<PAGE>


================================================================================

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                ---------------

                                    FORM 10-Q

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

     FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

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

     FOR THE TRANSITION PERIOD FROM _________________ TO __________________


                                ---------------

                         COMMISSION FILE NUMBER: 0-13976

                                   AKORN, INC.
             (Exact Name of Registrant as Specified in its Charter)

               LOUISIANA                                    72-0717400
   (State or Other Jurisdiction of                       (I.R.S. Employer
    Incorporation or Organization)                      Identification No.)

          2500 MILLBROOK DRIVE
        BUFFALO GROVE, ILLINOIS                               60089
(Address of Principal Executive Offices)                    (Zip Code)

                                 (847) 279-6100
                         (Registrant's telephone number)

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

                                 Yes       No X
                                    ---      --- 

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

                                 Yes       No X
                                    ---      --- 

     The financial statements included in this Form 10-Q have not been reviewed
by independent public accountants in accordance with Rule 10-01 (d) of
Regulation S-X. See explanatory Note on Page 2.

     At May 12, 2003 there were 19,729,759 shares of common stock, no par value,
outstanding.

================================================================================



<PAGE>




<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>

PART I.  FINANCIAL INFORMATION


         ITEM 1. Financial Statements (Unaudited)

                 Condensed Consolidated Balance Sheets-March 31, 2003
                 and December 31, 2002......................................  3

                 Condensed Consolidated Statements of Operations-Three 
                 months ended March 31, 2003 and 2002.......................  4

                 Condensed Consolidated Statements of Cash Flows-Three
                 months ended March 31, 2003 and 2002.......................  5

                 Notes to Condensed Consolidated Financial Statements.......  6


         ITEM 2. Management's discussion and analysis of financial 
                 condition and results of operations........................ 23


         ITEM 3. Quantitative and Qualitative Disclosures about
                 Market Risks............................................... 32


         ITEM 4. Controls and Procedures.................................... 32



PART II. OTHER INFORMATION


         ITEM 1. Legal Proceedings.......................................... 33


         ITEM 2. Changes in Securities and Use of Proceeds.................. 35


         ITEM 3. Default Upon Senior Securities............................. 35


         ITEM 4. Submission of Matters to a Vote of Security Holders........ 35


         ITEM 5. Other Information.......................................... 35


         ITEM 6. Exhibits and Reports on Form 8-K........................... 35
</TABLE>



                                       1

<PAGE>


                                EXPLANATORY NOTE


     On April 24, 2003, Deloitte And Touche, LLP ("Deloitte") notified the
Company that it would decline to stand for re-election as the Company's
independent accountants after completion of the audit of the Company's
consolidated financial statements as of and for the year ended December 31,
2002. The Company has begun the process of selecting a new independent
accountant, but has not completed this process as of the date of this filing. As
a result, independent accountants have not reviewed the financial statements and
notes thereto included in this Form 10-Q in accordance with Rule 10-01(d) of

Regulation S-X. The Company believes that the unaudited financial statements and
notes to the consolidated financial statements included herewith contain all of
the information and necessary adjustments for a fair presentation of these
financial statements and accompanying notes.




                                       2

<PAGE>


                                   AKORN, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                  IN THOUSANDS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                       MARCH 31,   DECEMBER 31,
                                                         2003         2002
                                                       ---------   ------------
<S>                                                    <C>         <C>
                                     ASSETS
CURRENT ASSETS
   Cash and cash equivalents ......................... $     343     $     364
   Trade accounts receivable (less allowance
      for doubtful accounts of $1,200 and $1,200) ....     3,701         1,421
   Inventory .........................................    10,616        10,401
   Deferred income taxes..............................        --            --
   Income taxes recoverable ..........................       670           670
   Prepaid expenses and other current assets .........       715           383
                                                       ---------     ---------
        TOTAL CURRENT ASSETS .........................    16,045        13,239

OTHER ASSETS
   Intangibles, net...................................    13,788        14,142
   Investment in Novadaq Technologies, Inc. ..........       713           713
   Deferred income taxes..............................        --            --
   Other .............................................       104           130
                                                       ---------     ---------
      TOTAL OTHER ASSETS .............................    14,605        14,985
PROPERTY, PLANT AND EQUIPMENT, NET ...................    34,949        35,314
                                                       ---------     ---------
      TOTAL ASSETS.................................... $  65,599     $  63,538
                                                       =========     =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
   Current installments of long-term debt ............ $  37,088     $  35,859
   Trade accounts payable ............................     6,491         5,756
   Accrued compensation ..............................       590           836
   Accrued expenses and other current liabilities ....     1,299         1,352
                                                       ---------     ---------
      TOTAL CURRENT LIABILITIES ......................    45,468        43,803
LONG-TERM DEBT .......................................     7,852         7,799
OTHER LONG-TERM LIABILITIES ..........................       704           584
                                                       ---------     ---------
      TOTAL LIABILITIES ..............................    54,024        52,186

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
   Common stock ......................................    26,866        26,866
   Accumulated deficit................................   (15,291)      (15,514)
                                                       ---------     ---------
      TOTAL SHAREHOLDERS' EQUITY .....................    11,575        11,352
                                                       ---------     ---------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $  65,599     $  63,538
                                                       =========     =========
</TABLE>


            See notes to condensed consolidated financial statements.




                                       3

<PAGE>


                                   AKORN, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                       IN THOUSANDS, EXCEPT PER SHARE DATA
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED
                                                             MARCH 31,
                                                        --------------------
                                                          2003        2002
                                                        --------    --------
<S>                                                     <C>         <C>
Revenues .............................................  $ 12,782    $ 13,443
Cost of sales ........................................     6,938       7,094
                                                        --------    --------
      GROSS PROFIT ...................................     5,844       6,349

Selling, general and administrative expenses .........     4,169       4,455
Provision, net of recoveries, for bad debts ..........        54        --
Amortization of intangibles ..........................       355         343
Research and development expenses ....................       473         420
                                                        --------    --------
      TOTAL OPERATING EXPENSES .......................     5,051       5,218
                                                        --------    --------
      OPERATING INCOME ...............................       793       1,131

Interest expense .....................................      (645)       (887)
Interest and other income (expense), net .............        --          --   
                                                        --------    --------
      INTEREST EXPENSE AND OTHER .....................      (645)       (807)
                                                        --------    --------
      INCOME BEFORE INCOME TAXES .....................       148         244

Income tax provision .................................        25          93
                                                        --------    --------
      NET INCOME .....................................  $    123    $    151
                                                        ========    ========
NET INCOME PER SHARE:
   BASIC .............................................  $   0.01    $   0.01
                                                        ========    ========
   DILUTED ...........................................  $   0.01    $   0.01
                                                        ========    ========

SHARES USED IN COMPUTING NET INCOME PER SHARE:
   BASIC .............................................    19,688      19,524
                                                        ========    ========
   DILUTED ...........................................    19,799      21,791
                                                        ========    ========
</TABLE>


            See notes to condensed consolidated financial statements.




                                       4

<PAGE>

                                   AKORN, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  IN THOUSANDS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED
                                                             MARCH 31,
                                                     -----------------------
                                                        2003          2002
                                                     ---------     ---------
<S>                                                  <C>           <C>
OPERATING ACTIVITIES
Net income  ........................................ $     123     $     151
Adjustments to reconcile net income to net
   cash provided by operating activities:
   Depreciation and amortization ...................     1,130         1,054
   Deferred income taxes ...........................        --            93
   Amortization of debt discounts ..................       120           129
   Changes in operating assets and liabilities:
      Accounts receivable...........................    (2,280)          513
      Income taxes recoverable......................        --            24
      Inventory.....................................      (215)       (1,213)
      Prepaid expenses and other current assets.....      (332)         (152)
      Trade accounts payable........................       735         1,590
      Accrued compensation..........................      (246)         (155)
      Income taxes payable..........................        --            --
      Accrued expenses and other liabilities........       (45)       (1,645)
                                                     ---------     ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES     (1,010)        1,306

INVESTING ACTIVITIES
Purchases of property, plant and equipment .........      (410)         (974)
                                                     ---------     ---------
NET CASH (USED IN) INVESTING ACTIVITIES ............      (410)         (974)

FINANCING ACTIVITIES
Repayment of long-term debt ........................        --           (66)
Borrowings under bank credit agreement .............     1,359            --
Proceeds from employee stock purchase plan/exercise 
  of stock options .................................        40           204
                                                     ---------     ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..........     1,399           138

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ...       (21)         (447)

Cash and cash equivalents at beginning of period ...       364         5,355
                                                     ---------     ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ......... $     343     $   4,908
                                                     =========     =========

Amount paid for interest
  (net of capitalized interest)..................... $     349     $     620

Amount paid for income taxes........................        --            --
</TABLE>


            See notes to condensed consolidated financial statements.



                                       5

<PAGE>


                                   AKORN, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE A - BASIS OF PRESENTATION

     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. Customers
include physicians, optometrists, wholesalers, group purchasing organizations
and other pharmaceutical companies.

     Consolidation: The accompanying unaudited condensed consolidated financial
statements include the accounts of Akorn, Inc. and its wholly owned subsidiary
(the "Company"). Intercompany transactions and balances have been eliminated in
consolidation. These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and accordingly do not include all the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.

     Basis of Presentation: The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. 

     The Company experienced losses from operations in 2002, 2001 and 2000 and
has a working capital deficiency of $29.4 million as of March 31, 2003. The
Company also is in default under its existing credit agreement and is a party to
governmental proceedings and potential claims by the Food and Drug
Administration ("FDA") that could have a material adverse effect on the Company.
See Note M - "Legal Proceedings". Although the Company has entered into a
Forbearance Agreeement (as defined below) with its senior lenders, is working
with the FDA to favorably resolve such proceeding, has appointed a new interim
chief executive officer and implemented other management changes and has taken
steps to return to profitability, there is substantial doubt about the Company's
ability to continue as a going concern. The Company's ability to continue as a
going concern is dependent upon its ability to (i) continue to finance it
current cash needs, (ii) continue to obtain extensions of the Forbearance
Agreement, (iii) successfully resolve the ongoing governmental proceeding with
the FDA and (iv) ultimately refinance its senior bank debt and obtain new
financing for future operations and capital expenditures. If it is unable to do
so, it may be required to seek protection from its creditors under the federal
bankruptcy code.

     While there can be no guarantee that the Company will be able to continue
to generate sufficient revenues and cash flow from operations to finance its
current cash needs, the Company generated positive cash flow from operations in
2002 and for the period from January 1 through April 30, 2003. As of April 30,
2003, the Company had approximately $400,000 in cash and equivalents and
approximately $1.4 million of undrawn availability under its second line of
credit described below.

     There can also be no guarantee that the Company will successfully resolve
the ongoing governmental proceedings with the FDA. However, the Company has
submitted to the FDA and begun to implement a plan for comprehensive corrective
actions at its Decatur, Illinois facility.

     Moreover, there can be no guarantee that the Company will be successful in
obtaining further extensions of the Forbearance Agreement or in refinancing the
senior debt and obtaining new financing for future operations. However, the
Company is current on its interest payment obligations to its senior lenders,
management believes that the Company has a good relationship with its senior
lenders and, as required, the Company has retained a consulting 




                                       6

<PAGE>

firm, submitted a restructuring plan and engaged an investment banker to assist
in raising additional financing and explore other strategic alternatives for
repaying the senior bank debt. The Company has also added key management
personnel, including the appointment of a new interim chief executive officer
and vice president of operations, and additional personnel in critical areas,
such as quality assurance. Management has reduced the Company's cost structure,
improved the Company's processes and systems and implemented strict controls
over capital spending. Management believes these activities have improved the
Company's profitability and cash flow from operations and improve its prospects
for refinancing its senior debt and obtaining additional financing for future
operations.

