STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN -- (CONTINUED)

The fair value of each option granted during the year ended December 31,
2001 is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: (i) dividend yield of 0%, (ii) expected
volatility of 79%, (iii) risk-free interest rate of 4.4% and (iv) expected life
of 5 years.

The fair value of each option granted during the year ended December 31,
2000 is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: (i) dividend yield of 0%, (ii) expected
volatility of 98%, (iii) risk-free interest rate of 5.0% and (iv) expected life
of 5 years.

The fair value of each option granted during the year ended December 31,
1999 is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: (i) dividend yield of 0%, (ii) expected
volatility of 51%, (iii) risk-free interest rate of 6.5% and (iv) expected life
of 5 years.

The following table summarizes information about stock options outstanding
at December 31, 2001 (shares in thousands):

The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock option plans.

Had compensation cost for the Company's stock-based compensation plans been
determined based on Statement of Financial Accounting Standards ("SFAS") No.
123, the Company's net income and net income per share for the years ended
December 31, 2001, 2000 and 1999 would have been the pro forma amounts indicated
below (in thousands, except per share amounts):

The Akorn, Inc. Employee Stock Purchase Plan permits eligible employees to
acquire shares of the Company's common stock through payroll deductions not
exceeding 15% of base wages, at a 15% discount from market price. A maximum of
1,000,000 shares of the Company's common stock may be acquired under the terms
of the Plan. Purchases of shares issued from treasury stock approximated 7,000
shares during the year ended December 31, 1999. New shares issued under the plan
approximated 44,000 in 2001, 20,000 in 2000, and 26,000 in 1999.

38

NOTE J -- INCOME TAXES

The income tax provision (benefit) consisted of the following (in
thousands):

Income tax expense (benefit) differs from the "expected" tax expense
(benefit) computed by applying the U.S. Federal corporate income tax rate of 34%
to income before income taxes as follows (in thousands):

Deferred tax assets (liabilities) at December 31, 2001 and 2000 include (in
thousands):

The deferred taxes are classified in the accompanying balance sheets as
follows (in thousands):

Management concluded that it was more likely than not that all of the net
deferred tax assets will be realized through future taxable earnings.
Accordingly, no valuation allowance is recorded.

39

NOTE K -- CHANGES IN ACCOUNTING ESTIMATES

The Company accrues an estimate of the difference between the gross sales
price of certain products sold to wholesalers and the expected resale prices of
such products under contractual arrangements with third parties such as
hospitals and group purchasing organizations at the time of sale to the
wholesaler. Similarly, the Company records an allowance for rebates related to
contracts and other programs with wholesalers. These allowances are reflected as
a reduction of account receivable balances. The Company evaluates the allowance
balances against actual chargebacks and rebates processed by wholesalers. Actual
chargebacks and rebates processed can vary materially from period to period. The
Company has an increasing number of contracts and other programs with
wholesalers, each incorporating various numbers and types of chargebacks and
rebates. The recorded allowance amount reflects the Company's current estimate
of the chargeback and rebate amounts wholesalers have earned under these various
contracts and programs.

In May 2001, the Company completed an analysis of its March 31, 2001
allowance for chargebacks and rebates and determined that an increase from the
allowance of $3,296,000 at December 31, 2000 was necessary. In performing such
analysis, the Company utilized recently obtained reports of wholesaler's
inventory information, which had not been previously obtained or utilized. Based
on the wholesaler's March 31, 2001 inventories and historical chargeback and
rebate activity, the Company recorded an allowance of $6,961,000, which resulted
in an expense of $12,000,000 for the three months ended March 31, 2001.

During the quarter ended June 30, 2001, the Company further refined its
estimates of the chargeback and rebate liability determining that an additional
$2,250,000 provision needed to be recorded. This additional increase to the
allowance was necessary to reflect the continuing shift of sales to customers
who purchase their products through group purchasing organizations and buying
groups. The Company had previously seen a much greater level of list price
business than is occurring in the current business environment.

The Company records an allowance for estimated product returns. This
allowance is reflected as a reduction of account receivable balances. The
Company evaluates the allowance balance against actual returns processed. Actual
returns processed can vary materially from period to period.

