<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 JUNE 30, 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  X   No
                                    ---     ---

    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 3.

    At August 13, 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-June 30, 2003
                 and December 31, 2002......................................       4
                 Condensed Consolidated Statements of Operations-Three 
                 and Six months ended June 30, 2003 and 2002................       5
                 Condensed Consolidated Statements of Cash Flows-Six
                 months ended June 30, 2003 and 2002........................       6
                 Notes to Condensed Consolidated Financial Statements.......       7

         ITEM 2. Management's discussion and analysis of financial
                 condition and results of operations........................      22

         ITEM 3. Quantitative and Qualitative Disclosures about
                 Market Risks...............................................      31

         ITEM 4. Controls and Procedures....................................      31

PART II. OTHER INFORMATION

         ITEM 1. Legal Proceedings..........................................      32

         ITEM 2. Changes in Securities and Use of Proceeds..................      33

         ITEM 3. Default Upon Senior Securities.............................      33

         ITEM 4. Submission of Matters to a Vote of Security Holders........      34

         ITEM 5. Other Information..........................................      34

         ITEM 6. Exhibits and Reports on Form 8-K...........................      34

</TABLE>




                                       2

<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. Deloitte completed its audit and delivered its auditors' report on May 20,
2003, and has advised the Company that the client-auditor relationship between
the Company and Deloitte has ceased. 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 and this Form 10-Q does not
comply with other requirements of Section 13(a) of the Securities Exchange Act
of 1934 relating to independent accountants or auditors. 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.


                                       3

<PAGE>




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



<TABLE>
<CAPTION>
                                                            JUNE 30,     DECEMBER 31,
                                                              2003          2002
                                                            --------     ------------
<S>                                                         <C>           <C>     
                    ASSETS
CURRENT ASSETS
   Cash and cash equivalents ..........................     $    (14)     $    364
   Trade accounts receivable (less allowance
      for doubtful accounts of $559 and $1,200) .......         (504)        1,421
   Inventory ..........................................        9,766        10,401
   Deferred income taxes ..............................           --            --
   Income taxes recoverable ...........................          841           670
   Prepaid expenses and other current assets ..........          781           383
                                                            --------      --------
        TOTAL CURRENT ASSETS ..........................       10,869        13,239
OTHER ASSETS
   Intangibles, net ...................................       13,444        14,142
   Investment in Novadaq Technologies, Inc. ...........          713           713
   Deferred income taxes ..............................           --            --
   Other ..............................................          130           130
                                                            --------      --------
      TOTAL OTHER ASSETS ..............................       14,287        14,985
PROPERTY, PLANT AND EQUIPMENT, NET ....................       34,688        35,314
                                                            --------      --------
      TOTAL ASSETS ....................................     $ 59,844      $ 63,538
                                                            ========      ========
     LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
   Current installments of long-term debt .............     $ 43,130      $ 35,859
   Trade accounts payable .............................        6,171         5,756
   Accrued compensation ...............................          788           836
   Accrued expenses and other current liabilities .....          879         1,352
                                                            --------      --------
      TOTAL CURRENT LIABILITIES .......................       50,968        43,803
LONG-TERM DEBT ........................................        1,468         7,799
OTHER LONG-TERM LIABILITIES ...........................           --           584
                                                            --------      --------
      TOTAL LIABILITIES ...............................       52,436        52,186
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
   Common stock .......................................       26,866        26,866
   Accumulated deficit ................................      (19,457)      (15,514)
                                                            --------      --------
      TOTAL SHAREHOLDERS' EQUITY ......................        7,408        11,352
                                                            --------      --------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......     $ 59,844      $ 63,538
                                                            ========      ========

</TABLE>


            See notes to condensed consolidated financial statements.


                                       4

<PAGE>



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



<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED            SIX MONTHS ENDED
                                                             JUNE 30,                     JUNE 30,
                                                       ----------------------      ----------------------
                                                         2003          2002          2003          2002
                                                       --------      --------      --------      --------
<S>                                                    <C>           <C>           <C>           <C>     
Revenues .........................................     $  8,840      $ 14,165      $ 21,622      $ 27,608
Cost of sales ....................................        8,305         7,799        15,243        14,893
                                                       --------      --------      --------      --------
      GROSS PROFIT ...............................          535         6,366         6,379        12,715
Selling, general and administrative expenses .....        3,952         6,315         8,121        10,770
Provision, net of recoveries, for bad debts ......         (342)         (400)         (288)         (400)
Amortization of intangibles ......................          344           355           699           698
Research and development expenses ................          362           562           835           982
                                                       --------      --------      --------      --------
      TOTAL OPERATING EXPENSES ...................        4,316         6,832         9,367        12,050
                                                       --------      --------      --------      --------
      OPERATING INCOME (LOSS) ....................       (3,781)         (466)       (2,988)          667
Interest expense .................................         (612)         (826)       (1,257)       (1,713)
Interest and other income (expense), net .........           --            --            --            --
                                                       --------      --------      --------      --------
      INTEREST EXPENSE AND OTHER .................         (612)         (826)       (1,257)       (1,713)
                                                       --------      --------      --------      --------
      INCOME (LOSS) BEFORE INCOME TAXES ..........       (4,393)       (1,292)       (4,245)       (1,048)
Income tax provision (benefit) ...................         (196)         (509)         (171)         (416)
                                                       --------      --------      --------      --------
      NET INCOME (LOSS) ..........................     $ (4,197)     $   (783)     $ (4,074)     $   (632)
                                                       ========      ========      ========      ========
NET INCOME (LOSS) PER SHARE:
   BASIC .........................................     $  (0.21)     $  (0.04)     $  (0.21)     $  (0.03)
                                                       ========      ========      ========      ========
   DILUTED .......................................     $  (0.21)     $  (0.04)     $  (0.21)     $  (0.03)
                                                       ========      ========      ========      ========
SHARES USED IN COMPUTING NET LOSS PER SHARE:
   BASIC .........................................       19,723        19,566        19,705        19,545
                                                       ========      ========      ========      ========
   DILUTED .......................................       19,723        19,566        19,705        19,545
                                                       ========      ========      ========      ========
</TABLE>


            See notes to condensed consolidated financial statements.


                                       5

<PAGE>



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


<TABLE>
<CAPTION>
                                                                       SIX MONTHS ENDED
                                                                           JUNE 30,
                                                                      -------------------
                                                                       2003         2002
                                                                      -------      ------- 
<S>                                                                   <C>          <C>     
OPERATING ACTIVITIES
Net income (loss) ...............................................     $(4,074)     $  (632)

Adjustments to reconcile net income to net cash provided by
   operating activities:
   Depreciation and amortization ................................       2,228        2,158
   Deferred income taxes ........................................          --         (688)
    Write-down of long-lived assets .............................          --        1,560
   Amortization of debt discounts ...............................         500          259
   Changes in operating assets and liabilities:
      Accounts receivable .......................................       1,925          409
      Income taxes recoverable ..................................        (170)       5,874
      Inventory .................................................         635       (2,038)
      Prepaid expenses and other current assets .................        (398)        (169)
      Trade accounts payable ....................................         415        2,592
      Accrued compensation ......................................         (48)         188
      Income taxes payable ......................................          --           --
      Accrued expenses and other liabilities ....................        (414)      (1,571)
                                                                      -------      -------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................         599        7,942
INVESTING ACTIVITIES
Purchases of property, plant and equipment ......................        (903)      (2,906)
                                                                      -------      -------
NET CASH (USED IN) INVESTING ACTIVITIES .........................        (903)      (2,906)
FINANCING ACTIVITIES
Repayment of long-term debt .....................................        (155)      (5,734)
Borrowings under bank credit agreement ..........................          11           --
Proceeds from employee stock purchase plan/exercise
  of stock options ..............................................          71          243
                                                                      -------      -------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................         (73)      (5,491)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ................        (378)        (455)
Cash and cash equivalents at beginning of period ................         364        5,355
                                                                      -------      -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................     $   (14)     $ 4,900
                                                                      =======      =======
Amount paid for interest
  (net of capitalized interest) .................................     $   655      $ 1,433
Amount paid for income taxes ....................................          --           --

</TABLE>

            See notes to condensed consolidated financial statements.


                                       6

<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 the first six months of
2003 and in each of the three most recent years (2000-2002) and has a working
capital deficiency of $40.1 million as of June 30, 2003. The Company also is in
default under its existing senior credit agreement and subordinated debt
agreements and is subject to ongoing Food and Drug Administration ("FDA")
compliance matters that could have a material adverse effect on the Company. See
Note H - "Financing Arrangements" and Note M - "Legal Proceedings". Although the
Company has entered into a Forbearance Agreement (as defined below) with its
senior lender, the Company's subordinated lenders are currently prohibited from
taking action to collect the subordinated debt without the consent of the
Company's senior lender, and the Company is working with the FDA to favorably
resolve such compliance matters, 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 compliance matters with the
FDA and (iv) ultimately refinance its senior bank debt, resolve the defaults
under its subordinated 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 first six months of 2003. As of June 30, 2003, the Company had
a deficit of approximately $14,000 in cash and equivalents due to outstanding
checks and approximately $1.3 million of undrawn availability under its second
line of credit described below. As a result of its cash position and its
negative accounts receivable balance, in July, 2003, the Company obtained an
additional $1,000,000 of availability under its second line of credit. There can
be no assurance that the line of credit, together with cash generated from
operations, will be sufficient to meet the cash requirements for operating the
Company's business.

    There can also be no guarantee that the Company will successfully resolve
the ongoing compliance matters 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, resolving the defaults under its subordinated debt and obtaining
new financing for future operations. However, the Company is current on its
interest payment obligations to its senior lender, 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 and resolving the
defaults under its subordinated debt. The Company has also added key management
personnel, including the appointment of a new chief executive officer, vice
president of operations and vice president of quality assurance, quality control
and regulatory affairs, and additional personnel in critical areas. Management
has reduced the Company's cost structure, improved the Company's processes and
systems and 




                                       7

<PAGE>
implemented strict controls over capital spending. Management believes these
activities have improved the Company's results of operations, cash flow from
operations and 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 preceding 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 and resolves the defaults under its subordinated 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 lender 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 lender also notified the Company that it would forbear from
exercising its remedies under the Credit Agreement until January 3, 2003 (as
indicated below, subsequently extended to August 22, 2003) if a forbearance
agreement could be reached. On September 20, 2002, the Company and its senior
lender entered into an agreement under which the senior lender would agree to
forbear from exercising its remedies (the "Forbearance Agreement") and the
Company acknowledged its current default. The Forbearance Agreement provides a
second line of credit that currently allows the Company to borrow the lesser of
(i) the difference between the Company's outstanding indebtedness to the senior
lender and $39,200,000 and (ii) $2,750,000, 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 lender.

    The Company, as required in the Forbearance Agreement, agreed to provide the
senior lender 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 lender, 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 lender gave notice of its exercise of certain
remedies available under the Credit Agreement including, but not limited to, its
setting off the Company's deposits with the senior lender against the Company's
obligations to the senior lender. 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 lender
withdrawing its 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"), originally consisting of Directors Ellis and Bruhl, with Mr. Ellis
serving as Chairman. Ron Johnson was added to the Corporate Governance Committee
when he was appointed to the Board in March, 2003. The Board delegated to the
Corporate Governance Committee all authority to make any and all decisions with
respect to the evaluation and approval of the restructuring plan to be developed
by the Consultant with respect to the Company's bank debt and to interface with
the Consultant 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 Company is successful in refinancing or
restructuring its debt pursuant to a new or restated credit facility maturing on
or after January 1, 2004, the Consultant will be paid a cash fee equal to 1 1/2%
of the amount of the debt which is refinanced or restructured. Additionally, the
success fee arrangement provides that the Company will issue a warrant to
purchase 1,250,000 shares of common stock at an exercise price of $1.00 per
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 




                                       8

<PAGE>

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 lender
in December 2002. The restructuring plan requested that the senior lender
convert the Company's senior debt to a term note that would mature no earlier
than February 2004 and increase the second 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 lender 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 lender agreed to successive short-term extensions of the Forbearance
Agreement until the completion of the re-inspection. Following completion of the
FDA re-inspection of the Decatur facility on February 6, 2003 and issuance of
the FDA findings (see Note M - "Legal Proceedings"), the senior lender indicated
that it was not willing to convert the senior debt to a term loan, but it did
agree to further extensions of the Forbearance Agreement. As required by one of
these extensions, 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. That process is 
continuing.