     As a result of all of the factors cited in the preceeding paragraphs,
management of the Company believes that the Company should be able to sustain
its operations and continue as a going concern. However, the ultimate outcome of
this uncertainty cannot be presently determined and, accordingly, there remains
substantial doubt as to whether the Company will be able to continue as a going
concern. Further, even if the Company's efforts to raise additional financing
and explore other strategic alternatives result in a transaction that repays the
senior bank debt, there can be no assurance that the current common stock will
have any value following such a transaction. In particular, if any new financing
is obtained, it likely will require the granting of rights, preferences or
privileges senior to those of the common stock and result in substantial
dilution of the existing ownership interests of the common stockholders.

     As discussed in Note H - "Financing Arrangements", the Company has
significant borrowings which require, among other things, compliance with
various covenants. The borrowings are incurred primarily under an amended and
restated revolving credit agreement (the "Credit Agreement").

     On September 16, 2002, the Company was notified by its senior lenders that
it was in default due to failure to pay the principal and interest owed as of
August 31, 2002 under the then most recent extension of the Credit Agreement.
The senior lenders also notified the Company that they would forbear from
exercising their remedies under the Credit Agreement until January 3, 2003 (as
indicated below, subsequently extended to June 30, 2003) if a forbearance
agreement could be reached. On September 20, 2002, the Company and its senior
lenders entered into an agreement under which the senior lenders would agree to
forbear from exercising their remedies (the "Forbearance Agreement") and the
Company acknowledged its current default. The Forbearance Agreement provides a
second line of credit allowing the Company to borrow the lesser of (i) the
difference between the Company's outstanding indebtedness to the senior lenders
and $39,200,000, (ii) the Company's borrowing base and (iii) $1,750,000, to fund
the Company's day-to-day operations. The Forbearance Agreement provides for
certain additional restrictions on operations and additional reporting
requirements. The Forbearance Agreement also requires automatic application of
cash from the Company's operations to repay borrowings under the new revolving
loan, and to reduce the Company's other obligations to the senior lenders.

     The Company, as required in the Forbearance Agreement, agreed to provide
the senior lenders with a plan for restructuring its financial obligations on or
before December 1, 2002, and agreed to retain a consulting firm by September 27,
2002 to assist in the development and execution of this restructuring plan and,
in furtherance of that commitment, on September 26, 2002, the Company entered
into an agreement (the "Consulting Agreement") with a consulting firm, AEG
Partners, LLC (the "Consultant"), whereby the Consultant would assist in the
development and execution of this restructuring plan and provide oversight and
direction to the Company's day-to-day operations. On November 18, 2002, the
Consultant notified the Company of its intent to resign from the engagement
effective December 2, 2002, based upon the Company's alleged failure to
cooperate with the Consultant, in breach of the Consulting Agreement. The
Company's senior lenders, upon learning of the Consultant's action, notified the
Company by letter dated November 18, 2002, that, as a result of the Consultant's
resignation, the Company was in default under terms of the Forbearance Agreement
and the Credit Agreement and demanded payment of all outstanding principal and
interest on the loan. This notice was followed by a second letter dated November
19, 2002, in which the senior lenders gave notice of their exercise of certain
remedies available under the Credit Agreement including, but not limited to,
their setting off the Company's deposits with the senior lender against the
Company's obligations to the senior lenders. The Company immediately entered
into discussions with the Consultant which led, on November 21, 2002, to the
Consultant rescinding its notification of resignation and to the 




                                       7

<PAGE>

senior lenders withdrawing their demand for payment and restoring the Company's
accounts.

     During the Company's discussions with the Consultant, the Company agreed to
establish a special committee of the Board (the "Corporate Governance
Committee") consisting of Directors Ellis and Bruhl, with Mr. Ellis serving as
Chairman. The Consultant will interface with the Corporate Governance Committee
regarding the Company's restructuring actions. The Company also agreed that the
Consultant will oversee the Company's interaction with all regulatory agencies
including, but not limited to, the FDA. In addition, the Company has agreed to a
"success fee" arrangement with the Consultant. Under terms of the arrangement,
if the Consultant is successful in obtaining an extension to January 1, 2004 or
later on the Company's senior debt, the Consultant will be paid a cash fee equal
to 1 1/2% of the amount of the senior debt which is refinanced or restructured.
Additionally, the success fee arrangement provides that the Company will issue
1,250,000 warrants to purchase common stock at an exercise price of $1.00 per
warrant share to the Consultant upon the date on which each of the following
conditions have been met or waived by the Company: (i) the Forbearance Agreement
shall have been terminated, (ii) the Consultant's engagement pursuant to the
Consulting Agreement shall have been terminated and (iii) the Company shall have
executed a new or restated multi-year credit facility. All unexercised warrants
shall expire on the fourth anniversary of the date of issuance.

     As required by the Forbearance Agreement, a restructuring plan was
developed by the Company and the Consultant and presented to the Company's
senior lenders in December 2002. The restructuring plan requested that the
senior lenders convert the Company's senior debt to a term note that would
mature no earlier than February 2004 and increase the current line of credit
from $1.75 million to $3 million to fund operations and capital expenditures. In
light of the FDA's re-inspection of the Decatur facility in early December 2002,
the Company and the senior lenders agreed to defer further discussions of that
request until completion of the re-inspection and the Company's response
thereto. As a result, the senior lenders have agreed to successive short-term
extensions of the Forbearance Agreement, the latest of which is an eleventh
amendment to the Forbearance Agreement expiring on June 30, 2003. Following
completion of the FDA inspection of the Decatur facility on February 6, 2003 and
issuance of the FDA findings (see Note M - "Legal Proceedings"), the senior
lenders have indicated that they are not willing to convert the senior debt to a
term loan but discussions continue regarding a possible increase in the
revolving line of credit. As required by the Company's senior lenders, on May 9,
2003, the Company engaged Leerink Swann, an investment banking firm, to assist
in raising additional financing and explore other strategic alternatives for
repaying the senior bank debt. Subject to the absence of any additional defaults
and subject to the senior lenders' satisfaction with the Company's progress in
resolving the matters raised by the FDA and in obtaining additional financing
and exploring other strategic alternatives , the Company expects to continue
obtaining short-term extensions of the Forbearance Agreement. However, there can
be no assurance that the Company will be successful in obtaining further
extensions of the Forbearance Agreement beyond June 30, 2003.

     As described in more detail in Note M - "Legal Proceedings", the Company is
also a party to governmental proceeding by the FDA. While the Company is
cooperating with the FDA and seeking to resolve the pending matter, an
unfavorable outcome in such proceeding may have a material impact on the
Company's operations and its financial condition, results of operations and/or
cash flows and, accordingly, may constitute a material adverse action that would
result in a covenant violation under the Credit Agreement

     In the event that the Company is not in compliance with the Credit
Agreement covenants and does not negotiate amended covenants or obtain a waiver
thereof, then the senior lenders, at their option, may demand immediate payment
of all outstanding amounts due and exercise any and all available remedies,
including, but not limited to, foreclosure on the Company's assets.

     Adjustments: In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2003
are not necessarily indicative of the results that may be expected for a full
year. For further information, refer to the 



                                       8

<PAGE>

consolidated financial statements and footnotes for the year ended December 31,
2002, included in the Company's Annual Report on Form 10-K.


NOTE B - USE OF ESTIMATES
 
     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 doubtful accounts, the allowance for chargebacks, the allowance
for rebates, the reserve for slow-moving and obsolete inventory, the allowance
for product returns, the carrying value of intangible assets and the carrying
value of deferred tax assets.

NOTE C - REVENUE RECOGNITION  

     The Company recognizes product sales for its ophthalmic and injectable
business segments upon the shipment of goods for customers whose terms are FOB
shipping point. The Company has several customers whose terms are FOB
destination point and recognizes revenue upon delivery of the product to these
customers. Revenue is recognized when all obligations of the Company have been
fulfilled and collection of the related receivable is probable. Provision for
estimated chargebacks, rebates, discounts and product returns is made at the
time of sale and is analyzed and adjusted, if necessary, at each balance sheet
date.
 
     The contract services segment, which produces products for third party
customers, based upon their specification, at a pre-determined price, also
recognizes sales upon the shipment of goods or upon delivery of the product as
appropriate. Revenue is recognized when all obligations of the Company have been
fulfilled and collection of the related receivable is probable.
 
     Royalty revenue is recognized in the period to which such revenue relates
based upon when the Company receives notification (monthly or quarterly) from
the counterparty that such counterparty has sold product for which Akorn is
entitled to a royalty.

NOTE D - ACCOUNTS RECEIVABLE ALLOWANCES

     The nature of the Company's business inherently involves, in the ordinary
course, significant amounts and substantial volumes of accounting activity
(i.e., transactions and estimates) relating to allowances for product returns,
chargebacks, rebates and discounts given to customers. This is a natural
circumstance of the pharmaceutical industry and not specific to the Company and
inherently lengthens the collection process. Depending on the product, the
end-user customer, the specific terms of national supply contracts and the
particular arrangements with the Company's wholesaler customers, certain
rebates, chargebacks and other credits are deducted from the Company's accounts
receivable. The process of claiming these deductions depends on wholesalers
reporting to the Company the amount of deductions that were earned under the
respective terms with end-user customers (which in turn depends on which
end-user customer, with different pricing arrangements might be entitled to a
particular deduction). This process can lead to "partial payments" against
outstanding invoices as the wholesalers take the claimed deductions at the time
of payment.

Allowance for Chargebacks and Rebates

     The Company maintains allowances for chargebacks and rebates. These
allowances are reflected as a reduction of accounts receivable.

     The Company enters contractual agreements with certain third parties such
as hospitals and group-purchasing organizations to sell certain products at
predetermined prices. The parties have elected to have these contracts
administered through wholesalers. When a wholesaler sells products to one of the
third parties that is subject to a contractual price agreement, the difference
between the price to the wholesaler and the price under contract is charged back
to the Company by the wholesaler. The Company tracks sales and submitted
chargebacks by product number for each wholesaler. Utilizing this information,
the Company estimates a chargeback percentage for each product. The Company
reduces gross sales and increases the chargeback allowance by the estimated
chargeback amount for each product sold to a wholesaler. The Company reduces the
chargeback allowance when it processes a request for a chargeback from a
wholesaler. Actual chargebacks processed can vary materially from period to
period.

     Management obtains wholesaler inventory reports to aid in analyzing the
reasonableness of the chargeback allowance. The Company assesses the
reasonableness of its chargeback allowance by applying the product 




                                       9

<PAGE>

chargeback percentage based on historical activity to the quantities of
inventory on hand per the wholesaler inventory reports.

     Similarly, the Company maintains an allowance for rebates related to
contract and other programs with certain customers. The rebate allowance also
reduces gross sales and accounts receivable by the amount of the estimated
rebate amount when the Company sells its products to its rebate-eligible
customers. Rebate percentages vary by product and by volume purchased by each
eligible customer. The Company tracks sales by product number for each eligible
customer and then applies the applicable rebate percentage, using both
historical trends and actual experience to estimate its rebate allowance. The
Company reduces gross sales and increases the rebate allowance by the estimated
rebate amount for each product sold to an eligible customer. The Company reduces
the rebate allowance when it processes a customer request for a rebate. At each
balance sheet date, the Company evaluates the allowance against actual rebates
processed and such amount can vary materially from period to period.

     The recorded allowances reflect the Company's current estimate of the
future chargeback and rebate liability to be paid or credited to the wholesaler
under the various contracts and programs. For the three month period ended March
31, 2003 and 2002, the Company recorded chargeback and rebate expense of
$2,762,000, and $4,076,000, respectively. The allowance for chargebacks and
rebates was $3,753,000 and $4,302,000 as of March 31, 2003 and December 31,
2002, respectively.