Based on the wholesaler's inventory information, the Company increased its
allowance for potential product returns to $2,232,000 at March 31, 2001 from
$232,000 at December 31, 2000. The provision for the three months ended March
31, 2001 was $2,559,000. The allowance for potential product returns was
$548,000 at December 31, 2001.

The Company records an allowance for doubtful accounts, which reflects
trade receivable balances owed to the Company that are believed to be
uncollectible. This allowance is reflected as a reduction of account receivable
balances. The expense related to doubtful accounts is reflected in SG&A
expenses.

Based upon its recent unsuccessful efforts to collect past due balances,
the Company updated its analysis of potentially uncollectible trade receivable
balances and recorded a total bad debt provision for the year of $12,000,000.
The Company recorded $7,520,000 and $4,610,00 in the first and second quarter of
2001, respectively and reduced the allowance $130,000 in the fourth quarter of
2001. As a result, and after the effect of balances written off, the allowance
for doubtful accounts increased to $3,706,000 at December 31, 2001 from $801,000
at December 31, 2000.

The Company records an allowance for discounts and allowances, which
reflects discounts and allowances available to certain customers based on agreed
upon terms of sale. This allowance is reflected as a reduction of account
receivable balances. The Company evaluates the allowance balance against actual
discounts taken.

The Company records an estimate for slow-moving and obsolete inventory
based upon recent historical sales by unit. The Company evaluates the potential
sales of its products over their remaining lives and estimates the amount that
may expire before being sold.

In the fourth quarter of 2000, the Company increased this reserve by
$2,700,000 to account for slow moving and obsolete inventory primarily related
to products purchased from third parties in 1998 and 1999 for which the original
sales forecast overestimated actual demand.

40

NOTE K -- CHANGES IN ACCOUNTING ESTIMATES -- (CONTINUED)

In the first quarter of 2001, based on sales trends and forecasted sales
activity by product, the Company increased its allowance for inventory
obsolescence to $4,583,000. The provision for the three months ended March 31,
2001 was $1,500,000. The allowance for inventory obsolescence was $1,845,000 at
December 31, 2001.

All other increases to the allowances for chargebacks and rebates, returns,
doubtful accounts, discounts and allowances and inventory obsolescence occurred
as part of the normal recording of product sales.

NOTE L -- RETIREMENT PLAN

All employees who have attained the age of 21 are eligible for
participation in the Company's 401(k) Plan. The plan-related expense recognized
for the years ended December 31, 2001, 2000 and 1999 totaled $234,000, $285,000
and $220,000, respectively. The employer's matching contribution is a percentage
of the amount contributed by each employee and is funded on a current basis.

NOTE M -- INDUSTRY SEGMENT INFORMATION

The Company classifies its operations into three business segments,
ophthalmic, injectable and contract services. The ophthalmic segment
manufactures, markets and distributes diagnostic and therapeutic pharmaceuticals
and surgical instruments and related supplies. The injectable segment
manufactures, markets and distributes injectable pharmaceuticals, primarily in
niche markets. Selected financial information by industry segment is presented
below (in thousands):

The Company does not identify assets by segment for internal purposes.

NOTE N -- COMMITMENTS AND CONTINGENCIES

The Company is a party in legal proceedings and potential claims arising in
the ordinary course of its business. See Note G -- Financing Arrangements and
Note T -- Subsequent Events. Despite the inherent uncertainties of litigation,
management of the Company at this time does not believe that such proceedings
will have a material adverse impact on the consolidated financial position,
results of operations, or cash flows of the Company.

41

NOTE O -- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)

NOTE P -- RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivatives Instruments and Hedging Activities." SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS No. 137 and No. 138, was effective for the Company's
fiscal 2001 financial statements and was adopted by the Company on January 1,
2001. Adoption of these standards did not have a material effect on the
Company's financial position or results of operations.

In July 2001, the FASB approved three statements, SFAS 141, "Business
Combinations," SFAS 142, "Goodwill and Other Intangible Assets," and SFAS 143,
"Accounting for Asset Retirement Obligations."