    On July 3, 2003 the senior lender extended the expiration date of the
Forbearance Agreement from June 30, 2003 until July 31, 2003 and agreed to make
up to an additional $1,000,000 available to the Company under its current line
of credit increasing the maximum amount available under the line of credit from
$1,750,000 to $2,750,000. On August 8, 2003, the senior lender extended the
expiration date of the Forbearance Agreement until August 22, 2003.

    The Forbearance Agreement, as amended and extended, provides that the senior
lender will forbear from exercising its remedies as a result of specified
existing defaults by Akorn until the earlier of the expiration date and the
occurrence of any additional defaults by Akorn under the Credit Agreement.
Subject to the absence of any additional defaults and subject to the senior
lender's 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 August 22, 2003.

    As described in more detail in Note M - "Legal Proceedings", the Company is
also subject to ongoing compliance matters with the FDA. While the Company is
cooperating with the FDA and seeking to resolve the pending matters, an
unfavorable outcome 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 lender, at its 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 and six-month period ended June
30, 2003 are not necessarily indicative of the results that may be expected for
a full year. For further information, refer to the 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.





                                       9

<PAGE>

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. The amount of the deduction (if any)
depends on the identity of the end-user customer and the specific pricing
arrangements that Akorn has with that customer. This process can lead to
"partial payments" against outstanding invoices as the wholesalers take the
claimed deductions at the time of payment. The Company's negative accounts
receivable balance of $504,000 as of June 30, 2003 consists of gross receivables
of $5,601,000, less an aggregate of $5,546,000 in allowances for chargebacks,
rebates, product returns and discounts and a $559,000 allowance for doubtful
accounts.

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.



                                       10

<PAGE>

    The recorded allowances reflect the Company's current estimate of the future
chargeback and rebate liability to be paid or credited to the wholesalers under
the various contracts and programs. For the three month period ended June 30,
2003 and 2002, the Company recorded chargeback and rebate expense of $3,543,000,
and $3,478,000, respectively. For the six months ended June 30, 2003 and 2002,
the Company recorded chargeback and rebate expense of $6,305,000, and
$7,554,000, respectively. The allowance for chargebacks and rebates was
$4,076,000 and $4,302,000 as of June 30, 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 June 30, 2003 and 2002 the Company recorded a provision for
product returns of $640,000, and $588,000, respectively. For the six month
period ending June 30, 2003 and 2002 the Company recorded a provision for
product returns of $1,337,000, and $1,032,000, respectively. The allowance for
potential product returns was $1,354,000 and $1,166,000 at June 30, 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 June 30, 2003 and 2002, the Company
recorded a provision, net of recoveries, for doubtful accounts of ($342,000) and
($400,000), respectively. For the six month periods ending June 30, 2003 and
2002, the Company recorded a provision, net of recoveries, for doubtful accounts
of ($288,000) and ($400,000), respectively. The allowance for doubtful accounts
was $559,000 and $1,200,000 as of June 30, 2003 and December 31, 2002,
respectively. As of June 30, 2003, the Company had a total of $2,408,000 of past
due gross accounts receivable, of which $97,000 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 $559,000, the portion related to the
wholesaler customers is $397,000 with the remaining $162,000 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 June 30, 2003 and 2002, the Company recorded a provision
for 




                                       11

<PAGE>
discounts of $155,000 and $214,000, respectively. For the six months ending June
30, 2003 and 2002, the Company recorded a provision for discounts of $358,000
and $513,000, respectively. The allowance for discounts was $116,000 and
$172,000 as of June 30, 2003 and December 31, 2002, respectively.

NOTE E - INVENTORY

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


<TABLE>
<CAPTION>
                                       JUNE 30,    DECEMBER 31,
                                         2003          2002
                                     -----------   -----------
<S>                                  <C>           <C>       
     Finished goods...............    $    3,875    $    3,460
     Work in process..............         2,494         1,877
     Raw materials and supplies...         3,397         5,064
                                      ----------    ----------
                                      $    9,766    $   10,401
                                      ==========    ==========
</TABLE>


    Inventory at June 30, 2003 and December 31, 2002 is reported net of reserves
for slow-moving, unsaleable and obsolete items of $1,045,000 and $1,206,000,
respectively, primarily related to finished goods. For the three month period
ended June 30, 2003 and 2002, the Company recorded a provision of $239,000 and
$243,000, respectively. For the six months ended June 30, 2003 and 2002, the
Company recorded a provision of $408,000 and $493,000, 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 June 30, 2003 is as follows (in thousands):


<TABLE>
<CAPTION>
                                  AS OF JUNE 30, 2003
                   -----------------------------------------------
                   GROSS CARRYING     ACCUMULATED     NET CARRYING
                      AMOUNT          AMORTIZATION      AMOUNT
                   --------------     -----------     ------------
<S>                <C>               <C>             <C>    
Product Licenses     $22,685           $ 9,241         $13,444
</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
     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 and six months ended June 30,
2003 amounted to $344,000 and $699,000, respectively.

NOTE G - PROPERTY, PLANT AND EQUIPMENT

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


<TABLE>
<CAPTION>
                                              JUNE 30,     DECEMBER 31,
                                                2003          2002
                                              --------     -----------
<S>                                           <C>          <C>     
Land ....................................     $    396      $    396
Buildings and leasehold improvements ....        8,890         8,890
Furniture and equipment .................       27,739        27,390
Automobiles .............................           55            55
                                              --------      --------
                                                37,080        36,731
Accumulated depreciation ................      (20,766)      (19,236)
                                              --------      --------
                                                16,314        17,495
Construction in progress ................       18,374        17,819
                                              --------      --------
                                              $ 34,688      $ 33,514
                                              ========      ========
</TABLE>


                                       12

<PAGE>

    Construction in progress primarily represents capital expenditures related
to the Company's Lyophilization project that, upon completion, is expected to
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 $306,000 and $280,000 during the three-month
periods ended June 30, 2003 and 2002, respectively. For the six month period
ended June 30, 2003 and 2002, the Company capitalized interest expense related
to the Lyophilization project of $602,000 and $545,000, 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 $35,870,000 as of June 30, 2003 and $39,483,000 as of June 30,
2002. The interest rate as of June 30, 2003 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 lender under which the lender agreed to
forbear from taking action against the Company to enforce its 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 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) 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 lender agreed to extend the Credit Agreement, as
amended, 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 




                                       13

<PAGE>

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 lender 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 lender also notified the Company that it would forbear from
exercising its 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 lender entered into an
agreement under which the senior lender would agree to forbear from exercising
its remedies (the "Forbearance Agreement") and the Company acknowledged its
then-current default. The Forbearance Agreement provides a second line of credit
that currently allows the Company to borrow the lesser of (i) the difference
between the Company's outstanding indebtedness to the senior lender and
$39,200,000, and (ii) $2,750,000, 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
lender.

    The Company, as required in the Forbearance Agreement, agreed to provide the
senior lender 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 lender, 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 lender gave notice of its exercise of certain
remedies available under the Credit Agreement including, but not limited to, its
setting off the Company's deposits with the senior lender against the Company's
obligations to the senior lender. 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 lender
withdrawing its 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"), originally consisting of Directors Ellis, and Bruhl, with Mr. Ellis
serving as Chairman. Ron Johnson was added to the Corporate Governance Committee
when he was appointed to the Board in March 2003. The Board delegated to the
Corporate Governance Committee all authority to make any and all decisions with
respect to the evaluation and approval of the restructuring plan to be developed
by the Consultant with respect to the Company's bank debt and to interface with
the Consultant 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 Company is successful in refinancing or 
restructuring its debt pursuant to a new or restated credit facility maturing on
or after January 1, 2004, the Consultant will be paid a cash fee equal to 1 1/2%
of the amount of the debt which is refinanced or restructured. Additionally, the
success fee arrangement provides that the Company will issue a warrant to
purchase 1,250,000 shares of common stock at an exercise price of $1.00 per
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 lender
in December 2002. The restructuring plan requested that the senior lender
convert the Company's senior debt to a term note that would mature no earlier
than February 2004 and increase the second 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 lender 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 lender agreed to successive short-term extensions the Forbearance
Agreement until the completion of the re-inspection. Following completion of the
FDA re-inspection of the Decatur facility on February 6, 2003 



                                       14

<PAGE>
and issuance of the FDA findings (see Note M - "Legal Proceedings"), the senior
lender indicated that it was not willing to convert the senior debt to a term
loan, but it did agree to further extensions of the Forbearance Agreement. As
required by one of these extensions, 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.  That
process is continuing.


    On July 3, 2003 the senior lender extended the expiration date of the
Forbearance Agreement from June 30, 2003 until July 31, 2003 and agreed to make
up to an additional $1,000,000 available to the Company under its current line
of credit increasing the maximum amount available under the line of credit from
$1,750,000 to $2,750,000. On August 8, 2003, the senior lenders extended the
expiration date of the Forbearance Agreement until August 22, 2003.

    The Forbearance Agreement, as amended and extended, provides that the senior
lender will forbear from exercising its remedies as a result of specified
existing defaults by Akorn until the earlier of the expiration date and the
occurrence of any additional defaults by Akorn under the Credit Agreement.
Subject to the absence of any additional defaults and subject to the senior
lender's 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 August 22, 2003.

    As described in more detail in Note M - "Legal Proceedings", the Company is
also subject to ongoing compliance matters with the FDA. While the Company is
cooperating with the FDA and seeking to resolve the pending matter, an
unfavorable outcome 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 lender,
at its 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 " Kapoor 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 Kapoor 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
Kapoor Trust for the subordinated debt, the Company issued the Kapoor Trust two
warrants which allow the Kapoor 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 Kapoor 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 Kapoor Trust until the repayment of the senior
debt pursuant to the terms of a subordination agreement, which was entered into
between the Kapoor Trust and the Company's senior lender. 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.

                                       15

<PAGE>
    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 (the "NeoPharm Promissory Note"),
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 NeoPharm Promissory Note is subordinated to the Company's senior debt but is
senior to the Company's subordinated debt owed to the Kapoor 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. The Company is currently in default under the
NeoPharm Promissory Note as a result of its failure to remove all FDA warning
letter sanctions related to the Company's Decatur, Illinois facility by June 30,
2003. As a result, amounts owed under the NeoPharm Promissory Note now bear
interest at a default rate, which is 3% per annum over the rate that would
otherwise be in effect.. However, the subordination provisions applicable to the
NeoPharm Promissory Note prohibit NeoPharm from taking any action to enforce or
collect the NeoPharm Promissory Note without the consent of the Company's senior
lender. 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 Kapoor
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 Kapoor 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 Kapoor Trust
could only convert the interest accrued on the $2,000,000 tranche through the
original maturity of the Tranche B note. The Company is currently in default
under the Trust Agreement as a result of a cross-default to the NeoPharm
Promissory Note. However, the Kapoor Trust is prohibited from taking any action
to enforce or collect amounts owed to it without the prior written consent of
the Company's senior lender and NeoPharm.