Allowance for Product Returns

     The Company also maintains an allowance for estimated product returns. This
allowance is reflected as a reduction of accounts receivable balances. The
Company evaluates the allowance balance against actual returns processed. In
addition to considering in process product returns and assessing the potential
implications of historical product return activity, the Company also considers
the wholesaler's inventory information to assess the magnitude of unconsumed
product that may result in a product return to the Company in the future. Actual
returns processed can vary materially from period to period. For the three month
period ending March 31, 2003 and 2002 the Company recorded a provision for
product returns of $679,000, and $445,000, respectively. The allowance for
potential product returns was $1,247,000 and $1,166,000 at March 31, 2003 and
December 31, 2002, respectively.

Allowance for Doubtful Accounts

     The Company maintains 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 accounts receivable
balances. In estimating the allowance for doubtful accounts, the Company has:

     o    Identified the relevant factors that might affect the accounting
          estimate for allowance for doubtful accounts, including: (a)
          historical experience with collections and write-offs; (b) credit
          quality of customers; (c) the interaction of credits being taken for
          discounts, rebates, allowances and other adjustments; (d) balances of
          outstanding receivables, and partially paid receivables; and (e)
          economic and other exogenous factors that might affect collectibility
          (e.g., bankruptcies of customers, factors that affect particular 
          distribution channels, etc.).

     o    Accumulated data on which to base the estimate for allowance for
          doubtful accounts, including: (a) collections and write-offs data; (b)
          information regarding current credit quality of customers; and (c)
          other information such as buying patterns and payment patterns,
          particularly in respect of major customers.

     o    Developed assumptions reflecting management's judgments as to the most
          likely circumstances and outcomes, regarding, among other matters: (a)
          collectibility of outstanding balances relating to "partial payments;"
          (b) the ability to collect items in dispute (or subject to
          reconciliation) with customers; and (c) economic factors that might
          affect collectibility of outstanding balances - based upon information
          available at the time.

     For the three month periods ending March 31, 2003 and 2002, the Company
recorded a provision, net of recoveries, for doubtful accounts of $54,000 and
$0, respectively. The allowance for doubtful accounts was $1,200,000 as of both
March 31, 2003 and December 31, 2002, respectively. As of March 31, 2003, the
Company had a total of $4,007,000 of past due gross accounts receivable, of
which $222,000 was over 60 days past due. The Company performs monthly a
detailed analysis of the receivables due from its wholesaler customers and
provides a 




                                       10

<PAGE>

specific reserve against known uncollectible items for each of the wholesaler
customers. The Company also includes in the allowance for doubtful accounts an
amount that it estimates to be uncollectible for all other customers based on a
percentage of the past due receivables. The percentage reserved increases as the
age of the receivables increases. Of the recorded allowance for doubtful
accounts of $1,200,000, the portion related to the wholesaler customers is
$626,000 with the remaining $574,000 reserve for all other customers.

Allowance for Discounts

     The Company maintains an allowance for discounts, which reflects discounts
available to certain customers based on agreed upon terms of sale. This
allowance is reflected as a reduction of accounts receivable. The Company
evaluates the allowance balance against actual discounts taken. For the three
month periods ending March 31, 2003 and 2002, the Company recorded a provision
for discounts of $203,000 and $299,000, respectively. The allowance for
discounts was $199,000 and $172,000 as of March 31, 2003 and December 31, 2002,
respectively.


NOTE E - INVENTORY

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


<TABLE>
<CAPTION>
                                                     MARCH 31,     DECEMBER 31,
                                                       2003            2002
                                                    ----------     ------------
<S>                                                 <C>            <C>
Finished goods..................................... $    3,904     $      3,460
Work in process....................................      2,270            1,877
Raw materials and supplies.........................      4,442            5,064
                                                    ----------     ------------
                                                    $   10,616     $     10,401
                                                    ==========     ============
</TABLE>



     Inventory at March 31, 2003 and December 31, 2002 is reported net of
reserves for slow-moving, unsaleable and obsolete items of $1,308,000 and
$1,206,000, respectively, primarily related to finished goods. For the three
month Periods ended March 31, 2003 and 2002, the Company recorded a provision of
$169,000 and $250,000, respectively.


NOTE F - INTANGIBLE ASSETS

     Intangible assets consist of product licenses 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. The Company assesses the impairment of intangibles based on
several factors, including estimated fair market value and anticipated cash
flows. The Company has no goodwill or other similar asset with indefinite lives
currently recorded on its balance sheet. A summary of the Company's acquired
amortizable intangible assets as of March 31, 2003 is as follows (in thousands):


<TABLE>
<CAPTION>
                                                AS OF MARCH 31, 2003
                                    --------------------------------------------
                                    GROSS CARRYING    ACCUMULATED   NET CARRYING
                                        AMOUNT       AMORTIZATION      AMOUNT
                                    --------------   ------------   ------------
<S>                                 <C>              <C>            <C>

Product Licenses..................    $   22,685       $  8,897      $ 13,788
</TABLE>


     The amortization expense of the above-listed acquired intangible assets for
each of the five years ending December 31, 2007 will be as follows (in
thousands):


<TABLE>
<S>                                                       <C>
     For the year ended 12/31/03 (a)...................   1,419
</TABLE>




                                       11

<PAGE>



<TABLE>
<S>                                                       <C>
     For the year ended 12/31/04.......................   1,404
     For the year ended 12/31/05.......................   1,357
     For the year ended 12/31/06.......................   1,304
     For the year ended 12/31/07.......................   1,281
</TABLE>


     (a) Amortization expense for the three months ended March 31, 2003 amounted
to $355,000.


NOTE G - PROPERTY, PLANT AND EQUIPMENT

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


<TABLE>
<CAPTION>
                                                    MARCH 31,     DECEMBER 31,
                                                      2003            2002
                                                   ----------     ------------
<S>                                                <C>            <C>
Land...........................................    $      396      $      396
Buildings and leasehold improvements...........         8,890           8,890
Furniture and equipment........................        27,692          27,390
Automobiles....................................            55              55
                                                   ----------      ----------
                                                       37,033          36,731
Accumulated depreciation.......................       (20,012)        (19,236)
                                                   ----------      ----------
                                                       17,021          17,495
Construction in progress.......................        17,928          17,819
                                                   ----------      ----------
                                                   $   34,949      $   33,514
                                                   ==========      ==========
</TABLE>


     Construction in progress primarily represents capital expenditures related
to the Company's Lyophilization project that will enable the Company to perform
processes in-house that are currently being performed by a sub-contractor. The
Company capitalized interest expense related to the Lyophilization project of
$296,000 and $264,000 during the three-month periods ended March 31, 2003 and
2002, respectively.


NOTE H - FINANCING ARRANGEMENTS

     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 Credit Agreement is
secured by substantially all of the assets of the Company and its subsidiaries
and contains a number of restrictive covenants. There were outstanding
borrowings of $35,565,000 and $44,800,000 at December 31, 2002 and 2001,
respectively. The interest rate as of December 31, 2002 was 7.25%.

     On April 16, 2001, the 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 was to 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
"Prior Agreement") with its senior lenders under which the lenders agreed to
forbear from taking action against the Company to enforce their rights under the
then existing Credit Agreement until January 2, 2002. As part of the Prior
Agreement, the Company acknowledged the existence of certain events of default.
These events included a default on a $1.3 million principal 




                                       12

<PAGE>

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 Prior 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 Prior 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 the Company's 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. The Credit Agreement required 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 Company remitted the $5.6
million payment on May 8, 2002. The Company is also obligated to remit any
additional federal tax refunds received above the estimated $5.6 million.

     The Company's senior lenders agreed to extend the Credit Agreement, as
Iamended, to July 31, 2002 and then again to August 31, 2002. These two
extensions contain the same covenants and reporting requirements except that the
Company is not required to comply with conditions (g) and (h) which relate to
the offering of equity securities. In both instances, the balance of $39.2
million was due at the end of the extension term.

     On September 16, 2002, the Company was notified by its senior lenders that
it was in default due to failure to pay the principal and interest owed as of
August 31, 2002 under the then most recent extension of the Credit Agreement.
The senior lenders also notified the Company that they would forbear from
exercising their remedies under the Credit Agreement until January 3, 2003 if a
forbearance agreement could be reached.

     On September 20, 2002, the Company and its senior lenders entered into an
agreement under which the senior lenders would agree to forbear from exercising
their remedies (the "Forbearance Agreement") and the Company acknowledged its
then-current default. The Forbearance Agreement provides a second line of credit
allowing the Company to borrow the lesser of (i) the difference between the
Company's outstanding indebtedness to the senior lenders and $39,200,000, (ii)
the Company's borrowing base and (iii) $1,750,000, to fund the Company's
day-to-day operations. The Forbearance Agreement requires that, except for
existing defaults, the Company continue to comply with all of the covenants in
the Credit Agreement and provides for certain additional restrictions on
operations and additional reporting requirements. The Forbearance Agreement also
requires automatic application of cash from the Company's operations to repay
borrowings under the new revolving loan, and to reduce the Company's other
obligations to the senior lenders.




                                       13

<PAGE>

     The Company, as required in the Forbearance Agreement, agreed to provide
the senior lenders with a plan for restructuring its financial obligations on or
before December 1, 2002, and agreed to retain a consulting firm by September 27,
2002 to assist in the development and execution of this restructuring plan and,
in furtherance of that commitment, on September 26, 2002, the Company entered
into an agreement (the "Consulting Agreement") with a consulting firm, AEG
Partners, LLC (the "Consultant") whereby the Consultant would assist in the
development and execution of this restructuring plan and provide oversight and
direction to the Company's day-to-day operations. On November 18, 2002, the
Consultant notified the Company of its intent to resign from the engagement
effective December 2, 2002, based upon the Company's alleged failure to
cooperate with the Consultant, in breach of the Consulting Agreement. The
Company's senior lenders, upon learning of the Consultant's action, notified the
Company by letter dated November 18, 2002, that, as a result of the Consultant's
resignation, the Company was in default under terms of the Forbearance Agreement
and the Credit Agreement and demanded payment of all outstanding principal and
interest on the loan. This notice was followed by a second letter dated November
19, 2002, in which the senior lenders gave notice of their exercise of certain
remedies available under the Credit Agreement including, but not limited to,
their setting off the Company's deposits with the senior lenders against the
Company's obligations to the senior lenders. The Company immediately entered
into discussions with the Consultant which led, on November 21, 2002, to the
Consultant rescinding its notification of resignation and to the senior lenders
withdrawing their demand for payment and restoring the Company's accounts.

     During the Company's discussions with the Consultant, the Company agreed to
establish a special committee of the Board (the "Corporate Governance
Committee") consisting of Directors Ellis and Bruhl, with Mr. Ellis serving as
Chairman. The Consultant will interface with the Corporate Governance Committee
regarding the Company's restructuring actions. The Company also agreed that the
Consultant will oversee the Company's interaction with all regulatory agencies
including, but not limited to, the FDA. In addition, the Company has agreed to a
"success fee" arrangement with the Consultant. Under terms of the arrangement,
if the Consultant is successful in obtaining an extension to January 1, 2004 or
later on the Company's senior debt, the Consultant will be paid a cash fee equal
to 1 1/2% of the amount of the senior debt which is refinanced or restructured.
Additionally, the success fee arrangement provides that the Company will issue
1,250,000 warrants to purchase common stock at an exercise price of $1.00 per
warrant share to the Consultant upon the date on which each of the following
conditions have been met or waived by the Company: (i) the Forbearance Agreement
shall have been terminated, (ii) the Consultant's engagement pursuant to the
Consulting Agreement shall have been terminated and (iii) the Company shall have
executed a new or restated multi-year credit facility. All unexercised warrants
shall expire on the fourth anniversary of the date of issuance.