SFAS 141 supercedes APB Opinion No. 16, "Business Combinations," and
eliminates the pooling-of-interests method of accounting for business
combinations, thus requiring all business combinations be accounted for using
the purchase method. In addition, in applying the purchase method, SFAS 141
changes the criteria for recognizing intangible assets apart from goodwill. The
following criteria is to be considered in determining the recognition of the
intangible assets: (1) the intangible asset arises from contractual or other
legal rights, or (2) the intangible asset is separable or dividable from the
acquired entity and capable of being sold, transferred, licensed, rented, or
exchanged. The requirements of SFAS 141 are effective for all business
combinations completed after June 30, 2001. The adoption of this new standard
did not have a material impact on the Company's financial statements.

SFAS 142 supercedes APB Opinion No. 17, "Intangible Assets," and requires
goodwill and other intangible assets that have an indefinite useful life to no
longer be amortized; however, these assets must be reviewed at least annually
for impairment. The Company has adopted SFAS 142 as of January 1, 2002. The
Company is currently evaluating the impact of this new standard on the Company's
financial statements.

SFAS 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Company has adopted SFAS 143 as of
January 1, 2002. The adoption of this new standard did not have a material
impact on the Company's financial statements.

In August 2001 the FASB issued SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This statement also
supercedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 is effective January 1, 2002.
The adoption of this new standard did not have a material impact on the
Company's financial statements.

42

NOTE Q -- CUSTOMER CONCENTRATION

No single customer accounted for more than 10% of the Company's revenues
during 2001 or 1999. During 2000, the Company realized approximately 12% of its
revenues from one customer. This customer is a distributor of the Company's
products as well as a distributor of a broad range of health care products for
many companies in the health care sector. This customer is not the end user of
the Company's products. If sales to this customer were to diminish or cease, the
Company believes that the end users of its products would find no difficulty
obtaining the Company's products either directly from the Company or from
another distributor. The account receivable balance for this customer was
approximately 22% of gross trade receivables at December 31, 2000.

NOTE R -- DISCONTINUED PRODUCTS

In May 2001, the Company decided to no longer sell one of its products due
to uncertainty of product availability from a third-party manufacturer, rising
manufacturing costs and delays in obtaining FDA approval to manufacture the
product in-house. The Company recorded an asset impairment charge of $1,170,000
related to manufacturing equipment specific to the product and an asset
impairment charge of $140,000 related to the remaining balance of the product
acquisition intangible asset during the first quarter of 2001.

In November 2001, the Company decided to no longer sell one of its products
due to unavailability of raw material at a competitive price and declining
market share. The Company recorded an asset impairment charge of $725,000
related to the remaining balance of the product acquisition intangible asset
during the fourth quarter of 2001.

NOTE S -- RESTRUCTURING CHARGES

During 2001, the Company adopted a restructuring program with aggressive
actions to properly size its operations to current business conditions. These
actions were designed to reduce costs and improve operating efficiencies. The
program included, among other items, severance of employees, plant-closing costs
related to the Company's San Clemente, CA sales office and rent for unused
facilities under lease in San Clemente and Lincolnshire, IL. The restructuring,
affecting all three business segments, reduced the Company's workforce by 50
employees, representing 12.5% of the total workforce. Activities previously
executed in San Clemente have been relocated to the Company's headquarters.

The restructuring program costs are included in selling, general and
administrative expenses in the accompanying consolidated statement of income and
resulted in a charge to operations of approximately $1,117,000 consisting of
severance costs of $398,000, lease costs of $625,000 and other costs of $94,000.

At December 31, 2001, the amount remaining in the accruals for the
restructuring program was approximately $528,000. Approximately $315,000 of the
restructuring accrual will be paid by June 30, 2002 and the remainder will be
paid over the lease term, which expires in April 2003.

NOTE T -- SUBSEQUENT EVENTS

On January 25, 2002, the Company and Novadaq Technologies, Inc. ("Novadaq")
reached a settlement of a dispute involving the two companies. Under terms of a
revised agreement, Novadaq will assume all costs associated with development of
certain devices and procedures for use in fluorescene angiography. The Company,
in consideration of foregoing any share of future net profits, will obtain an
equity ownership interest in Novadaq and the right to be the exclusive supplier
of ICG for use in Novadaq's diagnostic procedures. In addition, Antonio R. Pera,
Akorn's President and Chief Operating Officer, was named to Novadaq's Board of
Directors. In conjunction with the revised agreement, Novadaq and the Company
have agreed to withdraw from arbitration proceedings that were currently in
process at the time.