    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
$1,773,000 and $1,917,000 at June 30, 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 (loss) 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 and six-months periods ended June 30, 2003 and June 30, 2002
(in thousands, except per share information):


                                       16

<PAGE>


<TABLE>
<CAPTION>
                                                                     THREE MONTHS ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,
                                                                     ---------------------------     ------------------------
                                                                        2003            2002            2003         2002  
                                                                     ---------     -------------    ----------    -----------    
<S>                                                                  <C>           <C>              <C>           <C>         
Net loss per share - basic:                                                                                                      
   Net loss .....................................................     $ (4,197)        $   (783)       $ (4,074)     $   (632)   
                                                                                                                                 
   Weighted average number of shares outstanding ................       19,723           19,566          19,705        19,545    
Net loss per share - basic ......................................     $  (0.21)        $  (0.04)       $  (0.21)     $  (0.03)   
                                                                      ========         ========        ========      ========    
Net loss per share - diluted:                                                                                                    
   Net loss .....................................................     $ (4,197)        $   (783)       $ (4,074)     $   (632)   
   Net loss adjustment for interest on convertible debt                                                                          
      and convertible interest on debt ..........................           --               --              --            --    
                                                                      --------         --------        --------      --------    
   Net loss, as adjusted ........................................     $ (4,197)        $   (783)       $ (4,074)     $   (632)   
                                                                      --------         --------        --------      --------    
                                                                                                                                 
   Weighted average number of shares outstanding ................       19,723           19,566          19,705        19,545    
   Additional shares assuming conversion of convertible debt                                                                     
      and convertible interest on debt ..........................           --               --              --            --    
   Additional shares assuming exercise of warrants ..............           --               --              --            --    
   Additional shares assuming exercise of options ...............           --               --              --            --    
   Weighted average number of shares outstanding, as adjusted ...       19,723           19,566          19,705        19,545    
Net loss per share - diluted ....................................     $  (0.21)        $  (0.04)       $  (0.21)     $  (0.03)   
                                                                      ========         ========        ========      ========    
</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 (in thousands):



<TABLE>
<CAPTION>
                                                                                  THREE MONTHS ENDED   SIX MONTHS ENDED
                                                                                        JUNE 30,            JUNE 30,
                                                                                  ------------------   ------------------
                                                                                   2003        2002      2002      2002
                                                                                  ------     -------   -------    -------
<S>                                                                               <C>                     <C>           
Shares subject to anti-dilutive warrants and conversion rights not
included in earnings per share calculation......................................  4,474         --        4,474       --
Shares subject to anti-dilutive options not included in earnings per 
share calculation...............................................................  3,600       2,568       3,600     2,568
</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 six
months ended June 30, would have been as follows (in thousands, except per share
information):



<TABLE>
<CAPTION>
                                                  2003         2002
                                               -------      ------- 
<S>                                            <C>          <C>     
Net loss, as reported                          $(4,074)     $  (632)
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                                       (86)        (204)
Pro forma net loss                             $(4,160)     $  (836)
Basic and diluted loss per share
  of common stock
Basic as reported                              $ (0.21)     $ (0.03)
Basic pro forma                                $ (0.21)     $ (0.03)
Diluted as reported                                N/A          N/A
Diluted pro forma                                  N/A          N/A
</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 


                                       17

<PAGE>

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 JUNE 30,      SIX MONTHS ENDED JUNE 30,   
                                                ---------------------------     --------------------------   
                                                  2003               2002         2003              2002        
                                                --------          ---------     --------          --------    
<S>                                             <C>               <C>           <C>               <C>         
REVENUES                                                                                                      
Ophthalmic ................................     $  5,965          $  7,000      $ 11,252          $ 13,785    
Injectable ................................        1,544             4,411         7,449             8,199    
Contract Services .........................        1,331             2,754         2,921             5,624    
                                                --------          --------      --------          --------    
      Total revenues ......................     $  8,840          $ 14,165      $ 21,622          $ 27,608    
                                                ========          ========      ========          ========    
GROSS PROFIT                                                                                                  
Ophthalmic ................................     $  1,136          $  3,600      $  3,087          $  7,264    
Injectable ................................         (228)            2,586         3,777             4,427    
Contract Services .........................         (373)              180          (485)            1,024    
                                                --------          --------      --------          --------    
      Total gross profit ..................          535             6,366         6,379            12,715    
                                                                                                              
Operating expenses ........................        4,316             6,832         9,367            12,050    
                                                --------          --------      --------          --------    
      Total operating income ..............       (3,781)             (466)       (2,988)              665    
Interest and other income  (expense) ......         (613)             (826)       (1,257)           (1,713)   
                                                --------          --------      --------          --------    
                                                                                                              
   Loss before income taxes................     $ (4,393)         $ (1,292)     $ (4,245)         $ (1,048)   
                                                ========          ========      ========          ========  
</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 July 11, 2003, the Company reached a revised 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
proposed consent order, as revised, contains an additional commitment by the
Company to do the following: (A) appoint a special committee comprised entirely
of outside directors, (B) within 30 days after entry of the order, have the
special committee retain a qualified independent consultant ("consultant")
acceptable to the staff to perform a test of the Company's material internal
controls, practices, and policies related to accounts receivable, and (C) within
180 days, have the consultant present his or her findings to the commission for
review to provide assurance that the Company is keeping accurate books and
records and has devised and maintained a system of adequate internal accounting
controls with respect to the Company's accounts 


                                       18

<PAGE>

receivables. 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 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 inspection 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 and
has provided progress reports to the FDA on April 15, and May 15, 2003 and 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) 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; (ii)
seek to enjoin the Company from further violations, which may include temporary
suspension of some or all operations and potential monetary penalties; or (iii)
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 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 (ii) or (iii), the Company will be able
to continue manufacturing and distributing its current product lines.

    If the FDA chooses option (ii) or (iii), 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 lender 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 claimed was $3.8
million. In July 2003, the Company agreed to a settlement with respect to one of
the claims alleged by these demand letters. The Company does not believe that
this settlement or the outcome of the second alleged claim will have a material
impact on the Company's financial position.

    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."



                                       19

<PAGE>

    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.

    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", which
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 did not 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 adopted SFAS No. 146 for exit or disposal activities initiated after
December 31, 2002. The adoption of this standard did not 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 



                                       20

<PAGE>

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 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

    On July 3, 2003 the Company's senior lender extended the expiration date of
the Forbearance Agreement relating to the senior debt to July 31, 2003 and
agreed to make up to an additional $1,000,000 available to the Company under its
current line of credit increasing the maximum amount available under the line of
credit from $1,750,000 to $2,750,000. On August 8, 2003, the senior lender
further extended the expiration date of the Forbearance Agreement to August 22,
2003. For further discussion, refer to Note M - "Legal Proceedings" - to the
Condensed Consolidated Financial Statements.

    On July 11, 2003 the Company reached a revised agreement in principle with
the SEC staff that would resolve the issues arising from the SEC's investigation
and proposed enforcement action. For further discussion, refer to Note M -
"Legal Proceedings" - to the Condensed Consolidated Financial Statements.

    On July 15, 2003 NeoPharm notified the Company that it believed that the
Company had defaulted on its obligations under the processing agreement entered
into in connection with the NeoPharm Promissory Note. Although the Company does
not agree with NeoPharm's assertions regarding the processing agreement, it has
acknowledged that an event of default occurred under the NeoPharm Promissory
Note as a result of the Company's failure to remove all FDA warning letter
sanctions related to the Company's Decatur, Illinois facility by June 30, 2003.
However, the subordination provisions applicable to the NeoPharm Promissory Note
prohibit NeoPharm from taking any action to enforce or collect the NeoPharm
Promissory Note without the consent of The Northern Trust Company. For further
discussion, refer to Note H - "Financing Arrangements" - to the Condensed
Consolidated Financial Statements.

    On July 21, 2003, the Kapoor Trust notified the Company that it was in
default under the Trust Agreement as a result of, among other things, a
cross-default to the NeoPharm Promissory Note. However, the Kapoor Trust is
prohibited from taking any action to enforce or collect amounts owed to it
without the prior written consent of the Company's senior lender and NeoPharm.
For further discussion, refer to Note H - "Financing Arrangements" - to the
Condensed Consolidated Financial Statements.


                                       21

<PAGE>


I
tem 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 wholesalers under
the various contracts and programs. For the three month period ended June 30,
2003 and 2002, the Company recorded chargeback and rebate expense of $3,543,000,
and $3,478,000, respectively. For the six months ended June 30, 2003 and 2002,
the Company recorded chargeback and rebate expense of $6,305,000, and
$7,554,000, respectively. The allowance for chargebacks and rebates was
$4,076,000 and $4,302,000 as of June 30, 2003 and December 31, 2002,
respectively.



                                       22

<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 the three month
period ending June 30, 2003 and 2002 the Company recorded a provision for
product returns of $640,000, and $588,000, respectively. For the six month
period ending June 30, 2003 and 2002 the Company recorded a provision for
product returns of $1,337,000, and $1,032,000, respectively. The allowance for
potential product returns was $1,354,000 and $1,166,000 at June 30, 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 June 30, 2003 and 2002, the Company
recorded a provision, net of recoveries, for doubtful accounts of ($342,000) and
($400,000), respectively. For the six month periods ending June 30, 2003 and
2002, the Company recorded a provision, net of recoveries, for doubtful accounts
of ($288,000) and ($400,000), respectively. The allowance for doubtful accounts
was $559,000 and $1,200,000 as of June 30, 2003 and December 31, 2002,
respectively. As of June 30, 2003, the Company had a total of $2,408,000 of past
due gross accounts receivable, of which $97,000 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 $559,000, the portion related to the
wholesaler customers is $397,000 with the remaining $162,000 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 June 30, 2003 and 2002, the Company recorded a provision
for discounts of $155,000 and $214,000, respectively. For the six months ending
June 30, 2003 and 2002, the Company recorded a provision for discounts of
$358,000 and $513,000, respectively. The allowance for discounts was $116,000
and $172,000 as of June 30, 2003 and December 31, 2002, respectively.


                                       23

<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 month period ended June 30, 2003 and 2002, the Company recorded a
provision of $239,000 and $243,000, respectively. For the six months ended June
30, 2003 and 2002, the Company recorded a provision of $408,000 and $493,000,
respectively. The allowance for inventory obsolescence at June 30, 2003 and
December 31, 2002 was $1,045,000 and $1,206,000, 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 and for the
first six months of 2003 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 June 30, 2003 and
December 31, 2002 was $9,241,000 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
        lender, 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 August 22, 2003;

    o   the subordination provisions that currently prohibit NeoPharm from
        taking any action to enforce or collect the NeoPharm Promissory Note,
        which is currently in default, without the prior written consent of
        Company's senior lender;

    o   the subordination provisions that currently prohibit the Kapoor Trust
        from taking any action to enforce or collect the subordinated debt owed
        to the Kapoor Trust, which is currently in default, without the prior
        written consent of Company's senior lender and NeoPharm;

    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;


                                       24

<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;

    o   other factors referred to in the Company's other Securities and Exchange
        Commission filings including " Item 7. Management's 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 JUNE 30, 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 JUNE 30,
                                      2003               2002
                                    ----------------------------
<S>                                 <C>                <C>
Ophthalmic segment..........        $   5,965          $   7,000
Injectable segment..........            1,544              4,411
Contract Services segment...            1,331              2,754
                                    ---------          ---------
Total revenues..............        $   8,840          $  14,165
                                    =========          =========
</Table>


    Consolidated revenues decreased 37.6% in the quarter ended June 30, 2003
compared to the same period in 2002.

    Ophthalmic segment revenues decreased 14.8%, due to lower volume of the
Company's diagnostic products, particularly Fluress and Fluoracaine which were
impacted by the continued effects of the late 2002 temporary suspension of
production, pending requalification of these products in a new container.
Injectable segment revenues decreased 65.0% for the quarter because the release
of the rheumatology and antidote product backorder in the first quarter of 2003
resulted in surplus customer inventory in the second quarter. The Company
anticipates that injectable revenues will return to 2002 levels in subsequent
quarters. Contract services revenues decreased by 51.7% due to customer concerns
about the status of the ongoing FDA compliance matters at the Company's Decatur
facility as well as the temporary closure for aseptic processing of a production
room at that same 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". Production of Fluress in a new container resumed in June and sales
resumed in July 2003. However, production of Fluress, Fluoracaine and other
ophthalmic products is currently suspended due to temporary closure of another
production room at the Decatur facility. The Company does not expect to resume
aseptic processing in the aforementioned Decatur production room or to reopen
the other production room prior to the fourth quarter of 2003. While the Company
does have Fluress and other ophthalmic product inventory on hand that it can
ship, revenues and cash flow from operations for the fourth quarter of 2003
could be adversely impacted if the Company is unable to resume aseptic
processing in the aforementioned Decatur production room or reopen the other
production room in the fourth quarter of 2003, as expected.