     As required by the Forbearance Agreement, a restructuring plan was
developed by the Company and the Consultant and presented to the Company's
senior lenders in December 2002. The restructuring plan requested that the
senior lenders convert the Company's senior debt to a term note that would
mature no earlier than February 2004 and increase the current line of credit
from $1.75 million to $3 million to fund operations and capital expenditures. In
light of the FDA's re-inspection of the Decatur facility in early December 2002,
the Company and the senior lenders agreed to defer further discussions of that
request until completion of the re-inspection and the Company's response
thereto. As a result, the senior lenders have agreed to successive short-term
extensions of the Forbearance Agreement, the latest of which is an eleventh
amendment to the Forbearance Agreement expiring on June 30, 2003. Following
completion of the FDA inspection of the Decatur facility on February 6, 2003 and
issuance of the FDA findings (see Note M - "Legal Proceedings"), the senior
lenders have indicated that they are not willing to convert the senior debt to a
term loan but discussions continue regarding a possible increase in the
revolving line of credit. As required by the Company's senior lenders, on May 9,
2003, the Company engaged Leerink Swann as an investment banking firm, to assist
in raising additional financing and explore other strategic alternatives for
repaying the senior bank debt. Subject to the absence of any additional defaults
and subject to the senior lenders' satisfaction with the Company's progress in
resolving the matters raised by the FDA and in obtaining additional financing
and exploring other strategic alternatives, the Company expects to continue
obtaining short-term extensions of the Forbearance Agreement. However, the can
be no assurances that the Company will be successful in obtaining further
extensions of the Forbearance Agreement beyond June 30, 2003.



                                       14

<PAGE>


     As described in more detail in Note M - "Legal Proceedings", the Company is
also a party to governmental proceedings by the FDA. While the Company is
cooperating with the FDA and seeking to resolve the pending matter, an
unfavorable outcome in such proceeding may have a material impact on the
Company's operations and its financial condition, results of operations and/or
cash flows and, accordingly, may constitute a material adverse action that would
result in a covenant violation under the Credit Agreement.

     In the event that the Company is not in compliance with the Credit
Agreement covenants through the latest extension of the Forbearance Agreement
and does not negotiate amended covenants or obtain a waiver thereof, then the
senior lenders, at their option, may demand immediate payment of all outstanding
amounts due and exercise any and all available remedies, including, but not
limited to, foreclosure on the Company's assets.

     On July 12, 2001 as required under the terms of the Prior 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 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, 2001) and $2,000,000 ("Tranche B" which was received on
August 16, 2001). 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. All
unexercised warrants expire on December 20, 2006.

     Under the terms of the Trust Agreement, the subordinated debt bears
interest at prime plus 3%, which is the same rate the Company pays on its senior
debt. Interest cannot be paid to the Trust until the repayment of the senior
debt pursuant to the terms of a subordination agreement, which was entered into
between the Trust and the Company's senior lenders. Should the subordination
agreement be terminated, interest may be paid sooner. 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 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. In accordance with EITF Abstract No.
00-27, the Company has also computed and recorded a value related to the
"intrinsic" value of the convertible debt. This calculation determines the value
of the embedded conversion option within the debt that has become beneficial to
the owner as a result of the application of APB Opinion No. 14. This value was
determined to be $1,508,000 and was recorded as additional paid in capital. The
remaining $1,976,000 was recorded as long-term debt. The resultant debt discount
of $3,024,000, equivalent to the value assigned to the warrants and the
"intrinsic" value of the convertible debt, is being 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 the Company's efforts to complete its
lyophilization facility located in Decatur, Illinois. Under the terms of the
Promissory Note, dated December 20, 2001, interest accrues 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 the Company 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
the Company's senior debt 




                                       15

<PAGE>

but is senior to the Company's subordinated debt owed to the Trust. The note was
executed in conjunction with a Processing Agreement that provides NeoPharm with
the option of securing at least 15% of the capacity of the Company's
lyophilization facility each year. Dr. John N. Kapoor, the Company's chairman is
also chairman of NeoPharm and holds a substantial stock position in NeoPharm as
well as in the Company.

     Contemporaneous 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 maturity of the
Trust Agreement from July 12, 2004 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, as well as interest on
the $2,000,000 tranche after the original maturity of the Tranche B note, into
common stock of the Company. Previously, the Trust could only convert the
interest accrued on the $2,000,000 tranche through the original maturity of the
Tranche B note. The terms of the agreement to change the convertibility of the
Tranche A interest and the convertibility of the Tranche B interest for the
extension of the term require shareholder approval to be received by August 31,
2002, which was subsequently extended to June 30, 2003. If the Company's
shareholders do not approve these changes, the Company would be in default under
the Trust Agreement and, at the option of the Trust, the Subordinated Debt could
be accelerated and become due and payable on June 30, 2003. Any default under
the Trust Agreement would constitute an event of default under both the Credit
Agreement and the Neopharm Promissory Note. In the event of default, amounts due
under the Credit Agreement and the Neopharm Promissory Note could be declared to
be due and payable, notwithstanding the Forebearance Agreement which is
presently in place between the Company and its senior lender. The Company
expects that it will reach agreement with the Trust to extend, if necessary, the
shareholder approval date until the next shareholders meeting.

     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
$1,845,000 and $1,917,000 at March 31, 2003 and December 31, 2002, respectively.
The principal balance is payable 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.


NOTE I - NON-CASH TRANSACTIONS

     The Company received an equity ownership in Novadaq Technologies, Inc.,
("Novadaq"), of 4,000,000 common shares (representing approximately 16.4% of the
outstanding shares) as part of the settlement between the Company and Novadaq
reached on January 25, 2002. The Company had previously advanced $690,000 to
Novadaq for development costs and recorded these advances as an intangible
asset. Based on the settlement, the Company has reclassified these advances as
an Investment in Novadaq Technologies, Inc. The Company has determined this
investment should be valued using the cost method as described in Accounting
Principles Board ("APB") Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock."


NOTE J - EARNINGS 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 three-month periods ended March 31, 2003 and March 31, 2002 (in
thousands, except per share information):


<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED MARCH 31,
                                           ------------------------------
                                                2003            2002
                                           -------------     ------------
<S>                                        <C>               <C>
Net income per share - basic:
   Net income ..........................   $         123     $        151

</TABLE>





                                       16

<PAGE>



<TABLE>
<CAPTION>
                                                                                     THREE MONTHS ENDED MARCH 31,
                                                                                    ------------------------------
                                                                                         2003            2002
                                                                                    -------------     ------------
<S>                                                                                 <C>               <C>

   Weighted average number of shares outstanding................................           19,688           19,524
                                                                                    -------------     ------------
Net income per share - basic....................................................    $        0.01     $       0.01
                                                                                    =============     ============
Net income per share - diluted:
   Net income ..................................................................    $         123     $        151
   Net income adjustment for interest on convertible debt
      and convertible interest on debt..........................................               --               62
                                                                                    -------------     ------------
   Net income, as adjusted......................................................    $         123     $        213
                                                                                    =============     ============
   Weighted average number of shares outstanding................................           19,688           19,524
   Additional shares assuming conversion of convertible debt
      and convertible interest on debt .........................................               --            1,153
   Additional shares assuming exercise of warrants .............................               --              504
   Additional shares assuming exercise of options...............................              111              610
   Weighted average number of shares outstanding, as adjusted...................           19,799           21,791
                                                                                    -------------     ------------
Net income per share - diluted..................................................    $        0.01     $       0.01
                                                                                    =============     ============
</TABLE>


     Certain warrants, options and conversion rights are not included in the
earnings per share calculation when the exercise price or conversion price is
greater that the average market price for the period. The number of shares
subject to warrants, options and conversion rights excluded in each period is
reflected in the following table.


<TABLE>
<CAPTION>
                                                                                     THREE MONTHS ENDED MARCH 31,
                                                                                    ------------------------------
                                                                                         2003            2002
                                                                                    -------------     ------------
<S>                                                                                 <C>               <C>

Shares subject to anti-dilutive warrants and conversion rights not included in 
  earnings per share calculation................................................       1,667               --
Shares subject to anti-dilutive options not included in earnings per share 
  calculation...................................................................       3,636            1,434
</Table>

  

NOTE K - STOCK BASED COMPENSATION

     The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees" in accounting for qualifying options granted to its employees under
its 1988 Incentive Compensation Program and applies Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Issued Employees" ("SFAS
123") for disclosure purposes only. The SFAS 123 disclosures include pro forma
net income and earnings per share as if the fair value-based method of
accounting had been used.

     If compensation for employee options had been determined based on SFAS 123,
the Company's pro forma net income and pro forma income per share for the three
months ended March 31, would have been as follows:


<Table>
<Caption>
                                                  2003          2002
                                                ---------     ---------
<S>                                             <C>           <C>
Net income, as reported                         $ 123,000     $ 151,000

Add stock-based employee compensation
   expense included in reported net income             --            --

Deduct total stock-based employee
  compensation expense determined
  under fair-value-based method for
  all awards                                      (89,000)     (196,000)
                                                ---------     ---------
Pro forma net income/(loss)                     $  34,000     $ (45,000)
                                                =========     =========

Basic and diluted income/(loss) per share
  of common stock

Basic as reported                               $    0.01     $    0.01
Basic pro forma                                 $    0.00     $   (0.00)  
Diluted as reported                             $    0.01     $    0.01
Diluted pro forma                               $    0.00     $   (0.00)
</Table>


NOTE L - 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. The injectable segment manufactures, markets and distributes
injectable pharmaceuticals, primarily in niche markets. The contract services
segment manufactures products for third party pharmaceutical and biotechnology
customers based on their specifications. Selected financial information by
industry segment is presented below (in thousands).



<TABLE>
<CAPTION>
                                                                                     THREE MONTHS ENDED MARCH 31,
                                                                                    ------------------------------
                                                                                         2003            2002
                                                                                    -------------     ------------
<S>                                                                                 <C>               <C>
REVENUES
Ophthalmic .....................................................................    $       5,287     $      6,785
Injectable .....................................................................            5,905            3,788
Contract Services ..............................................................            1,590            2,870
                                                                                    -------------     ------------
      Total revenues ...........................................................    $      12,782     $     13,443
                                                                                    =============     ============

GROSS PROFIT
Ophthalmic .....................................................................    $       2,016     $      3,663
Injectable .....................................................................            3,721            1,834
Contract Services ..............................................................              106              852
                                                                                    -------------     ------------
      Total gross profit .......................................................            5,844            6,349
</TABLE>





                                       17

<PAGE>



<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED MARCH 31,
                                              ------------------------------
                                                   2003            2002
                                              -------------     ------------
<S>                                           <C>               <C>
Operating expenses...........................         5,051            5,218
                                              -------------     ------------
      Total operating income ................           793            1,131
Interest and other income (expense), net ....          (645)            (807)
                                              -------------     ------------
   Income before income taxes................ $         148     $        244
                                              =============     ============
</TABLE>


     The Company manages its business segments to the gross profit level and
manages its operating costs on a company-wide basis. The Company does not
identify assets by segment for internal purposes.


NOTE M - LEGAL PROCEEDINGS

     On March 27, 2002, the Company received a letter informing it that the
staff of the regional office of the Securities and Exchange Commission ("SEC")
in Denver, Colorado, would recommend to the SEC that it bring an enforcement
action against the Company and seek an order requiring the Company to be
enjoined from engaging in certain conduct. The staff alleged that the Company
misstated its income for fiscal years 2000 and 2001 by allegedly failing to
reserve for doubtful accounts receivable and overstating its accounts receivable
balance as of December 31, 2000. The staff alleged that internal control and
books and records deficiencies prevented the Company from accurately recording,
reconciling and aging its accounts receivable. The Company also learned that
certain of its former officers, as well as a then current employee had received
similar notifications. Subsequent to the issuance of the Company's consolidated
financial statements for the year ended December 31, 2001, management of the
Company determined it needed to restate the Company's financial statements for
2000 and 2001 to record a $7.5 million increase to the allowance for doubtful
accounts as of December 31, 2000, which it had originally recorded as of March
31, 2001.