On March 21, the Company announced that it had been notified by the U.S.
Patent and trademark Office that U.S. patent number 6,352,663 titled Methods for
diagnosing and treating abnormal vasculature using fluorescent dye angiography
and dye enhanced photocoagulation had been issued to the Company. This was one
of the three U.S. patents on file as of December 31, 2001.
43

NOTE T -- SUBSEQUENT EVENTS -- (CONTINUED)

After the close of business on March 27, 2002, the Company received a
letter informing it that the staff of the Securities and Exchange Commission's
regional office in Denver, Colorado, plans to recommend to the Commission that
it bring an enforcement action for injunctive relief against the Company. Based
on the letter, the Company believes the recommended action would concern the
Company's alleged misstatement, in quarterly and annual Securities and Exchange
Commission filing and earnings press releases, of its income for fiscal year
2000 by allegedly failing to reserve for doubtful accounts receivable and
overstating its accounts receivable balance. The Company has also learned that
certain of its former officers, as well as a current employee have received
similar notifications. The Company disagrees with the staff's proposed
recommendation and allegations; it has been invited to submit its views as to
why an enforcement action should not be brought, and intends to do so. Because
the proposed enforcement action relates to matters in a prior fiscal year, it is
not anticipated that these proceedings will have any material impact on the
Company's Consolidated Balance Sheet as of December 31, 2001 or on the Company's
2002 or future operating results.

The Company is party to a License Agreement with The Johns Hopkins
University, Applied Physics Laboratory ("JHU/APL") effective April 26, 2000, and
amended effective July 15, 2001 (See Note C). Pursuant to the License Agreement,
the Company licensed two patents from JHU/APL for the development and
commercialization of a diagnosis and treatment for age-related macular
degeneration ("AMD") using Indocyanine Green ("ICG"). A dispute has arisen
between the Company and JHU/APL concerning the License Agreement. Specifically,
JHU/APL has challenged the Company's performance under the License Agreement and
alleged that the Company is in breach of the License Agreement. The Company's
has denied JHU/APL's allegations and contends that it has performed in
accordance with the terms of the License Agreement. As a result of the dispute,
on March 29, 2002, the Company commenced a lawsuit in the U.S. District Court
for the Northern District of Illinois, seeking declaratory and other relief
against JHU/APL. On Monday, April 1, 2002, the Company and JHU/APL agreed,
through counsel, to attempt to negotiate a resolution to the present dispute. If
negotiations prove unsuccessful, the Company and JHU/APL will seek to mediate
the dispute. Failing that, the litigation would proceed forward. The Company has
an intangible asset valued at $2,084,500 recorded as a result of the License
Agreement, as amended. Unsuccessful resolution of the dispute could result in a
revaluation of this intangible asset.

On March 6, 2002, the Company received a letter from the United States
Attorney's Office, Central District of Illinois, Springfield, Illinois, advising
the Company that the United States Drug Enforcement Administration had referred
a matter to that office for a possible civil legal action for alleged violations
of the Comprehensive Drug Abuse Prevention Control Act of 1970, 21 U.S.C. sec.
801, et. seq. and regulations promulgated under the Act. The Company is
cooperating fully with the government and anticipates that any action under this
matter will not have a material impact on its financial statements.

44

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information relating to our directors that is required by this item is
incorporated by reference from the information under the caption "Election of
Directors" contained in our definitive proxy statement (the "Proxy Statement"),
which will be filed with the Securities and Exchange Commission in connection
with our Annual Meeting of Shareholders.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth the executive officers of the Company as of
March 15, 2002. Each officer serves as such at the pleasure of the Board of
Directors.