    Consolidated gross margin was 6.1% for the second quarter as compared to a
gross margin of 44.9% in the same period a year ago, mainly due to the volume
decrease in high margin antidote and rheumatology product sales combined with
volume shortfalls in the Ophthalmic and Contract Services segments.
Additionally, increased costs associated with addressing the Company's current
FDA compliance matters had a negative margin impact for the quarter.

    Selling, general and administrative (SG&A) expenses decreased 39.1%, to
$3,844,000 from $6,315,000, during the quarter ended June 30, 2003 as compared
to the same period in 2002. 2002 results include a $1,559,500 asset impairment
charge related to the abandonment of the Johns Hopkins patents. Net of this
charge, SG&A expenses decreased 19.2%, due to lower personnel and marketing
costs.


                                       25

<PAGE>
    Provision, net of recoveries, for bad debts was a net $234,000 recovery for
the second quarter of 2003. Provision, net of recoveries, for bad debts was a
net $400,000 recovery for the second quarter of 2002.

    Research and development (R&D) expense decreased 35.6% in the quarter, to
$362,000 from $562,000 for the same period in 2002 due to scaled back activities
from historical levels pending resolution of the FDA warning letter.

    Interest and other expense for the second quarter of 2003 was $612,000, a
25.9% 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 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 asset to the amount that is more likely than not to
be realized. The Company recorded a valuation allowance of $1,638,000 in the 
second quarter of 2003, which reduced the deferred tax asset to zero.

    For the second quarter of 2003, the Company recorded a net tax benefit of
$196,000 relating to anticipated state income tax refunds. For the second
quarter of 2002, the Company recorded a net tax benefit of $509,000 relating to
the pre-tax loss for the period. The $1,638,000 valuation allowance for deferred
taxes described in the preceding paragraph eliminated any potential federal
income tax benefits from the net tax benefit for the second quarter of 2003.
There was no valuation allowance for deferred taxes at the end of the second
quarter of 2002.

    The Company reported a net loss of 4,197,000 or $0.21 per weighted average
share for the three months ended June 30, 2003, versus share a loss of $783,000
or $0.04 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 and increase in the deferred tax valuation allowance, partially offset
in part by lower expenditures in SG&A, research and development and reduced
interest expenses.


SIX MONTH PERIOD ENDED JUNE 30, 2003 COMPARED TO 2002

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


<Table>
<Caption>
                                   SIX MONTHS ENDED JUNE 30,
                                    2003               2002
                                 ----------------------------
<S>                              <C>                <C>
Ophthalmic segment..........     $  11,252          $  13,785
Injectable segment..........         7,449              8,199
Contract Services segment...         2,921              5,624
                                 ---------          ---------
Total revenues..............     $  21,622          $  27,608
                                 =========          =========
</Table>


    Consolidated revenues decreased 21.7% for the six months ended June 30, 2003
compared to the same period in 2002.

    Ophthalmic segment revenues decreased 18.4%, primarily due to the temporary
suspension in late 2002 of production of Fluress and Fluoracaine, as well as
increased customer purchases of angiography and ointment products in the fourth
quarter of 2002, which resulted in surplus customer inventory during the 2003
period. Injectable segment revenues decreased 9.1% year to date due to lower
volumes of anesthesia products partially offset by increased sales due to the
release of rheumatology and antidote product backorders. The Company anticipates
that injectable revenues will return to 2002 levels in subsequent quarters.
Contract services revenues decreased by 48.1% due mainly to customer concerns
about the status of the ongoing FDA compliance matters at the Company's Decatur
facility as well as the temporary closure for aseptic processing of a production
room at that same 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". Production of Fluress in a new container resumed in June and sales
resumed in July 2003. However, production of Fluress, Fluoracaine and other
ophthalmic products is currently suspended due to temporary closure of another
production room at the Decatur facility. The Company does not expect to resume
aseptic processing in the aforementioned Decatur production room or to reopen
the other production room prior to the fourth quarter of 2003. While the Company
does have Fluress and other ophthalmic product inventory on hand that it can
ship, revenues and cash flow from operations for the fourth quarter of 2003
could be adversely impacted if the Company is unable to resume aseptic
processing in the aforementioned Decatur production room or reopen the other
production room in the fourth quarter of 2003, as expected.


                                       26

<PAGE>


    The chargeback and rebate expense for the six months ended June 30, 2003
declined to $6,305,000 from $7,554,000 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.

    Year to date consolidated gross margin was 29.5% for 2003 as compared to a
gross margin of 46.1% 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 increased
costs associated with the resolution of the Company's current FDA compliance
matters.

    Selling, general and administrative (SG&A) expenses decreased 25.6%, to
$8,013,000 from $10,770,000, for the year to date period ended June 30, 2003 as
compared to the same period in 2002. Net of the $1,559,500 asset impairment
charge related to the abandonment of the Johns Hopkins patents, SG&A expenses
decreased 11.8%, due to lower personnel and marketing costs.

    Provision, net of recoveries, for bad debts was a $287,000 net recovery year
to date, reflecting a $136,000 provision which was offset by $424,000 in
recoveries for the same period. The bad debt expenses net of recoveries for 2002
was a net $400,000 recovery, reflecting a $0 provision which was offset by
$400,000 in recoveries for the same period.

    Research and development (R&D) expense decreased 15.0% in 2003, to $835,000
from $982,000 for the same period in 2002 due to scaled back activities from
historical levels pending resolution of the FDA warning letter.

    Interest and other expense for the six month period ending June 30, 2003 was
$1,257,000, a 26.6% 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 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. The Company recorded a valuation allowance of $1,638,000 in the 
second quarter of 2003, which reduced the deferred tax asset to zero.

    For the six months ending June 30, 2003, the Company recorded a net tax
benefit of $171,000 relating to anticipated state income tax refunds. For the
six months ending June 30, 2002, the Company recorded a net tax benefit of
$416,000 relating to the pre-tax loss for the period. The $1,638,000 valuation
allowance for deferred taxes described in the preceding paragraph eliminated any
potential federal income tax benefits from the net tax benefit for the six
months ending June 30, 2003. There was no valuation allowance for deferred taxes
at the end of the six month period ending June 30, 2002.

    The Company reported a net loss of $$4,074,000 or $0.21 per weighted average
share for the six months ended June 30, 2003, versus share $416,000 or $0.03 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 and
increase in the deferred tax valuation allowance, partially offset by lower SG&A
and research expenditures as well as reduced interest expenses.


FINANCIAL CONDITION AND LIQUIDITY

Overview

    As of June 30, 2003, the Company had a cash and cash equivalent deficit of
$14,000 and net accounts receivable as of June 30, 2003 was a negative $504,000.
The cash and cash equivalents deficit was due to checks that were outstanding as
of June 30, 2003. The Company's negative accounts receivable balance of $504,000
as of June 30, 2003 consists of gross receivables of $5,601,000, less an
aggregate of $5,546,000 in allowances for chargebacks, rebates, product returns
and discounts and a $559,000 allowance for doubtful accounts. The negative
accounts receivable balance resulted from aggressive collection of outstanding
receivables and from reduced sales in the second quarter of 2003. The net
working capital deficiency at June 30, 2003 was $40,099,000 versus $30,564,000
at December 31, 2002. The negative working capital position reflects the
classification of the Company's senior and subordinated debt obligations of
$43,130,000 as a current liability at June 30, 2003, as compared to
reclassification of only the senior debt obligations of $35,859,000 as of
December 31, 2002.

    For the six months ended June 30, 2003, the Company had $599,000 in cash
provided by operations, due to a decrease in accounts receivable and inventory,
as well as an increase in accounts payable. The decrease in receivables was due
to the collection on the sale 


                                       27

<PAGE>

of backordered injectable products from the first quarter of 2003 to customers
whose credit terms were such that collection of the receivables occurred in
April 2003 and from reduced sales in the second quarter of 2003. Inventory
decreased due to strict controls over purchases of raw materials and components.
Investing activities during the period ended June 30, 2003 used $930,000 in
cash, including $780,000 related to the lyophilized (freeze-dried)
pharmaceuticals manufacturing line expansion. Financing activities used $73,000
in cash during the period ended June 30, 2003.

    The Company experienced losses from operations for the first six months of
2003 and in each of the three most recent years (2000-2002) and has a working
capital deficiency of $40.1 million as of June 30, 2003. The Company also is in
default under its existing senior credit agreement and subordinated debt
agreements and is subject to ongoing Food and Drug Administration ("FDA")
compliance matters that could have a material adverse effect on the Company. See
"Credit Agreement", "- Subordinated Debt" and Part II - Item 1 - "Legal
Proceedings". Although the Company has entered into a Forbearance Agreement (as
defined below) with its senior lender, the Company's subordinated lenders are
currently prohibited from taking action to collect the subordinated debt without
the consent of the Company's senior lender, and the Company is working with the
FDA to favorably resolve such compliance matters, 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 compliance
matters with the FDA and (iv) ultimately refinance its senior bank debt, resolve
the defaults under its subordinated 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 first six months of 2003. As of June 30, 2003, the Company a
cash deficit of $14,000 and approximately $1.3 million of undrawn availability
under the second line of credit described below. As a result of its cash
position and its negative accounts receivable balance at the end of the second
quarter, the Company obtained an additional $1,000,000 of availability under its
second line of credit in July, 2003. There can be no assurance that the
increased line of credit, together with cash generated from operations, will be
sufficient to meet the cash requirements for operating the Company's business.

    There also can be no guarantee that the Company will successfully resolve
the ongoing compliance matters 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, resolving the defaults under its subordinated debt and obtaining
new financing for future operations. However, the Company is current on its
interest payment obligations to its senior lender, 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 and resolving the
defaults under its subordinated debt. The Company has also added key management
personnel, including the appointment of a new chief executive officer, vice
president of operations and vice president of quality assurance, quality control
and regulatory affairs, 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
results of operations, cash flow from operations and the prospects for
refinancing its senior debt, resolving the defaults under its subordinated debt
and obtaining additional financing for future operations.

    As a result of all of the factors cited in the preceding 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 and resolves the defaults under its subordinated 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 lender 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 lender also notified the Company that they would forbear from
exercising its remedies under the Credit Agreement until January 3, 2003 (as
indicated below, subsequently extended to August 22, 2003) if a forbearance
agreement could be reached. On September 20, 2002, the Company and its senior
lender entered into an agreement under which the senior lender would agree to
forbear from exercising its remedies (the "Forbearance Agreement") and the
Company acknowledged its then-current default. The Forbearance Agreement
provides a second line of credit that currently allows the Company to borrow the
lesser of (i) the difference between the Company's outstanding indebtedness to
the senior lender and $39,200,000, (ii) $2,750,000, 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 lender. 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 lender, at its 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.

    As required by the Forbearance Agreement, a restructuring plan was developed
by the Company and the Consultant and presented to the Company's senior lender
in December 2002. The restructuring plan requested that the senior lender
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 lender 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 lender agreed to successive short-term extensions of the Forbearance
Agreement until the completion of the re-inspection. Following completion of the
FDA re-inspection of the Decatur facility on February 6, 2003 and issuance of
the FDA findings (see Note M - "Legal Proceedings"), the senior lender indicated
that it was not willing to convert the senior debt to a term loan, but it did
agree to further extensions of the Forbearance Agreement. As required by one of
these extensions, 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.  That process is
continuing.