     On February 27, 2003, the Company reached an agreement in principle with
the staff of the SEC's regional office in Denver, Colorado, that would resolve
the issues arising from the staff's investigation and proposed enforcement
action as discussed above. The Company has offered to consent to the entry of an
administrative cease and desist order as proposed by the staff, without
admitting or denying the findings set forth therein. The proposed consent order
finds that the Company failed to promptly and completely record and reconcile
cash and credit remittances, including from its top five customers, to invoices
posted in its accounts receivable sub-ledger. According to the findings in the
proposed consent order, the Company's problems resulted from, among other
things, internal control and books and records deficiencies that prevented the
Company from accurately recording, reconciling and aging its receivables. The
proposed consent order finds that the Company's 2000 Form 10-K and first quarter
2001 Form 10-Q misstated its account receivable balance or, alternatively,
failed to disclose the impairment of its accounts receivable and that its first
quarter 2001 Form 10-Q inaccurately attributed the increased accounts receivable
reserve to a change in estimate based on recent collection efforts, in violation
of Section 13(a) of the Exchange Act and rules 12b-20, 13a-1 and 13a-13
thereunder. The proposed consent order also finds that the Company failed to
keep accurate books and records and failed to devise and maintain a system of
adequate internal accounting controls with respect to its accounts receivable in
violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The
proposed consent order does not impose a monetary penalty against the Company or
require any additional restatement of the Company's financial statements. The
Company has recently become aware of and informed the SEC staff of certain
weaknesses in its internal controls, which it is in the process of addressing.
It is uncertain at this time what effect that this action will have on the
agreement in principle currently pending with the SEC staff. The proposed
consent order does not become final until it is approved by the SEC.
Accordingly, the Company may incur additional costs and expenses in connection
with this proceeding.

     In October 2000, the FDA issued a warning letter to the Company following
the FDA's routine cGMP inspection of the Company's Decatur manufacturing
facilities. This letter addressed several deviations from regulatory
requirements including cleaning validations and general 




                                       18

<PAGE>
documentation issues and requested corrective actions be undertaken by the
Company. The Company initiated corrective actions and responded to the warning
letter. Subsequently, the FDA conducted another inspection in late 2001 and
identified deviations from regulatory requirements including process controls
and cleaning validations. This led to the FDA leaving the warning letter in
place and issuing a Form 483 to document its findings. While no further
correspondence was received from the FDA, the Company responded to the
inspectional findings. This response described the Company's plan for addressing
the issues raised by the FDA and included improved cleaning validation, enhanced
process controls and approximately $2.0 million of capital improvements. In
August 2002 the FDA conducted another inspection of the Decatur facility, which
also identified deviations from cGMPs. The Company responded to these
observations in September 2002. In response to the Company's actions, the FDA
conducted another inspection of the Decatur facility during the period December
10, 2002 to February 6, 2003. This inspection also identified deviations from
regulatory requirements including the manner in which the Company processes and
investigates manufacturing discrepancies and failures, customer complaints and
the thoroughness of equipment cleaning validations. Deviations identified during
this inspection had been raised in previous FDA inspections. The Company has
responded to these latest findings in writing and in a meeting with the FDA in
March 2003. The Company set forth its plan for implementing comprehensive
corrective actions, has provided progress reports to the FDA on April 15, and
May 15, 2003 and has committed to providing the FDA an additional periodic
report of progress on June 15, 2003.

     As a result of the latest inspection and the Company's response, the FDA
may take any of the following actions: (i) accept the Company's reports and
response and take no further action against the Company; (ii) permit the Company
to continue its corrective actions and conduct another inspection (which likely
would not occur before the fourth quarter of 2003) to assess the success of
these efforts; (iii) seek to enjoin the Company from further violations, which
may include temporary suspension of some or all operations and potential
monetary penalties; or (iv) take other enforcement action which may include
seizure of Company products. At this time, it is not possible to predict the
FDA's course of action.

     FDA approval is required before any drug can be manufactured and marketed.
New drugs require the filing of a New Drug Application ("NDA"), including
clinical studies demonstrating the safety and efficacy of the drug. Generic
drugs, which are equivalents of existing, off-patent brand name drugs, require
the filing of an Abbreviated New Drug Application ("ANDA"). The Company believes
that unless and until the FDA chooses option (i) or, in the case of option (ii),
unless and until the issues identified by the FDA have been successfully
corrected and the corrections have been verified through reinspection, it is
doubtful that the FDA will approve any NDAs or ANDAs that may be submitted by
the Company. This has adversely impacted, and is likely to continue to adversely
impact the Company's ability to grow sales. However, the Company believes that
unless and until the FDA chooses option (iii) or (iv), the Company will be able
to continue manufacturing and distributing its current product lines.

     If the FDA chooses option (iii) or (iv), such action could significantly
impair the Company's ability to continue to manufacture and distribute its
current product line and generate cash from its operations, could result in a
covenant violation under the Company's senior debt or could cause the Company's
senior lenders to refuse further extensions of the Company's senior debt, any or
all of which would have a material adverse effect on the Company's liquidity.
Any monetary penalty assessed by the FDA also could have a material adverse
effect on the Company's liquidity.



                                       19

<PAGE>

     On December 19, 2002 and January 22, 2003, the Company received demand
letters regarding claimed wrongful deaths allegedly associated with the use of
the drug Inapsine, which the Company produced. The total claims of these two
items total $3.8 million. The Company has just begun the investigation of the
facts and circumstances surrounding these claims and cannot as of yet determine
the potential liability, if any, from these claims. The Company has submitted
these claims to its product liability insurance carrier. The Company intends to
vigorously defend itself in regards to these claims.

     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.


NOTE N - RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the FASB issued three statements, SFAS No. 141, "Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS
No. 143, "Accounting for Asset Retirement Obligations."

     SFAS No. 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 to be accounted for using
the purchase method. In addition, in applying the purchase method, SFAS No. 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 No. 141 are effective for all business
combinations initiated after June 30, 2001. The adoption of this new standard
did not have any effect on the Company's financial statements.

     SFAS No. 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 No. 142 as of January 1,
2002 and no impairments were recognized upon adoption. Subsequent to the
adoption, the Company recorded an impairment charge of $257,000 related to
product license intangibles in the third quarter of 2002.

     SFAS No. 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 No. 143 as
of January 1, 2002. The adoption of this new standard did not have any effect on
the Company's financial statements.

     In August 2001, the FASB issued SFAS No. 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 any effect on the Company's
financial statements upon adoption. Subsequent to the adoption of this standard,
the Company recorded a charge of $545,000 in the third quarter of 2002 related
to abandoned construction projects.



                                       20

<PAGE>

     In April 2002, the FASB issued SFAS No. 145 "Recission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
This statement updates, clarifies and simplifies existing accounting
pronouncements. SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt", which requires all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in APB 30 will now be used to classify those gains and losses. SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking Fund Requirements", amended SFAS
No. 4 is no longer necessary, because SFAS No. 4 has been rescinded. SFAS No.
145 amends SFAS No. 13 "Accounting for Leases", to require that certain lease
modifications that have economic effects similar to a sale-leaseback transaction
be accounted for in the same manner as a sale-leaseback transaction. Certain
provisions of SFAS No. 145 are effective for the fiscal years beginning after
May 15, 2002, while other provisions are effective for transactions occurring
after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a
material impact on the Company's financial statements.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires the Company
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The Company will adopt SFAS No. 146 for exit or disposal activities initiated
after December 31, 2002. The Company does not anticipate that adoption of this
standard will have a material effect on its financial statements.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". This Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosure in both annual and interim
financial statements. Certain of the disclosure requirements are required for
fiscal years ending after December 15, 2002 and are included in the Notes to the
Consolidated Financial Statements.

     In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.
This Interpretation elaborates on the disclosure to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation are applicable to guarantees issued or modified
after December 31, 2002 and are not expected to have a material effect on the
Company's financial statements. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has determined that FIN 45 did not have any effect on the
Company's financial statements.

     In January, 2003, the FASB issued Interpretation No. 46. ("FIN 46"),
"Consolidation of Variable Interest Entities" with the objective of improving
financial reporting by companies involved with variable interest entities. A
variable interest entity is a corporation, partnership, trust, or other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the equity to support its activities.
Historically, entities generally were not consolidated unless the entity was
controlled through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns, or both. A
company that consolidates a variable interest entity is called the "primary
beneficiary" of that entity. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 1, 2003.
The consolidation requirements of FIN 46 apply to existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Also, certain
disclosure requirements apply to all financial statements issued after 




                                       21

<PAGE>

January 31, 2003, regardless of when the variable interest entity was
established. The Company has determined that FIN 46 will not have an impact on
its financial condition, results of operations or cash flows.


NOTE O - SUBSEQUENT EVENTS

     Following the conclusion of the audit of the December 31, 2002 financial
statements, Deloitte and Touche, LLP resigned as the Company's outside auditors
and noted that it believed that certain matters of material weaknesses existed
in the Company's internal controls. Although the Company does not necessarily
agree with Deloitte's judgment that there existed material weaknesses in the
Company's internal controls, the Company is in the process of implementing
procedures designed to address all relevant internal control issues. This event
has been disclosed by the Company on an interim report on Form 8-K filed on
May 1, 2003.



                                       22

<PAGE>



 
    Item 2.


                                   AKORN, INC.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                           OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS



CRITICAL ACCOUNTING POLICIES


REVENUE RECOGNITION

     The Company recognizes product sales for its ophthalmic and injectable
business segments upon the shipment of goods for customers whose terms are FOB
shipping point. The Company has several customers whose terms are FOB
destination point and recognizes revenue upon delivery of the product to these
customers. Revenue is recognized when all obligations of the Company have been
fulfilled and collection of the related receivable is probable. Provision for
estimated chargebacks, rebates, discounts and product returns is made at the
time of sale and is analyzed and adjusted, if necessary, at each balance sheet
date.
 
     The contract services segment, which produces products for third party
customers, based upon their specification, at a pre-determined price, also
recognizes sales upon the shipment of goods or upon delivery of the product as
appropriate. Revenue is recognized when all obligations of the Company have been
fulfilled and collection of the related receivable is probable.
 
     Royalty revenue is recognized in the period to which such revenue relates
based upon when the Company receives notification (monthly or quarterly) from
the counterparty that such counterparty has sold product for which Akorn is
entitled to a royalty.

ALLOWANCE FOR CHARGEBACKS AND REBATES

     The Company maintains allowances for chargebacks and rebates. These
allowances are reflected as a reduction of accounts receivable.

     The Company enters contractual agreements with certain third parties such
as hospitals and group-purchasing organizations to sell certain products at
predetermined prices. The parties have elected to have these contracts
administered through wholesalers. When a wholesaler sells products to one of the
third parties that is subject to a contractual price agreement, the difference
between the price to the wholesaler and the price under contract is charged back
to the Company by the wholesaler. The Company tracks sales and submitted
chargebacks by product number for each wholesaler. Utilizing this information,
the Company estimates a chargeback percentage for each product. The Company
reduces gross sales and increases the chargeback allowance by the estimated
chargeback amount for each product sold to a wholesaler. The Company reduces the
chargeback allowance when it processes a request for a chargeback from a
wholesaler. Actual chargebacks processed can vary materially from period to
period.

     Management obtains wholesaler inventory reports to aid in analyzing the
reasonableness of the chargeback allowance. The Company assesses the
reasonableness of its chargeback allowance by applying the product chargeback
percentage based on historical activity to the quantities of inventory on hand
per the wholesaler inventory reports.