John N. Kapoor, Ph.D. Dr. Kapoor has served as Chief Executive Officer of
the Company since March 2001. Dr. Kapoor has served as Chairman of the Board of
the Company since May 1995 and from December 1991 to January 1993. Dr. Kapoor
also served as acting Chairman of the Board of the Company from April 1993 to
May 1995 and Chief Executive Officer of the Company from May 1996 to November
1998. Dr. Kapoor serves as Chairman of the Board of Option Care, Inc. (an
infusion services and supplies company) and was Chief Executive Officer of
Option Care, Inc. from August 1993 to April 1996. Dr. Kapoor is the president of
E.J. Financial Enterprises, Inc., (a health care consulting and investment
company), has served as Chairman of the Board of NeoPharm, Inc. (a specialty
pharmaceutical company) since July 1990 and is a director of First Horizon
Pharmaceutical Corporation (a distributor of pharmaceuticals).

Antonio R. Pera. Mr. Pera has served as President and Chief Operating
Officer of the Company since June 2001. Mr. Pera is also a director of the
Company. From September 1992 to June 2001, he was Vice President and General
Manager of the Bedford Laboratories Division of Ben Venue Laboratories, Inc. (a
manufacturer of injectable drugs), and a subsidiary of Boehringer-Ingelheim
Corporation. Mr. Pera held various positions from March 1989 through September
1992 with Anaquest (Ohmeda, Inc.) (a manufacturer of inhalation anesthetics).
From July 1985 to March 1989, Mr. Pera held several positions with Lyphomed,
Inc. (a parenteral products and injectable drug manufacturer) including two
years as General Manager of the AccuPharma Division of that Company. Mr. Pera is
also a director of Novadaq Technologies, Inc., a privately held research
company.

Ben J. Pothast. Mr. Pothast has served as Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company since September 2001. From 1998
to 2001, he was Director of Financial Planning and Analysis of Moore North
America (a business form printing company). From 1995 to 1998, Mr. Pothast was
Director of Business Planning and Corporate Finance of GATX Corporation (a
transportation and logistics company). From 1990 to 1995, he was Manager of
Financial Reporting and Analysis for The Perseco Company (a packaging and
logistics company). Mr. Pothast began his career at the public accounting firm
of Ernst & Young.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the Proxy
Statement.

45

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the
information under the caption "Certain Relationships and Transactions" contained
in the Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a).2. Financial Statement Schedule. The following Financial Statement
Schedule is filed with this Annual Report on Form 10-K on the page
indicated:

(a).3. Exhibits

Those exhibits marked with an asterisk (*) refer to exhibits filed
herewith. The other exhibits are incorporated herein by reference, as indicated
in the following list.

(2.0) Agreement and Plan of Merger among Akorn, Inc., Taylor, and
Pasadena Research Laboratories, Inc. dated May 7, 1996,
incorporated by reference to the Company's report on Form
10-K for the fiscal year ended June 30, 1996.
(3.1) Restated Articles of Incorporation of the Company dated
September 6, 1991, incorporated by reference to Exhibit 3.1
to the Company's report on Form 10-K for the fiscal year
ended June 30, 1991.
(3.2) Articles of Amendment to Articles of Incorporation of the
company dated February 28, 1997, incorporated by reference
to Exhibit 3.2 to the Company's report on Form 10-K for the
transition period from July 1, 1996 to December 31, 1996.
(3.3) Current Composite of By-laws of the Company, incorporated by
reference to Exhibit 3.3 to the Company's report on Form
10-K for the transition period from July 1, 1996 to December
31, 1996.
(4.1) Specimen Common Stock Certificate, incorporated by reference
to Exhibit 4.1 to the Company's report on Form 10-K for the
fiscal year ended June 30, 1988.
(10.1) Consulting Agreement dated November 15, 1990 by and between
E. J. Financial Enterprises, Inc., a Delaware corporation,
and the Company, incorporated by reference to Exhibit 10.24
to the Company's report on Form 10-K for the fiscal year
ended June 30, 1991.
(10.2) Amendment No. 1 to the Amended and Restated Akorn, Inc. 1988
Incentive Compensation Program, incorporated by reference to
Exhibit 10.33 to the Company's report on Form 10-K for the
fiscal year ended June 30, 1992.
(10.3) 1991 Akorn, Inc. Stock Option Plan for Directors,
incorporated by reference to Exhibit 4.3 to the Company's
registration statement on Form S-8, registration number
33-44785.
(10.4) Common Stock Purchase Warrant dated September 3, 1992,
issued by the Company to the John N. Kapoor Trust dated
September 20, 1989, incorporated by reference to Exhibit No.
7 to Amendment No. 3 to Schedule 13D, dated September 10,
1992, filed by John N. Kapoor and the John N. Kapoor Trust
dated September 20, 1989.