    On July 3, 2003 the senior lender extended the expiration date of the
Forbearance Agreement from June 30, 2003 until July 31, 2003 and agreed to make
up to an additional $1,000,000 available to the Company under its current line
of credit increasing the maximum amount available under the line of credit from
$1,750,000 to $2,750,000. On August 8, 2003, the senior lenders extended the
expiration date of the Forbearance Agreement until August 22, 2003.

    The Forbearance Agreement, as amended and extended, provides that the senior
lender will forbear from exercising its remedies as a result of specified
existing defaults by Akorn until the earlier of the expiration date and the
occurrence of any additional defaults by Akorn under the Credit Agreement.
Subject to the absence of any additional defaults and subject to the senior
lender's 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 August 22, 2003.

FDA Compliance Matters

    As described in more detail in Part II - Item 1 - "Legal Proceedings", the
Company is subject to ongoing FDA compliance matters. While the Company is
cooperating with the FDA and seeking to resolve the pending matters, an
unfavorable outcome 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.


                                       29

<PAGE>

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, resolve the
defaults under its current subordinated 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 June 30, 2003,
the Company had spent approximately $17.2 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 Trust dtd. 9/20/89 (the "Kapoor 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 Kapoor 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 Kapoor Trust for the subordinated debt, the
Company issued the Kapoor Trust two warrants which allow the Kapoor 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 Kapoor 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 Kapoor Trust until the repayment of the senior
debt pursuant to the terms of a subordination agreement, which was entered into
between the Kapoor Trust and the Company's senior lender. 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 the Company's efforts to complete its
lyophilization facility located in Decatur, Illinois. Under the terms of the
Promissory Note, dated December 20, 2001 (the "NeoPharm Promissory Note"),
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 NeoPharm Promissory Note is subordinated to the Company's senior debt but is
senior to the Company's subordinated debt owed to the Kapoor 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. The Company is currently in default under the
NeoPharm Promissory Note as a result of its failure to remove all FDA warning
letter sanctions related to the Company's Decatur, Illinois facility by June 30,
2003. As a result, amounts owed under the NeoPharm Promissory Note now bear
interest at a default rate, which is 3% per annum over the rate that would
otherwise be in effect.. However, the subordination provisions applicable to the
NeoPharm Promissory Note prohibit NeoPharm from taking any action to enforce or
collect the NeoPharm Promissory Note without the consent of the Company's senior
lender. 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 Kapoor
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 Kapoor 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 Kapoor Trust
could only convert the interest accrued on the $2,000,000 tranche through the
original maturity of the Tranche B note. The Company is currently in default
under the Trust Agreement as a result of a cross-default to the NeoPharm
Promissory Note. However, the Kapoor Trust is prohibited from taking any action
to enforce or collect amounts owed to it without the prior written consent of
the Company's senior lender and NeoPharm.


                                       30

<PAGE>


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
$1,773,000 and $1,917,000 at June 30, 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.


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 (3%). The NeoPharm Promissory Note 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 plus, as long as such note is in default, 300 basis points.
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 June 30, 2003 would result in a $466,000
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
June 30, 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 lender. 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.

    Based on their evaluation of the Company's disclosure controls and
procedures, as required by Rule 13a-15(b) under the Securities Exchange Act of
1934, the Chief Executive Officer and Chief Financial Officer concluded that the
Company's 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. In the second quarter of 2003, the Company
updated its internal control policies and procedures, expanded its interim
evaluation of accounts receivable for purposes of determining the allowance for
doubtful accounts and reassigned certain personnel to strengthen the accounting
for fixed assets. The Company also is in the process of taking a detailed
inventory of its fixed assets. There were no other changes in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.


                                       31

<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 July 11, 2003, the Company reached a revised 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
proposed consent order, as revised, contains an additional commitment by the
Company to do the following: (A) appoint a special committee comprised entirely
of outside directors, (B) within 30 days after entry of the order, have the
special committee retain a qualified independent consultant ("consultant")
acceptable to the staff to perform a test of the Company's material internal
controls, practices, and policies related to accounts receivable, and (C) within
180 days, have the consultant present his or her findings to the commission for
review to provide assurance that the Company is keeping accurate books and
records and has devised and maintained a system of adequate internal accounting
controls with respect to the Company's accounts receivables. 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 inspection 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 


                                       32

<PAGE>

writing and in a meeting with the FDA in March 2003. The Company set forth its
plan for implementing comprehensive corrective actions and has provided progress
reports to the FDA on April 15, May 15, 2003 and 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) 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; (ii)
seek to enjoin the Company from further violations, which may include temporary
suspension of some or all operations and potential monetary penalties; or (iii)
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 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 (ii) or (iii), the Company will be able
to continue manufacturing and distributing its current product lines.

    If the FDA chooses option (ii) or (iii), 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 lender 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 claimed was $3.8
million. In July 2003, the Company agreed to a settlement with respect to one of
the claims alleged by these demand letters. The Company does not believe that
this settlement or the outcome of the second alleged claim will have a material
impact on the Company's financial position.

    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 in its senior
credit facility, including the failure to make a $39,200,000 principal payment
that was due on August 31, 2002, as well as under a cross-default to other
indebtedness of the Company. 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, as amended, the senior lender has agreed to forbear from
exercising its remedies with respect to specified existing defaults under the
credit facility until August 22, 2003. The total amount owed under the senior
credit facility as of August 13, 2003 was $37,300,000.

    The Company also is in default under a Promissory Note to NeoPharm, Inc. in
the principal amount of $3,250,000 as a result of the Company's failure to
remove all FDA warning letter sanctions related to the Company's Decatur,
Illinois facility by June 30, 2003. However, NeoPharm is prohibited from taking
any action to enforce or collect the NeoPharm Promissory Note without the prior
written consent of Company's senior lender.

    The Company also is in default under the Convertible Bridge Loan and Warrant
Agreement relating to the $5,000,000 subordinated loan made to the Company by
The John N. Kapoor Trust dtd. 9/20/89 as a result of a cross-default to the
NeoPharm 


                                       33

<PAGE>

Promissory Note. However, the Kapoor Trust is prohibited from taking any action
to enforce or collect amounts owed to it without the prior written consent of
the Company's senior lender and NeoPharm.


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 June 30, 2003.


ITEM 5. OTHER INFORMATION

    None



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits

    (10.1) Amendment #1 to the Pre-Negotiation Agreement by and among the
    Company, Akorn (NJ) Inc. and The Northern Trust Company dated as of October
    18, 2002

    (10.2) Amendment #12 to the Pre-Negotiation Agreement by and among the
    Company, Akorn (NJ) Inc. and The Northern Trust Company dated as of June
    30, 2003

    (10.3) Amendment #13 to the Pre-Negotiation Agreement by and among the
    Company, Akorn (NJ) Inc. and The Northern Trust Company dated as of July
    31, 2003.

    (10.4) Subordination and Standby Agreement executed by The John N. Kapoor
    Trust dtd. September 20, 1989 in favor of The Northern Trust Company dated
    as of July 12, 2001.

    (31.1) Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
    under the Securities Exchange Act of 1934

    (31.2) Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
    under the Securities Exchange Act of 1934

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

    (b) Reports on Form 8-K

    During the quarterly period ended June 30, 2003, the Company filed a report
    on Form 8-K dated May 1, 2003 and an amendment to that report on Form 8-K/A
    dated May 21, 2003 relating to changes in the Company's certifying
    accountant.



                                       34

<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: August 14, 2003


                                       35




<PAGE>
                                                                    EXHIBIT 10.1

                  FIRST AMENDMENT TO PRE-NEGOTIATION AGREEMENT

                  THIS FIRST AMENDMENT TO PRE-NEGOTIATION AGREEMENT dated as of
October 18, 2002 (this "First Amendment"), by and among AKORN, INC., a Louisiana
corporation ("Akorn"), AKORN (NEW JERSEY), INC., an Illinois corporation ("Akorn
NJ") (Akorn and Akorn NJ being sometimes referred to herein individually as a
"Borrower" and collectively as the "Borrowers"), and THE NORTHERN TRUST COMPANY,
an Illinois banking corporation (the "Lender");

                                   WITNESSETH:

                  WHEREAS, the parties heretofore entered into the
Pre-Negotiation Agreement dated as of September 20, 2002 (the "Prior
Agreement"); and

                  WHEREAS, the Borrowers have requested (i) a waiver with
respect to compliance with Section 6.9 of the Prior Agreement for the period
ending September 30, 2002, (ii) an amendment to the definition of "Borrowing
Base" and (iii) an amendment to Section 7.1 of the Prior Agreement;

                  WHEREAS, the Lender has agreed to the Borrowers' request, but
only on the terms set forth herein;

                  NOW, THEREFORE, in consideration of the premises and the
covenants, agreements and acknowledgments contained herein, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby
 agree as follows:

                  Section 1. Defined Terms. All capitalized terms used and not
otherwise defined in this First Amendment shall have the same meanings as in the
Prior Agreement.

                  Section 2. Waiver. The Lender hereby waives the Borrowing
Condition Failure arising from the Borrowers' noncompliance with Section 6.9 of
the Prior Agreement for the period ending September 30, 2002.

                  Section 3. Amendments.

                  3.1 Section 1.1 of the Prior Agreement is hereby amended by
replacing with definition of "Borrowing Base" with the following:

                  "Borrowing Base" shall mean, for any date, the product of (a)
0.80 and (b) Net Trade Accounts Receivable on such date.

                  3.2 Section 7.1 of the Prior Agreement is hereby amended to
read as follows"

                  7.1 Payments. The Lender (a) shall, and the Borrowers hereby
irrevocably authorize the Lender to, withdraw on the Agreement Closing Date all
cash amounts on deposit (including arising from the liquidation of any cash
equivalent then on deposit and from the transfer on such date of cash from the
Lock-Box Account to the Concentration Account) and


<PAGE>
apply same to (i) the payment of the $200,000 fee referred to in Section 5.1(c)
and (ii) thereafter repay outstanding Tranche A Loans and (b) may in its sole
discretion (but shall be under no obligation to), and the Borrowers hereby
irrevocably authorize the Lender at any time and from time to time to, on each
Business Day after the Agreement Closing Date, withdraw all cash amounts on
deposit in the Concentration Account (including any cash transferred thereto on
such date from the Lock-Box Account) in excess of the Minimum Balance and apply
same to (i) first, to all Obligations (other than principal of the Loans) then
due and payable, (ii) second, to the outstanding principal amount of all Tranche
B Loans and (iii) thereafter, to the outstanding principal amount of all Tranche
A Loans.

                  Section 4. Pre-Negotiation Agreement and Documents to Remain
In Effect; Confirmation of Obligations; References. Except as expressly modified
and amended by this First Amendment, the Prior Agreement shall remain in full
force and effect as originally executed and delivered by the parties. In order
to induce the Lender to enter into this First Amendment, the Borrowers hereby
(i) confirm and reaffirm all of their obligations under the Documents, as
modified and amended as described above and under the Pre-Negotiation Agreement,
as modified and amended as described above; (ii) acknowledge and agree that the
Lender, by entering into this First Amendment, does not waive any existing or
future default or event of default under any of the Documents or the Prior
Agreement, or any rights, powers or remedies under any of the Documents or the
Pre-Negotiation Agreement, except as expressly provided in Section 2; (iii)
acknowledge and agree that the Lender has not heretofore waived any Borrowing
Condition Failure, or any rights or remedies under any of the Documents or the
Prior Agreement; and (iv) acknowledge that they do not have any defense, set-off
or counterclaim to the payment or performance of any of their obligations under
the Documents or the Prior Agreement, as amended hereby. All references to the
Prior Agreement shall henceforth be deemed to refer to the Prior Agreement as
modified by this First Amendment and as hereafter modified by any amendment,
modification or supplement thereto.