     Similarly, the Company maintains an allowance for rebates related to
contract and other programs with certain customers. The rebate allowance also
reduces gross sales and accounts receivable by the amount of the estimated
rebate amount when the Company sells its products to its rebate-eligible
customers. Rebate percentages vary by product and by volume purchased by each
eligible customer. The Company tracks sales by product number for each eligible
customer and then applies the applicable rebate percentage, using both
historical trends and actual experience to estimate its rebate allowance. The
Company reduces gross sales and increases the rebate allowance by the estimated
rebate amount for each product sold to an eligible customer. The Company reduces
the rebate allowance when it processes a customer request for a rebate. At each
balance sheet date, the Company evaluates the allowance against actual rebates
processed and such amount can vary materially from period to period.

     The recorded allowances reflect the Company's current estimate of the
future chargeback and rebate liability to be paid or credited to the wholesaler
under the various contracts and programs. For the three period ended March 31,
2003 and 2002, the Company recorded chargeback and rebate expense of $2,762,000,
and $4,076,000, respectively. The allowance for chargebacks and rebates was
$3,753,000 and $4,302,000 as of March 31, 2003 and December 31, 2002,
respectively.




                                       23

<PAGE>


ALLOWANCE FOR PRODUCT RETURNS

     The Company also maintains an allowance for estimated product returns. This
allowance is reflected as a reduction of accounts receivable balances. The
Company evaluates the allowance balance against actual returns processed. In
addition to considering in process product returns and assessing the potential
implications of historical product return activity, the Company also considers
the wholesaler's inventory information to assess the magnitude of unconsumed
product that may result in a product return to the Company in the future. Actual
returns processed can vary materially from period to period. For three month
period ending March 31, 2003 and 2002 the Company recorded a provision for
product returns of $679,000, and $445,000, respectively. The allowance for
potential product returns was $1,247,000 and $1,166,000 at March 31, 2003 and
December 31, 2002, respectively.


ALLOWANCE FOR DOUBTFUL ACCOUNTS

     The Company maintains 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 accounts receivable
balances. In estimating the allowance for doubtful accounts, the Company has:

     o    Identified the relevant factors that might affect the accounting
          estimate for allowance for doubtful accounts, including: (a)
          historical experience with collections and write-offs; (b) credit
          quality of customers; (c) the interaction of credits being taken for
          discounts, rebates, allowances and other adjustments; (d) balances of
          outstanding receivables, and partially paid receivables; and (e)
          economic and other exogenous factors that might affect collectibility
          (e.g., bankruptcies of customers, factors that affect particular 
          distribution channels, etc.).

     o    Accumulated data on which to base the estimate for allowance for
          doubtful accounts, including: (a) collections and write-offs data; (b)
          information regarding current credit quality of customers; and (c) 
          other information such as buying patterns and payment patterns, 
          particularly in respect of major customers.

     o    Developed assumptions reflecting management's judgments as to the most
          likely circumstances and outcomes, regarding, among other matters: (a)
          collectibility of outstanding balances relating to "partial payments;"
          (b) the ability to collect items in dispute (or subject to
          reconciliation) with customers; and (c) economic factors that might 
          affect collectibility of outstanding balances - based upon information
          available at the time.

     For the three month periods ending March 31, 2003 and 2002, the Company
recorded a provision, net of recoveries, for doubtful accounts of $54,000, and
$0, respectively. The allowance for doubtful accounts was $1,200,000 as of both
March 31, 2003 and December 31, 2002, respectively. As of March 31, 2003, the
Company had a total of $4,007,000 of past due gross accounts receivable, of
which $222,000 was over 60 days past due. The Company performs monthly a
detailed analysis of the receivables due from its wholesaler customers and
provides a specific reserve against known uncollectible items for each of the
wholesaler customers. The Company also includes in the allowance for doubtful
accounts an amount that it estimates to be uncollectible for all other customers
based on a percentage of the past due receivables. The percentage reserved
increases as the age of the receivables increases. Of the recorded allowance for
doubtful accounts of $1,200,000, the portion related to the wholesaler customers
is $626,000 with the remaining $574,000 reserve for all other customers.

ALLOWANCE FOR DISCOUNTS

     The Company maintains an allowance for discounts, which reflects discounts
available to certain customers based on agreed upon terms of sale. This
allowance is reflected as a reduction of accounts receivable. The Company
evaluates the allowance balance against actual discounts taken. For the three
month periods ending March 31, 2003 and 2002, the Company recorded a provision
for discounts of $203,000 and $299,000, respectively. The allowance for
discounts was $199,000 and $172,000 as of March 31, 2003 and December 31, 2002,
respectively.


                                       24

<PAGE>


ALLOWANCE FOR SLOW-MOVING INVENTORY

     The Company maintains an allowance for slow-moving and obsolete inventory
based upon recent sales activity by unit and wholesaler inventory information.
For the three months ended March 31, 2003 and 2002, the Company recorded a
provision for inventory obsolescence of $169,000, and $250,000, respectively.
The allowance for inventory obsolescence was $1,307,000 and $1,206,000 as of
March 31, 2003 and December 31, 2002, 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 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. In performing its analysis of whether a valuation allowance to
reduce the deferred tax asset is necessary, the Company considers both negative
and positive evidence, which can be objectively verified. Based upon its
analysis, the Company established a valuation allowance in 2002 to reduce the
deferred tax asset to zero. 

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 March 31, 2003 and
December 31, 2002 was $8,897,000 and $8,543,000, respectively. The Company
annually assesses the impairment of intangibles based on several factors,
including estimated fair market value and anticipated cash flows.



         FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE RESULTS

     Certain statements in this Form 10-Q 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:

     o    the Company's ability to restructure or refinance its debt to its
          senior lenders, which is currently in default, but subject to a
          forbearance agreement;

     o    the Company's ability to obtain further extensions of the forbearance
          agreement which originally expired on January 3, 2003, but has
          subsequently been extended for successive short-term periods, the
          latest of which expires on June 30, 2003;

     o    the Company's ability to avoid further defaults under debt covenants;

     o    the Company's ability to generate cash from operations sufficient to
          meet its working capital requirements;

     o    the Company's ability to obtain additional funding to operate and grow
          its business;

     o    the Company's ability to resolve its Food and Drug Administration
          compliance issues at its Decatur, Illinois facility;

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



                                       25

<PAGE>


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

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

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

     o    availability of raw materials needed to produce the Company's
          products; and

     o    other factors referred to in the Company's other Securities and
          Exchange Commission filings including " Item 7. Managements Discussion
          and Analysis of Financial Conditions and Results of Operations -
          Factors that May Affect Future Results" in the Company's Form 10-K for
          2002.



RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO 2002

     The following table sets forth, for the periods indicated, revenues by
segment, excluding intersegment sales (in thousands):


<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED MARCH 31,
                                             ------------------------------
                                                  2003            2002
                                             -------------     ------------
<S>                                          <C>               <C>
Ophthalmic segment........................   $       5,287     $      6,785
Injectable segment........................           5,905            3,788
Contract Services segment.................           1,590            2,870
                                             -------------     ------------
Total revenues............................   $      12,782     $     13,443
                                             =============     ============
</TABLE>


     Consolidated revenues decreased 4.9% in the quarter ended March 31, 2003
compared to the same period in 2002.

     Ophthalmic segment revenues decreased 22.1%, primarily due to the temporary
suspension in late 2002 of production of Fluress and Flouracaine, pending
requalification of these products in a new container, as well as the timing of
increased customer purchases of angiography and ointment products in the fourth
quarter of 2002. Those purchases resulted in increased inventory levels that
were reduced in the first quarter of 2003 without compensating re-orders for the
product. Injectable segment revenues increased 55.9% for the quarter due to the
strong volume of rheumatology and antidote product revenues due to the Company's
ability to fill backorders for these products that had accumulated in the second
half of 2002. The backorders were the result of the temporary closure for
asceptic processing of one of the production rooms at the Company's Decatur,
Illinois facility. In the fourth quarter of 2002, the Company was able to shift
production of these products to a different production room at its Decatur
facility, thereby allowing it to fill the backorders in the first quarter of
2003. The Company anticipates injectable revenues to return to 2002 levels in
subsequent quarters. Contract services revenues decreased by 44.6% due mainly to
customer concerns about the status of the ongoing FDA compliance matters at the
Company's Decatur facility.

     The Company anticipates that revenues from the Contract Services segment
will continue to lag historical levels and that Ophthalmic and Injectable
segment revenues are not likely to grow until the issues surrounding the FDA
review are resolved. The FDA compliance matters are not anticipated to be
resolved prior to the fourth quarter of 2003. See Part II - Item 1 - "Legal
Proceedings". In addition, the Company does not expect Fluress and Flouracaine
production or asceptic processing in the aforementioned Decatur production room
to resume prior to the third quarter of 2003. Revenues and cash flow from
operations for the remainder of 2003 could be adversely impacted if the Company
is unable to resume production of Fluress and Fluoracaine and resume asceptic
processing in the aforementioned Decatur production room in the third quarter of
2003.

     The chargeback and rebate expense for the three months ended March 31, 2003
declined to $2,762,000 from $4,076,000 in the comparable period in the prior
year, due to the increase in the product sales mix of lower chargeback and
rebate percentage items, such as antidote and rheumatology products.

     Consolidated gross margin was 45.7% for the 2003 first quarter as compared
to a gross margin of 47.2% in the same period a year ago. The increase in higher
margin antidote and rheumatology product sales was more than offset by the
volume declines in the Ophthalmic and Contract Services segments and an increase
in consulting costs to address the Company's current FDA 




                                       26

<PAGE>
compliance matters.

     Selling, general and administrative (SG&A) expenses decreased 6.4%, from
$4,455,000 to $4,169,000, during the quarter ended March 31, 2003 as compared to
the same period in 2002 due to a reduction in marketing costs partially offset
by an increase in legal and consulting costs primarily relating to the proposed
restructuring of the Company's senior debt.

     Provision, net of recoveries, for bad debts was $54,000 for the quarter,
reflecting a $136,000 provision for the three month period in 2003 offset by
$82,000 of recoveries for the same period. There were no bad debt expense or
recoveries in the first quarter of 2002.

     Research and development (R&D) expense increased 12.6% in the quarter, to
$473,000 from $420,000 for the same period in 2002. This increase was due to
increased batch testing for the Company's ANDA product pipeline as well as
testing associated with the Company's planned launch of its Lidocaine Jelly
product. The Company has been scaling back its research and development
activities from its historical levels and will continue to focus on strategic
product niches in the areas of controlled substances and Ophthalmics. 

     Interest and other expense for the first quarter of 2003 was $645,000, a
27.3% decrease compared to the same period in the prior year, primarily due to
lower interest rates as well as a lower debt balance.

     The Company's effective tax rate for the current quarter was 16.9% compared
to 38.1% for the comparable prior year quarter

     The Company reported a net income of $123,000 or $0.01 per weighted average
share for the three months ended March 31, 2003, versus share $151,000 or $0.01
per weighted average share for the comparable prior year quarter. The reduction
in net income was due primarily to the decrease in revenues and gross margins,
which was offset in part by lower SG&A and interest expenses.


FINANCIAL CONDITION AND LIQUIDITY

Overview

     As of March 31, 2003, the Company had cash and cash equivalents of
$343,000. The net working capital deficiency at March 31, 2003 was $29,423,000
versus $30,564,000 at December 31, 2002. The negative working capital position
reflects the classification of the Company's senior debt obligation as a current
liability, the balance of which increased to $37,088,000 at March 31, 2003 from
$35,859,000 as of December 31, 2002.