46

(10.5) Amended and Restated Credit Agreement dated September 15, 1999 among the Company, Akorn (New Jersey),
Inc. and The Northern Trust Company (the "Credit Agreement"), incorporated by reference to Exhibit 10.5
to the Company's report on Form 10-K for the fiscal year ended December 31, 1999.
(10.6) Amendment No. 1 to the Credit Agreement dated December 28, 1999, incorporated by reference to Exhibit
10.6 to the Company's report on Form 10-K for the fiscal year ended December 31, 1999.
(10.7) Amendment No. 2 to the Credit Agreement dated February 15, 2001, incorporated by reference to Exhibit
10.1 to the Company's report on Form 8-K filed on April 17, 2001.
(10.8) Amendment No. 3 to the Credit Agreement dated April 16, 2001, incorporated by reference to Exhibit 10.2
to the Company's report on Form 8-K filed on April 17, 2001.
(10.9) Promissory Note among the Company, Akorn (New Jersey), Inc. and The Northern Trust Company dated April
16, 2001, incorporated by reference to Exhibit 10.3 to the Company's report on Form 8-K filed on April
17, 2001.
(10.10) Letter of Commitment to the Company from John. N. Kapoor, incorporated by reference to Exhibit 10.3 to
the Company's report on Form 8-K filed on April 17, 2001.
(10.11) Promissory Note among the Company, Akorn (New Jersey), Inc. and The Northern Trust Company dated April
16, 2001, incorporated by reference to Exhibit 10.3 to the Company's report on Form 8-K filed on April
17, 2001.
(10.12) Convertible Bridge Loan and Warrant Agreement dated as of July 12, 2001, by and between Akorn, Inc. and
the John N. Kapoor Trust dtd. 9/20/89, incorporated by reference to Exhibit 10.1 to the Company's
report on Form 8-K filed on July 26, 2001.
(10.13) The Tranche A Common Stock Purchase Warrant, dated July 12, 2001, incorporated by reference to Exhibit
10.2 to the Company's report on Form 8-K filed on July 26, 2001.
(10.14) The Tranche B Common Stock Purchase Warrant, dated July 12, 2001, incorporated by reference to Exhibit
10.3 to the Company's report on Form 8-K filed on July 26, 2001.
(10.15) Registration Rights Agreement dated July 12, 2001, by and between Akorn, Inc. and the John N. Kapoor
Trust dtd. 9/20/89, incorporated by reference to Exhibit 10.4 to the Company's report on Form 8-K filed
on July 26, 2001.
(10.16) Forbearance Agreement by and among Akorn, Inc., Akorn (New Jersey), Inc. and The Northern Trust
Company, dated as of July 12, 2001, incorporated by reference to Exhibit 10.5 to the Company's report
on Form 8-K filed on July 26, 2001.
(10.17) *Promissory Note among the Company, Akorn (New Jersey), Inc. and NeoPharm, Inc. dated December 20,
2001.
(10.18) *Processing Agreement dated December 20, 2001, by and between Akorn, Inc. and NeoPharm, Inc.
(10.19) *Subordination, Standby and Intercreditor Agreement dated December 20, 2001, by and between NeoPharm,
Inc. and The Northern Trust Company.
(10.20) *Subordination and Intercreditor Agreement dated December 20, 2001, by and between NeoPharm, Inc. and
the John N. Kapoor trust dtd. 9/20/89.
(10.21) *Waiver Letter dated December 20, 2001 by and between the Company, Akorn (New Jersey), Inc. and The
Northern Trust Company.
(10.22) *Supply Agreement dated January 4, 2002, by and between Akorn, Inc. and Novadaq Technologies, Inc.
(21.1) *Subsidiaries of the Company.
(b) Reports on Form 8-K.

There was no Form 8-K filed during the fourth quarter of 2001.

47

AKORN, INC.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

48

SIGNATURES

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

AKORN, INC.

By: /s/ JOHN N. KAPOOR
------------------------------------
John N. Kapoor
Chief Executive Officer

Date: April 16, 2002

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