                  Section 5. Confirmation of Certifications, Representations
and Warranties. In order to induce the Lender to enter into this First Amendment
the Borrowers hereby certify, represent and warrant to the Lender that, except
as otherwise disclosed to the Lender in writing prior to the date hereof,
including in the Pre-Negotiation Agreement and in the Exhibits and Schedules
attached thereto and/or in documents submitted to the Lender prior to the date
hereof (including, but not limited to, any and all financial statements and
reports, budgets, statements of cash flow and governmental reports and filings)
(collectively referred to herein as "Disclosures"), all certifications,
representations and warranties contained in the Documents and in the
Pre-Negotiation Agreement and in all certificates heretofore delivered to the
Lender are true and correct as of the date hereof in all material respects, and,
subject to such Disclosures, all such certifications, representations and
warranties are hereby remade and made to speak as of the date of this First
Amendment.

                  Section 6. RELEASE. EACH BORROWER ON BEHALF OF ITSELF AND ITS
AFFILIATES, SUBSIDIARIES, SUCCESSORS, ASSIGNS, PRINCIPALS, SHAREHOLDERS,
BENEFICIARIES, OFFICERS, MANAGERS, DIRECTORS, AGENTS, REPRESENTATIVES, ADVISORS,
EMPLOYEES AND ATTORNEYS, HEREBY JOINTLY AND SEVERALLY RELEASES, WAIVES AND
FOREVER DISCHARGES EACH OF THE LENDER AND ITS AFFILIATES, SUBSIDIARIES,
SUCCESSORS, ASSIGNS,


                                      -2-

<PAGE>
PRINCIPALS, SHAREHOLDERS, BENEFICIARIES, OFFICERS, MANAGERS, DIRECTORS, AGENTS,
REPRESENTATIVES, ADVISORS, EMPLOYEES AND ATTORNEYS OF, FROM, AND WITH RESPECT TO
ANY AND ALL MANNER OF ACTIONS, CAUSES OF ACTIONS, SUITS, DISPUTES, CLAIMS,
COUNTERCLAIMS AND/OR LIABILITIES, CROSS CLAIMS, DEFENSES THAT ARE KNOWN OR
UNKNOWN, SUSPECTED OR UNSUSPECTED, PAST OR PRESENT, ASSERTED OR UNASSERTED,
CONTINGENT OR LIQUIDATED, WHETHER OR NOT WELL FOUNDED IN FACT OR LAW, WHETHER IN
CONTRACT, IN TORT OR OTHERWISE, AT LAW OR IN EQUITY, BASED UPON, RELATING TO OR
ARISING OUT OF ANY AND ALL TRANSACTIONS, RELATIONSHIPS OR DEALINGS WITH OR LOANS
MADE TO THE BORROWERS PURSUANT TO THE LOAN DOCUMENTS AND/OR THE PRIOR AGREEMENT
PRIOR TO THE EFFECTIVENESS HEREOF.

                  Section 7. Entire Agreement. This First Amendment sets forth
all of the covenants, promises, agreements, conditions and understandings of the
parties relating to the subject matter of this First Amendment, and there are no
covenants, promises, agreements, conditions or understandings, either oral or
written, between them relating to the subject matter of this First Amendment
other than as are herein set forth.

                  Section 8. Successors. This First Amendment shall inure to
the benefit of and shall be binding upon the parties and their respective
successors, assigns and legal representatives.

                  Section 9. Severability. In the event any provision of this
First Amendment shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.

                  Section 10. Amendments, Changes and Modifications. This First
Amendment may be amended, changed, modified, altered or terminated only by a
written instrument executed by all of the parties hereto:

                  Section 11. Construction.

                           (a) The words "hereof," "herein," and "hereunder,"
         and other words of a similar import refer to this First Amendment as a
         whole and not to the individual Sections in which such terms are used.

                           (b) References to Sections and other subdivisions of
         this First Amendment are to the designated Sections and other
         subdivisions of this First Amendment as originally executed.

                           (c) The headings of this First Amendment are for
         convenience only and shall not define or limit the provisions hereof.

                           (d) Where the context so requires, words used in
         singular shall include the plural and vice versa, and words of one
         gender shall include all other genders.



                                      -3-

<PAGE>
                           (e) Each party to this First Amendment and legal
         counsel for each party have participated in the drafting of this First
         Amendment, and accordingly the general rule of construction to the
         effect that any ambiguities in a contract are to be resolved against
         the party drafting the contract shall not be employed in the
         construction and interpretation of this First Amendment.

                  Section 12. Execution of Counterparts. This First Amendment
may be simultaneously executed in several counterparts, each of which shall be
an original and all of which shall constitute but one and the same instrument.

                  Section 13. Governing Law. This First Amendment shall be
governed by and be construed and enforced in accordance with the laws of the
State of Illinois.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]




                                      -4-

<PAGE>
                  IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first written above.

Address for Notices:                         AKORN, INC.

2500 Millbrook Drive
Buffalo Grove, IL  60089                     By /s/ Ben Pothast
Attention:  Chief Financial Officer             ---------------
Telecopier No.:  (847) 279-6191                 Name: Ben Pothast
Telephone No.:  (847) 279-6100                  Title:   C.F.O.
                                   

                                             AKORN (NEW JERSEY), INC.


                                             By /s/ Ben Pothast
                                                ---------------
                                                Name: Ben Pothast
                                                Title:   C.F.O.

50 South LaSalle Street
Chicago, Illinois  60675                     THE NORTHERN TRUST COMPANY
Attention:  Olga Georgiev
Telecopier No.:  (312) 630-6105
Telephone No.:  (312) 444-2438               By Olga Georgiev
                                               --------------
                                                Name:  Olga Georgiev
With a copy to                                  Title:
                                                       -------------------------
White & Case LLP
200 S. Biscayne Blvd., Suite 4900
Miami, FL  33131
Attention:  John K. Cunningham, Esq.




                                      -5-


<PAGE>
                                                                    EXHIBIT 10.2


                 TWELFTH AMENDMENT TO PRE-NEGOTIATION AGREEMENT

THIS TWELFTH AMENDMENT TO PRE-NEGOTIATION AGREEMENT dated as of June 30, 2003
(this "Twelfth Amendment"), by and among AKORN, INC., a Louisiana corporation
("Akorn"), AKORN (NEW JERSEY), INC., an Illinois corporation ("Akorn NJ") (Akorn
and Akorn NJ being sometimes referred to herein individually as a "Borrower" and
collectively as the "Borrowers"), and THE NORTHERN TRUST COMPANY, an Illinois
banking corporation (the "Lender");

                                   WITNESSETH:

                  WHEREAS, the parties heretofore entered into the
Pre-Negotiation Agreement dated as of September 20, 2002, as amended by the
First Amendment dated as of October 18, 2002, the Second Amendment dated as of
November 26, 2002, the Third Amendment dated as of December 30, 2002, the Fourth
Amendment dated as of January 16, 2003, the Fifth Amendment dated as of January
31, 2003, the Sixth Amendment, dated as of February 14, 2003, the Seventh
Amendment dated as of February 28, 2003, the Eighth Amendment dated as of March
14, 2003, the Ninth Amendment dated as of April 4, 2003, the Tenth Amendment
dated as of May 1, 2003 and the Eleventh Amendment dated as of May 9, 2003 (the
"Prior Agreement"); and

                  WHEREAS, the Borrowers have requested an amendment to Section
4.1
 of the Prior Agreement;

                  WHEREAS, the Lender has agreed to the Borrowers' request, but
only on the terms set forth herein;

                  NOW, THEREFORE, in consideration of the premises and the
covenants, agreements and acknowledgments contained herein, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:

                  Section 1. Defined Terms. All capitalized terms used and not
otherwise defined in this Twelfth Amendment shall have the same meanings as in
the Prior Agreement.

                  Section 2. Amendments.

                  2.1 Section 1.1 of the Prior Agreement is hereby amended by
replacing the following defined terms to read as follows:

                  "Loans" shall mean the Tranche A Loans, the Tranche B Loans
         and the Tranche C Loans. This definition amends and restates the
         definition contained in the Credit Agreement for all purposes.

                  "Tranche B Loans" shall have the meaning provided in Section
         8.1(a).

                  "Tranche B Note" shall have the meaning provided in Section
         8.2(a).




<PAGE>

                  2.2 Section 1.1 of the Prior Agreement is hereby amended by
inserting the following defined terms in appropriate alphabetical order:

                  "Cash Receipts" shall mean all cash (including, without
         limitation, cash received in respect of checks, drafts, bank credits
         and other similar instruments and receivables) received by any of the
         Borrowers from any source.

                  "Tranche C Commitment" shall mean, at any time, the commitment
         of the Lender to make Tranche C Loans during the Forbearance Period,
         which commitment shall be equal to the greater of (a) $150,000 and (b)
         110% of the "Tranche C Balance" set forth in the Budget for such time;
         provided, however, that at no time shall the Tranche C Commitment
         exceed $1,000,000.

                  "Tranche C Loans" shall have the meaning provided in Section
         8.1(b).

                  "Tranche C Note" shall have the meaning provided in Section
         8.2(b).

                  "Unutilized Commitment" shall mean, at any time, the
         difference between (i) $2,750,000 and (ii) the aggregate principal
         amount of all Tranche B Loans and Tranche C Loans then outstanding.

                  2.3 Section 4.1 of the Prior Agreement is hereby amended to
read as follows:

                  4.1 Forbearance Period. Subject to compliance by each Borrower
         with each of the terms and conditions of this Agreement, and without
         waiving the Existing Events, the Lender hereby agrees to forbear from
         enforcing its rights or remedies pursuant to the Loan Documents and
         applicable law (including, without limitation, to make a demand for
         payment as a result of the Payment Default) as a result of the Existing
         Events from the Agreement Closing Date until the earlier to occur of
         the following (as the case may be, the "Forbearance Termination Date"):
         (i) July 31, 2003 and (ii) the date on which a Borrowing Condition
         Failure occurs.

                  2.4 Section 6.6 of the Prior Agreement is hereby amended to
read as follows:

                  6.6 Budget; Reconciliation.

                  (a) Starting July 1, 2003, on or before the first day of each
         month until the Forbearance Termination Date, the Borrowers shall
         deliver to the Lender a budget, in form and substance satisfactory to
         the Lender, detailing the Borrowers' anticipated Cash Receipts and
         disbursements for such month (broken down on a weekly basis during such
         month) and setting forth the anticipated drawings and uses of Tranche C
         Loans during such month (the "Budget").

                  (b) Starting July 9, 2003, on each Wednesday until the
         Forbearance Termination Date, the Borrowers shall deliver to the Lender
         a report, in form and substance satisfactory to the Lender, detailing
         the Borrowers' actual Cash Receipts and disbursements (and borrowings
         and repayment of Tranche C Loans) during the immediately prior week,
         and showing the variance of such amounts from the


                                      -2-

<PAGE>

         corresponding amounts projected in the Budget for such week (the
         "Weekly Reconciliation Report").

                  2.5 Section 7.1 of the Prior Agreement is hereby amended to
read as follows:

                  7.1 Payments. The Lender (a) shall, and the Borrowers hereby
         irrevocably authorize the Lender to, withdraw on the Agreement Closing
         Date all cash amounts on deposit (including arising from the
         liquidation of any cash equivalent then on deposit and from the
         transfer on such date of cash from the Lock-Box Account to the
         Concentration Account) and apply same to (i) the payment of the
         $200,000 fee referred to in Section 5.1(c) and (ii) thereafter repay
         outstanding Tranche A Loans and (b) may in its sole discretion (but
         shall be under no obligation to), and the Borrowers hereby irrevocably
         authorize the Lender at any time and from time to time to, on each
         Business Day after the Agreement Closing Date, withdraw all cash
         amounts on deposit in the Concentration Account (including any cash
         transferred thereto on such date from the Lock-Box Account) in excess
         of the Minimum Balance and apply same to (i) first, to all Obligations
         (other than principal of the Loans) then due and payable, (ii) second,
         to the outstanding principal amount of all Tranche C Loans, (iii)
         third, to the outstanding principal amount of all Tranche B Loans and
         (iv) thereafter, to the outstanding principal amount of all Tranche A
         Loans.