     During the period ended March 31, 2003, the Company used $1,010,000 in cash
from operations, primarily due to an increase in receivables, offset in part by
an increase in accounts payable. The increase in receivables was due to the sale
of backordered injectable products in February 2003 to customers whose credit
terms are such that the receivables were not due until April 2003. As a result,
the Company's cash collections in April exceeded normalized levels and the
Company was able to reduce its accounts payable balance as well as the
outstanding balance on its revolving credit line below the levels as of March
31, 2003. Investing activities during the period ended March 31, 2003 include
$341,000 related to the lyophilized (freeze-dried) pharmaceuticals manufacturing
line expansion. Financing activities added $1,399,000 in cash during the period
ended March 31, 2003 primarily through the increase of the Company's revolving
credit line. As noted above, the Company reduced the outstanding balance on its
revolving credit line in April of 2003 based upon its cash collections in that
month.




                                       27

<PAGE>


     The Company has had three consecutive years of operating losses, is in
default under its existing credit agreement and is a party to governmental
proceedings and potential claims by the FDA that could have a material adverse
effect on the Company. Although the Company has entered into a Forbearance
Agreement (as defined below) with its senior lenders and obtained extensions
thereof through June 30, 2003, is working with the FDA to favorably resolve such
proceedings, has appointed a new interim chief executive officer and implemented
other management changes and has taken additional steps to return to
profitability, there is substantial doubt about the Company's ability to
continue as a going concern. The Company's ability to continue as a going
concern is dependent upon its ability to (i) continue to finance it current cash
needs, (ii) continue to obtain extensions of the Forbearance Agreement, (iii)
successfully resolve the ongoing governmental proceeding with the FDA and (iv)
ultimately refinance its senior bank debt and obtain new financing for future
operations and capital expenditures. If it is unable to do so, it may be
required to seek protection from its creditors under the federal bankruptcy
code.

     While there can be no guarantee that the Company will be able to continue
to generate sufficient revenues and cash flow from operations to finance its
current cash needs, the Company generated positive cash flow from operations in
2002 and for the period from January 1 through April 30, 2003. As of April 30,
2003, the Company had approximately $400,000 in cash and equivalents and
approximately $1.4 million of undrawn availability under the second line of
credit described below.

     There also can be no guarantee that the Company will successfully resolve
the ongoing governmental proceedings with the FDA. However, the Company has
submitted to the FDA and begun to implement a plan for comprehensive corrective
actions at its Decatur, Illinois facility.

     Moreover, there can be no guarantee that the Company will be successful in
obtaining further extensions of the Forbearance Agreement or in refinancing the
senior debt and obtaining new financing for future operations. However, the
Company is current on its interest payment obligations to its senior lenders,
management believes that the Company has a good relationship with its senior
lenders and, as required, the Company has retained a consulting firm, submitted
a restructuring plan and engaged an investment banker to assist in raising
additional financing and explore other strategic alternatives for repaying the
senior bank debt. The Company has also added key management personnel, including
the appointment of a new interim chief executive officer and vice president of
operations, and additional personnel in critical areas, such as quality
assurance. Management has reduced the Company's cost structure, improved the
Company's processes and systems and implemented strict controls over capital
spending. Management believes these activities have improved the Company's
profitability and cash flow from operations and improved the prospects to
refinance its senior debt and obtain additional financing for future operations.

     As a result of all of the factors cited in the preceeding three paragraphs,
management believes that the Company should be able to sustain its operations
and continue as a going concern. However, the ultimate outcome of this
uncertainty cannot be presently determined and, accordingly, there remains
substantial doubt as to whether the Company will be able to continue as a going
concern. Further, even if the Company's efforts to raise additional financing
and explore other strategic alternatives result in a transaction that repays the
senior bank debt, there can be no assurance that the current common stock will
have any value following such a transaction. In particular, if any new financing
is obtained, it likely will require the granting of rights, preferences or
privileges senior to those of the common stock and result in substantial
dilution of the existing ownership interests of the common stockholders.



                                       28

<PAGE>

Credit Agreement

     As discussed in Note H - "Financing Arrangements" - to the Condensed
Consolidated Financial Statements, the Company has significant borrowings which
require, among other things, compliance with various covenants. The borrowings
consist primarily of an Amended and Restated Revolving Credit Agreement (the
"Credit Agreement").

     On September 16, 2002, the Company was notified by its senior lenders that
it was in default due to failure to pay the principal and interest owed as of
August 31, 2002 under the then most recent extension of the Credit Agreement.
The senior lenders also notified the Company that they would forbear from
exercising their remedies under the Credit Agreement until January 3, 2003 (as
indicated below, subsequently extended to June 30, 2003) if a forbearance
agreement could be reached. On September 20, 2002, the Company and its senior
lenders entered into an agreement under which the senior lenders would agree to
forbear from exercising their remedies (the "Forbearance Agreement") and the
Company acknowledged its then-current default. The Forbearance Agreement
provides a second line of credit allowing the Company to borrow the lesser of
(i) the difference between the Company's outstanding indebtedness to the senior
lenders and $39,200,000, (ii) the Company's borrowing base and (iii) $1,750,000,
to fund the Company's day-to-day operations. The Forbearance Agreement provides
for certain additional restrictions on operations and additional reporting
requirements. The Forbearance Agreement also requires automatic application of
cash from the Company's operations to repay borrowings under the new revolving
loan, and to reduce the Company's other obligations to the senior lenders. In
the event that the Company is not in compliance with the continuing covenants
under the Credit Agreement and does not negotiate amended covenants or obtain a
waiver thereof, then the senior lenders, at their option, may demand immediate
payment of all outstanding amounts due and exercise any and all available
remedies, including, but not limited to, foreclosure on the Company's assets.
This could result in the Company seeking protection from its creditors and a
reorganization under the federal bankruptcy code.




                                       29

<PAGE>

     As required by the Forbearance Agreement, a restructuring plan was
developed by the Company and the Consultant and presented to the Company's
senior lenders in December 2002. The restructuring plan requested that the
senior lenders convert the Company's senior debt to a term note that would
mature no earlier than February 2004 and increase the current line of credit
from $1.75 million to $3 million to fund operations and capital expenditures. In
light of the FDA's re-inspection of the Decatur facility in early December 2002,
the Company and the senior lenders agreed to defer further discussions of that
request until completion of the re-inspection and the Company's response
thereto. As a result, the senior lenders have agreed to successive short-term
extensions of the Forbearance Agreement, the latest of which is an eleventh
amendment to the Forbearance Agreement expiring on June 30, 2003. Following
completion of the FDA inspection of the Decatur facility on February 6, 2003 and
issuance of the FDA findings, the senior lenders have indicated that they are
not willing to convert the senior debt to a term loan but discussions continue
regarding a possible increase in the revolving line of credit. As required by
the Company's senior lenders, on May 9, 2003, the Company engaged Leerink Swann,
an investment banking firm, to assist in raising additional financing and
explore other strategic alternatives for repaying the senior bank debt. Subject
to the absence of any additional defaults and subject to the senior lenders'
satisfaction with the Company's progress in resolving the matters raised by the
FDA and in obtaining additional financing and exploring other strategic
alternatives, the Company expects to continue obtaining short-term extensions
of the Forbearance Agreement. However, there can be no assurance that the
Company will be successful in obtaining further extensions of the Forbearance
Agreement beyond June 30, 2003.

FDA Proceeding

     As described in more detail in Part II - Item 1 - "Legal Proceedings", the
Company is a party to governmental proceeding by the FDA. While the Company is
cooperating with the FDA and seeking to resolve the pending matter, an
unfavorable outcome in such proceeding may have a material impact on the
Company's operations and its financial condition, results of operations and/or
cash flows and, accordingly, may constitute a material adverse action that would
result in a covenant violation under the Credit Agreement, any or all of which
could have a material adverse effect on the Company's liquidity.

Facility Expansion
 
     The Company is in the process of completing an expansion of its Decatur,
Illinois facility to add capacity to provide Lyophilization manufacturing
services, which manufacturing capability the Company currently does not have.
Subject to the Company's ability to refinance its senior debt and obtain new
financing for future operations and capital expenditures, the Company
anticipates the completion of the Lyophilization expansion in the second half of
2004. As of December 31, 2002, the Company had spent approximately $16.4 million
on the expansion and anticipates the need to spend approximately $1.0 million of
additional funds (excluding capitalized interest) to complete the expansion. The
majority of the additional spending will be focused on validation testing of the
Lyophilization facility as the major capital equipment items are currently in
place. Once the Lyophilization facility is validated, the Company will proceed
to produce stability batches to provide the data necessary to allow the
Lyophilization facility to be inspected and approved by the FDA.

Subordinated Debt

     On July 12, 2001, the Company entered into a $5,000,000 subordinated debt
transaction with The John N. Kapoor 



                                       30

<PAGE>

Trust dtd. 9/20/89 (the "Trust"), the sole trustee and sole beneficiary of which
is Dr. John N. Kapoor, the Company's 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,
2001) and $2,000,000 ("Tranche B" which was received on August 16, 2001). 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. All unexpired warrants
will expire on December 20, 2006.

     Under the terms of the Trust Agreement, the subordinated debt bears
interest at prime plus 3%, which is the same rate the Company pays on its senior
debt. Interest cannot be paid to the Trust until the repayment of the senior
debt pursuant to the terms of a subordination agreement, which was entered into
between the Trust and the Company's senior lenders. Should the subordination
agreement be terminated, interest may be paid sooner. 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.

     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, evidencing the loan (the Promissory
Note") 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. In consideration for the loan, under a separate manufacturing
agreement between the Company and NeoPharm, the Company, upon completion of the
lyophilization facility, agrees to provide NeoPharm with access to at least 15%
of the capacity of Akorn's lyophilization facility each year. 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. Dr. John N.
Kapoor, the Company's chairman is also chairman of NeoPharm and holds a
substantial stock position in that company as well as in the Company.

     Contemporaneous 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 maturity of the
Trust Agreement from July 12, 2004 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, as well as interest on
the $2,000,000 tranche after the original maturity of the Tranche B note, into
common stock of the Company. Previously, the Trust could only convert the
interest accrued on the $2,000,000 tranche through the original maturity of the
Tranche B note. The terms of the agreement to change the convertibility of the
Tranche A interest and the convertibility of the Tranche B interest for the
extension of the term require shareholder approval to be received by August 31,
2002, which was subsequently extended to June 30, 2003. If the Company's
shareholders do not approve these changes, the Company would be in default under
the Trust Agreement and, at the option of the Trust, the Subordinated Debt could
be accelerated and become due and payable on June 30, 2003. Any default under
the Trust Agreement would constitute an event of default under both the Credit
Agreement and the Neopharm Promissory Note. In the event of default, amounts due
under the Credit Agreement and the Neopharm Promissory Note could be declared to
be due and payable, notwithstanding the Forebearance Agreement which is
presently in place between the Company and its senior lender. The Company
expects that it will reach agreement with the Trust to extend, if necessary, the
shareholder approval date until the next shareholders meeting.

Other Indebtedness
 
     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
$1,845,000 and $1,917,000 at March 31, 2003 and December 31, 2002, respectively.
The principal balance is payable 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.



                                       31

<PAGE>

I
TEM 3. 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 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. Management estimates that a change of
100 basis points in its variable rate debt from the interest rates in effect at
March 31, 2003 would result in a $455,000 change in annual interest expense.

     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 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.

     The fair value of the debt obligations approximated the recorded value as
of March 31, 2003. The promissory note between the Company and NeoPharm, Inc.
bears 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 $2,649,000, would be lower than the
current carrying value of $3,250,000.



ITEM 4.  CONTROLS AND PROCEDURES

     The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the periods
specified in the SEC's rules and forms and that such information is accumulated
and communicated to the Company's management including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.

     Within 90 days of this report, the Company carried out an evaluation, under
the supervision and with the participation of our management, including the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the evaluation date, the disclosure
controls and procedures are effective in timely communicating to them the
material information relating to the Company required to be included in the
Company's periodic SEC filings.

     As discussed in greater detail in the Company's Report on Form 8-K dated
May 1, 2003, Deloitte & Touche LLP ("Deloitte") informed the Company that, in
connection with its audit of the Company's consolidated financial statements for
the year ended December 31, 2002, it noted certain matters involving the
Company's internal controls that Deloitte considered to be material weaknesses.
Although the Company does not necessarily agree with Deloitte's judgment that
there existed material weaknesses in the Company's internal controls, the
Company is in the process of implementing procedures designed to address all
relevant internal control issues. To date, the Company has expanded its interim
evaluation of accounts receivable for purposes of determining the allowance for
doubtful accounts and has reassigned certain personnel to strengthen the
accounting for fixed assets.


                                       32

<PAGE>


PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

     On March 27, 2002, the Company received a letter informing it that the
staff of the SEC's regional office in Denver, Colorado, would recommend to the
Commission that it bring an enforcement action against the Company and seek an
order requiring the Company to be enjoined from engaging in certain conduct. The
staff alleged that the Company misstated its income for fiscal years 2000 and
2001 by allegedly failing to reserve for doubtful accounts receivable and
overstating its accounts receivable balance as of December 31, 2000. The staff
alleged that internal control and books and records deficiencies prevented the
Company from accurately recording, reconciling and aging its accounts
receivable. The Company also learned that certain of its former officers, as
well as a then current employee had received similar notifications. Subsequent
to the issuance of the Company's consolidated financial statements for the year
ended December 31, 2001, management of the Company determined it needed to
restate the Company's financial statements for 2000 and 2001 to record a $7.5
million increase to the allowance for doubtful accounts as of December 31, 2000,
which it had originally recorded as of March 31, 2001.

     On February 27, 2003, the Company reached an agreement in principle with
the staff of the SEC's regional office in Denver, Colorado, that would resolve
the issues arising from the staff's investigation and proposed enforcement
action as discussed above. The Company has offered to consent to the entry of an
administrative cease and desist order as proposed by the staff, without
admitting or denying the findings set forth therein. The proposed consent order
finds that the Company failed to promptly and completely record and reconcile
cash and credit remittances, including from its top five customers, to invoices
posted in its accounts receivable sub-ledger. According to the findings in the
proposed consent order, the Company's problems resulted from, among other
things, internal control and books and records deficiencies that prevented the
Company from accurately recording, reconciling and aging its receivables. The
proposed consent order finds that the Company's 2000 Form 10-K and first quarter
2001 Form 10-Q misstated its account receivable balance or, alternatively,
failed to disclose the impairment of its accounts receivable and that its first
quarter 2001 Form 10-Q inaccurately attributed the increased accounts receivable
reserve to a change in estimate based on recent collection efforts, in violation
of Section 13(a) of the Exchange Act and rules 12b-20, 13a-1 and 13a-13
thereunder. The proposed consent order also finds that the Company failed to
keep accurate books and records and failed to devise and maintain a system of
adequate internal accounting controls with respect to its accounts receivable in
violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The
proposed consent order does not impose a monetary penalty against the Company or
require any additional restatement of the Company's financial statements. The
Company has recently become aware of and informed the SEC staff of certain
weaknesses in its internal controls, which it is in the process of addressing.
It is uncertain at this time what effect this action will have on the agreement
in principle currently pending with the SEC staff. The proposed consent order
does not become final until it is approved by the SEC. Accordingly, the Company
may incur additional costs and expenses in connection with this proceeding.

     In October 2000, the FDA issued a warning letter to the Company following
the FDA's routine cGMP inspection of the Company's Decatur manufacturing
facilities. An FDA warning letter is intended to provide notice to a company of
violations of the laws administered by the FDA. Its primary purpose is to elicit
voluntary corrective action. The letter warns that if voluntary action is not
forthcoming, the FDA may use other legal means to compel compliance. These
include seizure of products and/or injunction of the company and responsible
individuals. This letter addressed several deviations from regulatory
requirements including cleaning validations and general documentation issues and
requested corrective actions be undertaken by the Company. The Company initiated
corrective actions and responded to the warning letter. Subsequently, the FDA
conducted another inspection in late 2001 and identified additional deviations
from regulatory requirements including cleaning validations and process
controls. This led to the FDA leaving the warning letter in place and issuing a
Form 483 to document its findings. While no further correspondence was received
from the FDA, the Company responded to the inspectional findings. This response
described the Company's plan for addressing the issues raised by the FDA and
included improved cleaning validation, enhanced process controls and
approximately $2.0 million of capital improvements. In August, 




                                       33

<PAGE>
2002 the FDA conducted another inspection of the Decatur facility, which also
identified deviations from cGMPs. The Company responded to these observations in
September, 2002. In response to the Company's actions, the FDA conducted another
inspection of the Decatur facility during the period December 10, 2002 to
February 6, 2003. This inspection also identified deviations from regulatory
requirements including the manner in which the Company processes and
investigates manufacturing discrepancies and failures, customer complaints and
the thoroughness of equipment cleaning validations. Deviations identified during
this inspection had been raised in previous FDA inspections. The Company has
responded to these latest findings in writing and in a meeting with the FDA in
March 2003. The Company set forth its plan for implementing comprehensive
corrective actions, has provided progress reports to the FDA on April 15, and
May 15, 2003 and has committed to providing the FDA an additional periodic
report of progress on June 15, 2003.

    As a result of the latest inspection and the Company's response, the FDA may
take any of the following actions: (i) accept the Company's reports and response
and take no further action against the Company; (ii) permit the Company to
continue its corrective actions and conduct another inspection (which likely
would not occur before the fourth quarter of 2003) to assess the success of
these efforts; (iii) seek to enjoin the Company from further violations, which
may include temporary suspension of some or all operations and potential
monetary penalties; or (iv) take other enforcement action which may include
seizure of Company products. At this time, it is not possible to predict the
FDA's course of action.

     FDA approval is required before any drug can be manufactured and marketed.
New drugs require the filing of a New Drug Application ("NDA"), including
clinical studies demonstrating the safety and efficacy of the drug. Generic
drugs, which are equivalents of existing, off-patent brand name drugs, require
the filing of an Abbreviated New Drug Application ("ANDA"). The Company believes
that unless and until the FDA chooses option (i) or, in the case of option (ii),
unless and until the issues identified by the FDA have been successfully
corrected and the corrections have been verified through reinspection, it is
doubtful that the FDA will approve any NDAs or ANDAs that may be submitted by
the Company. This has adversely impacted, and is likely to continue to adversely
impact the Company's ability to grow sales. However, the Company believes that
unless and until the FDA chooses option (iii) or (iv), the Company will be able
to continue manufacturing and distributing its current product lines.

     If the FDA chooses option (iii) or (iv), such action could significantly
impair the Company's ability to continue to manufacture and distribute its
current product line and generate cash from its operations, could result in a
covenant violation under the Company's senior debt or could cause the Company's
senior lenders to refuse further extensions of the Company's senior debt, any or
all of which would have a material adverse effect on the Company's liquidity.
Any monetary penalty assessed by the FDA also could have a material adverse
effect on the Company's liquidity.

     On December 19, 2002 and January 22, 2003, the Company received demand
letters regarding claimed wrongful deaths allegedly associated with the use of
the drug Inapsine, which the Company produced. The total amount of the claims
asserted is $3.8 million. The Company has just begun the investigation of the
facts and circumstances surrounding these claims and cannot as of yet determine
the potential liability, if any, from these claims. The Company has submitted
these claims to its product liability insurance carrier. The Company intends to
vigorously defend itself in regards to these claims.



                                       34

<PAGE>

     The Company is a party to 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     None


ITEM 3. DEFAULT UPON SENIOR SECURITIES

     The Company is currently in default under certain covenants on its senior
credit facility, including the failure to make a $39,200,000 principal payment
that was due on August 31, 2002. The Company is current on its interest payment
obligations to its senior lender. As long as the Company is in compliance with
the terms of the Forbearance Agreement entered into with the senior lender on
September 20, 2002, the senior lender has agreed to forbear from exercising its
remedies under the credit facility until June 30, 2003.


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 March 31, 2003.


ITEM 5. OTHER INFORMATION

     None



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

     (99.1) Certification of Chief Executive Officer and Chief Financial Officer
     pursuant to 18 U.S.C. ss.1350, as adopted pursuant toss.906 of the
     Sarbanes-Oxley Act of 2002

     (b) Reports on Form 8-K

     The Company did not file any reports on Form 8-K during the quarter ended
     March 31, 2003.


                                       35

<PAGE>



                                   SIGNATURES

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



                                        AKORN, INC.



                                        /s/    BERNARD J. POTHAST
                                        -------------------------------
                                            Bernard J. Pothast
                                        Vice President, Chief Financial
                                             Officer and Secretary
                                        (Duly Authorized and Principal
                                               Financial Officer)

Date: May 21, 2003



                                       36

<PAGE>


                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Arthur S. Przybyl, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of Akorn, Inc.;

     2. Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;

     3. Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     quarterly report.

     4. The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          A)   Designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               quarterly report is being prepared;

          B)   Evaluated the effectiveness of the registrants disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

          C)   Presented in this quarterly report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5. The registrant's other certifying officer and I have disclosed, based
     on our most recent evaluation, to the registrant's auditors and the audit
     committee of the registrant's board of directors (or persons performing the
     equivalent functions);

          A)   All significant deficiencies in the design or operation of
               internal controls which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          B)   Any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

     6. The registrant's other certifying officer and I have indicated in this
     quarterly report whether there were significant changes in internal
     controls or in the other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.



Date:  May 21, 2003                      /s/ ARTHUR S. PRZYBYL
                                         --------------------------------------
                                         Name:  Arthur S. Przybl
                                         Title: Interim Chief Executive Officer




<PAGE>



                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Bernard J. Pothast, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of Akorn, Inc.;

     2. Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;

     3. Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     quarterly report.

     4. The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          A)   Designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               quarterly report is being prepared;

          B)   Evaluated the effectiveness of the registrants disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this quarterly report (the "Evaluation Date"); and

          C)   Presented in this quarterly report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     5. The registrant's other certifying officer and I have disclosed, based
     on our most recent evaluation, to the registrant's auditors and the audit
     committee of the registrant's board of directors (or persons performing the
     equivalent functions);

          A)   All significant deficiencies in the design or operation of
               internal controls which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          B)   Any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

     6. The registrant's other certifying officer and I have indicated in this
     quarterly report whether there were significant changes in internal
     controls or in the other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.



Date: May 21, 2003                       /s/ BERNARD J. POTHAST
                                         --------------------------------------
                                         Name:  Bernard J. Pothast
                                         Title: Chief Financial Officer






<PAGE>

                                                                    Exhibit 99.1



                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Akorn, Inc. (the "Company") on Form
10-Q for the period ended March 31, 2003, as filed with the Securities and
Exchange Commission and to which this Certification is an exhibit (the
"Report"), the undersigned officer of Akorn, Inc. does hereby certify, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
     (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
 
     (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
 

Date: May 21, 2003

                                                /s/ ARTHUR S. PRZYBYL
                                         --------------------------------------
                                                   Arthur S. Przybyl
                                             Interim Chief Executive Officer

 





                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Akorn, Inc. (the "Company") on Form
10-Q for the period ended March 31, 2003, as filed with the Securities and
Exchange Commission and to which this Certification is an exhibit (the
"Report"), the undersigned officer of Akorn, Inc. does hereby certify, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that
 to my knowledge:
 
     (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
 
     (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
 

Date: May 21, 2003


                                               /s/ BERNARD J. POTHAST
                                         --------------------------------------
                                                  Bernard J. Pothast
                                               Chief Financial Officer