                  2.6 Article VIII of the Prior Agreement is hereby amended to
read as follows:

                                  ARTICLE VIII
                       TRANCHE B AND TRANCHE C FACILITIES

                  8.1 Tranche B and Tranche C Loans.

                  (a) Subject to the terms and conditions of this Agreement and
         the Loan Documents, the Lender agrees to make advances (each, a
         "Tranche B Loan" and, collectively, the "Tranche B Loans") to the
         Borrowers, from time to time during the Forbearance Period, at such
         times and in such amounts as the Borrowers may request, not to exceed
         in the aggregate at any one time outstanding the Tranche B Commitment
         at such time. During such time, the Borrowers may from time to time
         borrow, repay and reborrow under this Section 8.1(a). Each Tranche B
         Loan to a Borrower shall be made on notice by such Borrower to the
         Lender at its principal banking office at 50 South LaSalle Street,
         Chicago, Illinois 60675, given no later than 10:00 a.m. (Chicago time)
         on the Business Day of the proposed Tranche B Loan; provided, however,
         that any Tranche B Loan requested shall be in a minimum amount of
         $100,000. Each such notice (a "Notice of Tranche B Borrowing") shall be
         substantially in the form of Exhibit A-1, co-signed by the Consultant,
         specifying therein the requested date and the amount of such Tranche B
         Loan, and such other information as may be required by Lender and shall
         be given in writing (by telecopy or overnight courier) or by telephone
         (to the extent the Consultant is part of such telephonic notice)
         confirmed immediately in writing if requested by the Lender. Lender
         shall be entitled to rely upon, and shall be fully protected under this
         Agreement and the Loan Documents in relying upon, any Notice of


                                      -3-

<PAGE>

         Tranche B Borrowing believed by Lender to be genuine and to assume that
         each Person executing and delivering the same was duly authorized.

                  (b) Subject to the terms and conditions of this Agreement and
         the Loan Documents, the Lender agrees to make advances (each, a
         "Tranche C Loan" and, collectively, the "Tranche C Loans") to the
         Borrowers, from time to time during the Forbearance Period, at such
         times and in such amounts as the Borrowers may request, not to exceed
         in the aggregate at any one time outstanding the Tranche C Commitment
         at such time. During such time, the Borrowers may from time to time
         borrow, repay and reborrow under this Section 8.1(b). Each Tranche C
         Loan to a Borrower shall be made on notice by such Borrower to the
         Lender at its principal banking office at 50 South LaSalle Street,
         Chicago, Illinois 60675, given no later than 10:00 a.m. (Chicago time)
         on the Business Day of the proposed Tranche C Loan; provided, however,
         that any Tranche C Loan requested shall be in a minimum amount of
         $100,000. Each such notice (a "Notice of Tranche C Borrowing") shall be
         substantially in the form of Exhibit A-2, co-signed by the Consultant,
         specifying therein the requested date and the amount of such Tranche C
         Loan, and such other information as may be required by Lender and shall
         be given in writing (by telecopy or overnight courier) or by telephone
         (to the extent the Consultant is part of such telephonic notice)
         confirmed immediately in writing if requested by the Lender. Lender
         shall be entitled to rely upon, and shall be fully protected under this
         Agreement and the Loan Documents in relying upon, any Notice of Tranche
         C Borrowing believed by Lender to be genuine and to assume that each
         Person executing and delivering the same was duly authorized.

                  8.2 Tranche B and Tranche C Notes.

                  (a) Borrowers shall execute and deliver to the Lender a note
         to evidence the Tranche B Loans, such note to be in the maximum amount
         of the Tranche B Commitment, dated the date hereof and in form and
         content acceptable to the Lender (the "Tranche B Note"). The Tranche B
         Note shall represent the joint and several obligation of each Borrower
         to pay the amount of the Tranche B Commitment or, if less, the
         aggregate unpaid principal amount of all Tranche B Loans made by the
         Lender to the Borrowers with interest thereon us prescribed in Section
         8.5. The date and amount of each Tranche B Loan and each payment of
         principal with respect thereto shall be recorded on the books and
         records of the Lender, which books and records shall constitute prima
         facie evidence of the accuracy of the information therein recorded. The
         entire unpaid balance of the Tranche B Loans shall be immediately due
         and payable on the Forbearance Termination Date.

                  (b) Borrowers shall execute and deliver to the Lender a note
         to evidence the Tranche C Loans, such note to be in the maximum amount
         of the Tranche C Commitment, dated the date hereof and in form and
         content acceptable to the Lender (the "Tranche C Note"). The Tranche C
         Note shall represent the joint and several obligation of each Borrower
         to pay the amount of the Tranche C Commitment or, if less, the
         aggregate unpaid principal amount of all Tranche C Loans made by the
         Lender to the Borrowers with interest thereon as prescribed in Section
         8.5. The date and amount of each Tranche C Loan and each payment of
         principal with respect thereto shall be



                                      -4-

<PAGE>

         recorded on the books and records of the Lender, which books and
         records shall constitute prima facie evidence of the accuracy of the
         information therein recorded. The entire unpaid balance of the Tranche
         C Loans shall be immediately due and payable on the Forbearance
         Termination Date.

                  8.3 Designated Borrower. Each Borrower hereby irrevocably
         designates Akorn as its sole agent for the purposes of (a) issuing
         Notices of Tranche B Borrowings and Notices of Tranche C Borrowings and
         (b) receiving notices and consents in respect of Tranche B Loans and
         Tranche C Loans.

                  8.4 Payments; Prepayment, Commitment Reduction; Commitment
         Fee.

                  (a) The Borrowers shall repay all outstanding principal of the
         Tranche B Loans and the Tranche C Loans on the Forbearance Termination
         Date.

                  (b) On any date on which the sum of the aggregate outstanding
         principal amount of the Tranche B Loans exceeds the Tranche B Loan
         Commitment then in effect, the Borrowers shall repay Tranche B Loans in
         an amount equal to such excess.

                  (c) On any date on which the sum of the aggregate outstanding
         principal amount of the Tranche C Loans exceeds the Tranche C Loan
         Commitment then in effect, the Borrowers shall repay Tranche C Loans in
         an amount equal to such excess.

                  (d) On any date on which any Borrower receives notice (which
         notice, absent manifest error, shall be conclusive and binding on all
         parties) from the Lender that any expenditures made by the Borrowers
         during any calendar month exceed the amounts allocated for such
         expenditures in the Budget for such month, the Borrowers shall repay
         all outstanding Tranche C Loans and the Tranche C Commitment (and the
         Borrowers' right to receive Tranche C Loans) shall be immediately
         terminated.

                  (e) Borrowers shall have the right at any time to voluntarily
         prepay all or part of the Tranche B Loans or the Tranche C Loans and
         permanently reduce or terminate the Tranche B Commitment or the Tranche
         C Commitment, and no prepayment fee, premium or penalty shall be
         payable in connection with any such voluntary prepayment. Upon any such
         prepayment and permanent reduction or termination of (i) the Tranche B
         Commitment, the Tranche B Commitment (and the Borrowers' right to
         receive Tranche B Loans) shall simultaneously terminate or be
         permanently reduced, as the case may be, and (ii) the Tranche C
         Commitment, the Tranche C Commitment (and the Borrowers' right to
         receive Tranche C Loans) shall simultaneously terminate or be
         permanently reduced, as the case may be.

                  (f) Borrowers shall pay to Lender, in arrears on the last
         Business Day of each calendar month and on the Forbearance Termination
         Date, a commitment fee computed at a rate equal to 0.5% per annum of
         the daily average Unutilized Commitment.


                                      -5-

<PAGE>

                  8.5 Interest on Tranche B Loans and Tranche C Loans.

                  (a) Borrowers shall pay interest to Lender, in arrears on the
         last Business Day of each calendar month (and on any date of repayment
         or prepayment of principal of Tranche B Loans), based on the amounts
         outstanding from time to time under the Tranche B Loans, at a rate
         equal to the sum of the Prime Rate and 3.0% per annum.

                  (b) Borrowers shall pay interest to Lender, in arrears on the
         last Business Day of each calendar month (and on any date of repayment
         or prepayment of principal of Tranche C Loans), based on the amounts
         outstanding from time to time under the Tranche C Loans, at a rate
         equal to the sum of the Prime Rate and 3.0% per annum.

                  (c) If any payment on the Tranche B Loans or the Tranche C
         Loans becomes due and payable on a day other than a Business Day, the
         maturity thereof shall be extended to the next succeeding Business Day
         and, with respect to payments of principal, interest thereon shall be
         payable at the then applicable rate during such extension.

                  (d) All computations of interest and fees shall be made by the
         Lender on the basis of a three hundred sixty (360) day year, in each
         case for the actual number of days occurring in the period for which
         such interest is payable. The Prime Rate shall be determined each day
         based upon the Prime Rate as in effect each day. Each determination by
         the Lender of an interest rate hereunder shall be conclusive and
         binding for all purposes, absent manifest error or bad faith.

                  (e) Notwithstanding anything to the contrary set forth in this
         Section 8.5, if, at any time until payment in full of all of the
         Obligations, the rate of interest payable in respect of the Tranche B
         Loans or the Tranche C Loans hereunder exceeds the highest rate of
         interest permissible under any law which a court of competent
         jurisdiction shall, in a final determination, deem applicable hereto
         (the "Maximum Lawful Rate"), then in such event and so long as the
         Maximum Lawful Rate would be so exceeded, the rate of interest payable
         in respect of the Tranche B Loans or Tranche C Loans, as the case may
         be, hereunder shall be equal to the Maximum Lawful Rate; provided,
         however, that if at any time thereafter the rate of interest payable
         hereunder is less than the Maximum Lawful Rate, Borrowers shall
         continue to pay interest hereunder at the Maximum Lawful Rate until
         such time as the total interest received by Lender from the making of
         Tranche B Loans or Tranche C Loans, as the case may be, hereunder is
         equal to the total interest which would have been received had the
         interest rate payable hereunder been (but for the operation of this
         paragraph) the interest rate payable since the Agreement Closing Date
         as otherwise provided in this Agreement. Thereafter, the interest rate
         payable hereunder shall be the rate of interest provided in Sections
         8.5(a) through (d) of this Agreement, unless and until the rate of
         interest again exceeds the Maximum Lawful Rate, in which event this
         paragraph shall again apply. In no event shall the total interest
         received by Lender pursuant to the terms hereof exceed the amount which
         Lender could lawfully have received had the interest due hereunder been
         calculated for the full term hereof at the Maximum Lawful Rate. In the
         event the Maximum Lawful Rate is calculated pursuant to this paragraph,
         such interest shall be calculated at a daily rate equal to the Maximum
         Lawful Rate divided by the number of days in the year in which such


                                      -6-

<PAGE>

         calculation is made. In the event that a court of competent
         jurisdiction, notwithstanding the provisions of this Section 8.5(c),
         shall make a final determination that Lender has received interest
         hereunder or under any of the other Loan Documents in excess of the
         Maximum Lawful Rate, Lender shall, to the extent permitted by
         applicable law, promptly apply such excess first to any interest due
         and not yet paid hereunder in respect of the Tranche B Loans or Tranche
         C Loans, as the case may be, then to the outstanding principal of the
         Tranche B Loans or Tranche C Loans, as the case may be, then to Fees
         and any other unpaid Obligations and thereafter shall refund any excess
         to Borrowers or as a court of competent jurisdiction may otherwise
         order.

                  8.6 Application and Allocation of Payments. Lender is
         authorized to, and at its option may, make or cause to be made Tranche
         B Loans and/or Tranche C Loans on behalf of the Borrowers for payment
         of all Fees, expenses, Charges, costs, principal, interest, or other
         Obligations owing by any Borrower under this Agreement or any of the
         other Loan Documents if and to the extent any such Borrower fails to
         promptly pay any such amounts as and when due. At Lender's option and
         to the extent permitted by applicable law, any advances so made shall
         be deemed Tranche B Loans or Tranche C Loans, as the case may be,
         constituting part of the Tranche B Loans or Tranche C Loans, as the
         case may be, hereunder. Borrowers hereby irrevocably waive the right to
         direct the application of any and all payments at any time or times
         hereafter received from or on behalf of any such Borrower, and each
         Borrower hereby irrevocably agrees that Lender shall have the
         continuing exclusive right to apply any and all such payments against
         the then due and payable Obligations of Borrowers and in repayment of
         the Loans as Lender may deem advisable notwithstanding any previous
         entry by Lender upon the Loan Account or any other books and records.

                  8.7 Conditions Precedent to Tranche B and Tranche C
         Borrowings. Notwithstanding any other provision of this Agreement and
         without affecting in any manner the rights of Lender hereunder,
         Borrowers shall have no rights under this Agreement (but shall have all
         applicable obligations hereunder), and Lender shall not be obligated to
         make any Tranche B Loan or Tranche C Loan, or to take, fulfill, or
         perform any other action hereunder, until the following conditions have
         been satisfied, in Lender's sole discretion, or waived in writing by
         Lender:

                  (a) Accuracy of Representations and Warranties. All of each
         Borrowers' representations and warranties contained herein or in any of
         the other Loan Documents shall be true and correct on and as of the
         Agreement Closing Date and the date on which each such Tranche B Loan
         or Tranche C Loan, as the case may be, is made as though made on and as
         of such date, except, to the extent that any such representation or
         warranty expressly relates to an earlier date.

                  (b) No Material Adverse Change. Except for the Existing
         Events, no Material Adverse Effect shall have occurred since the
         Agreement Closing Date (including, without limitation, in respect of
         events or circumstances that commenced prior to the Agreement Closing
         Date).



                                      -7-

<PAGE>

                  (c) No Default. Except for the Existing Events, no event shall
         have occurred and be continuing, or would result from the making of any
         Tranche B Loan or Tranche C Loan, which constitutes or would constitute
         a Default or an Event of Default.

         The request and acceptance by any Borrower of the proceeds of any
         Tranche B Loan or Tranche C Loan shall be deemed to constitute, as of
         the date of such request or acceptance, a representation and warranty
         by the Borrowers to the Lender that the conditions in this Section 8.7
         have been satisfied.

                  2.7 Section 11.18 of the Prior Agreement is hereby amended to
read as follows:

                  11.18 WAIVER OF JURY TRIAL. EACH OF THE BORROWERS AND THE
         LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT
         ANY OF THEM MAY HAVE TO A TRIAL BY JURY OF, UNDER OR IN CONNECTION WITH
         THIS AGREEMENT OR ANY DOCUMENTS OR INSTRUMENTS EXECUTED AND DELIVERED
         IN CONNECTION HEREWITH (INCLUDING WITHOUT LIMITATION, THE TRANCHE B
         NOTE AND THE TRANCHE C NOTE), OR ANY COURSE OF CONDUCT, COURSE OF
         DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY
         RELATING HERETO OR THERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
         THE LENDER TO ENTER INTO THIS AGREEMENT.

                  Section 3. Pre-Negotiation Agreement and Documents to Remain
In Effect; Confirmation of Obligations; References. Except as expressly modified
and amended by this Twelfth Amendment, the Prior Agreement shall remain in full
force and effect as originally executed and delivered by the parties. In order
to induce the Lender to enter into this Twelfth Amendment, the Borrowers hereby
(i) confirm and reaffirm all of their obligations under the Documents, as
modified and amended as described above and under the Pre-Negotiation Agreement,
as modified and amended as described above; (ii) acknowledge and agree that the
Lender, by entering into this Twelfth Amendment, does not waive any existing or
future default or event of default under any of the Documents or the Prior
Agreement, or any rights, powers or remedies under any of the Documents or the
Pre-Negotiation Agreement; (iii) acknowledge and agree that the Lender has not
heretofore waived any Borrowing Condition Failure, or any rights or remedies
under any of the Documents or the Prior Agreement; and (iv) acknowledge that
they do not have any defense, set-off or counterclaim to the payment or
performance of any of their obligations under the Documents or the Prior
Agreement, as amended hereby. All references to the Prior Agreement shall
henceforth be deemed to refer to the Prior Agreement as modified by this Twelfth
Amendment and as hereafter modified by any amendment, modification or supplement
thereto.

                  Section 4. Confirmation of Certifications, Representations and
Warranties. In order to induce the Lender to enter into this Twelfth Amendment
the Borrowers hereby certify, represent and warrant to the Lender that, except
as otherwise disclosed to the Lender in writing prior to the date hereof,
including in the Pre-Negotiation Agreement and in the Exhibits and Schedules
attached thereto and/or in documents submitted to the Lender prior to the date
hereof (including, but not limited to, any and all financial statements and
reports, budgets, statements of


                                      -8-

<PAGE>

cash flow and governmental reports and filings) (collectively referred to herein
as "Disclosures"), all certifications, representations and warranties contained
in the Documents and in the Pre-Negotiation Agreement and in all certificates
heretofore delivered to the Lender are true and correct as of the date hereof in
all material respects, and, subject to such Disclosures, all such
certifications, representations and warranties are hereby remade and made to
speak as of the date of this Twelfth Amendment.

                  Section 5. RELEASE. EACH BORROWER ON BEHALF OF ITSELF AND ITS
AFFILIATES, SUBSIDIARIES, SUCCESSORS, ASSIGNS, PRINCIPALS, SHAREHOLDERS,
BENEFICIARIES, OFFICERS, MANAGERS, DIRECTORS, AGENTS, REPRESENTATIVES, ADVISORS,
EMPLOYEES AND ATTORNEYS, HEREBY JOINTLY AND SEVERALLY RELEASES, WAIVES AND
FOREVER DISCHARGES EACH OF THE LENDER AND ITS AFFILIATES, SUBSIDIARIES,
SUCCESSORS, ASSIGNS, PRINCIPALS, SHAREHOLDERS, BENEFICIARIES, OFFICERS,
MANAGERS, DIRECTORS, AGENTS, REPRESENTATIVES, ADVISORS, EMPLOYEES AND ATTORNEYS
OF, FROM, AND WITH RESPECT TO ANY AND ALL MANNER OF ACTIONS, CAUSES OF ACTIONS,
SUITS, DISPUTES, CLAIMS, COUNTERCLAIMS AND/OR LIABILITIES, CROSS CLAIMS,
DEFENSES THAT ARE KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, PAST OR PRESENT,
ASSERTED OR UNASSERTED, CONTINGENT OR LIQUIDATED, WHETHER OR NOT WELL FOUNDED IN
FACT OR LAW, WHETHER IN CONTRACT, IN TORT OR OTHERWISE, AT LAW OR IN EQUITY,
BASED UPON, RELATING TO OR ARISING OUT OF ANY AND ALL TRANSACTIONS,
RELATIONSHIPS OR DEALINGS WITH OR LOANS MADE TO THE BORROWERS PURSUANT TO THE
LOAN DOCUMENTS AND/OR THE PRIOR AGREEMENT PRIOR TO THE EFFECTIVENESS HEREOF.

                  Section 6. Entire Agreement. This Twelfth Amendment sets
forth all of the covenants, promises, agreements, conditions and understandings
of the parties relating to the subject matter of this Twelfth Amendment, and
there are no covenants, promises, agreements, conditions or understandings,
either oral or written, between them relating to the subject matter of this
Twelfth Amendment other than as are herein set forth.

                  Section 7. Successors. This Twelfth Amendment shall inure to
the benefit of and shall be binding upon the parties and their respective
successors, assigns and legal representatives.

                  Section 8. Severability. In the event any provision of this
Twelfth Amendment shall be held invalid or unenforceable by any court of
competent jurisdiction, such holding shall not invalidate or render
unenforceable any other provision hereof.

                  Section 9. Amendments, Changes and Modifications. This Twelfth
Amendment may be amended, changed, modified, altered or terminated only by a
written instrument executed by all of the parties hereto:


                                      -9-

<PAGE>

                  Section 10. Construction.

                  (a) The words "hereof," "herein," and "hereunder," and other
         words of a similar import refer to this Twelfth Amendment as a whole
         and not to the individual Sections in which such terms are used.

                  (b) References to Sections and other subdivisions of this
         Twelfth Amendment are to the designated Sections and other subdivisions
         of this Twelfth Amendment as originally executed.

                  (c) The headings of this Twelfth Amendment are for convenience
         only and shall not define or limit the provisions hereof.

                  (d) Where the context so requires, words used in singular
         shall include the plural and vice versa, and words of one gender shall
         include all other genders.

                  (e) Each party to this Twelfth Amendment and legal counsel for
         each party have participated in the drafting of this Twelfth Amendment,
         and accordingly the general rule of construction to the effect that any
         ambiguities in a contract are to be resolved against the party drafting
         the contract shall not be employed in the construction and
         interpretation of this Twelfth Amendment.

                  Section 11. Execution of Counterparts. This Twelfth Amendment
may be simultaneously executed in several counterparts, each of which shall be
an original and all of which shall constitute but one and the same instrument.

                  Section 12. Governing Law. This Twelfth Amendment shall be
governed by and be construed and enforced in accordance with the laws of the
State of Illinois.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                      -10-

<PAGE>

                  IN WITNESS WHEREOF, the parties hereto have caused this
Twelfth Amendment to be executed by their respective officers thereunto duly
authorized, as of the date first written above.

Address for Notices:                             AKORN, INC.

2500 Millbrook Drive
Buffalo Grove, IL  60089                         By /s/ Arthur S. Przybyl
Attention:  Chief Financial Officer                ----------------------
Telecopier No.: (847) 279-6191                      Name:  Arthur S. Przybyl
Telephone No.:  (847) 279-6100                      Title: President and CEO
                                    

                                                 AKORN (NEW JERSEY), INC.


                                                 By /s/ Arthur S. Przybyl
                                                    Name:  Arthur S. Przybyl
                                                    Title: President and CEO

50 South LaSalle Street
Chicago, Illinois  60675                         THE NORTHERN TRUST COMPANY
Attention:  Olga Georgiev
Telecopier No.: (312) 630-6105
Telephone No.:  (312) 444-2438                   By /s/ F. M. Burian
                                                   -----------------
                                                    Name:  F. M. Burian
With a copy to                                      Title: Senior V.P.

White & Case LLP
200 S. Biscayne Blvd., Suite 4900
Miami, FL  33131
Attention:  John K. Cunningham, Esq.



                                      -11-

<PAGE>

                                 TRANCHE C NOTE

$1,000,000                                                         June 30, 2003
                                                               Chicago, Illinois


                  FOR VALUE RECEIVED, the undersigned, AKORN, INC., a Louisiana
corporation ("Akorn"), and AKORN (NEW JERSEY), INC., an Illinois corporation
("Akorn NJ"), jointly and severally, promise to pay to the order of THE NORTHERN
TRUST COMPANY (the "Lender"') on the Forbearance Termination Date, the principal
amount of ONE MILLION DOLLARS ($1,000,000), or the amount outstanding as
endorsed on the grid attached to this Tranche C Note or recorded in the Lender's
books and records, if the Lender is the holder hereof. Such endorsement or
recording by the Lender shall, absent manifest error, be rebuttably presumptive
evidence of the principal balance due on this Tranche C Note.

                  This Tranche C Note evidences indebtedness incurred under that
certain Pre-Negotiation Agreement, dated as of September 20, 2002 (as the same
may be subsequently amended, restated, supplemented or otherwise modified, the
"Pre-Negotiation Agreement"), among Akorn, Akorn NJ and the Lender, to which
Pre-Negotiation Agreement reference is hereby made for a statement of its terms
and provisions. All capitalized terms used but not otherwise defined herein
shall have the meanings assigned to them in the Pre-Negotiation Agreement.

                  Unless or until this Tranche C Note shall sooner become due
and payable, whether by acceleration or otherwise, the Borrowers may from time
to time borrow, repay and reborrow in accordance with the terms and conditions
of the Pre-Negotiation Agreement. The unpaid principal amount of this Tranche C
Note from time to time outstanding shall bear interest from the date of this
Tranche C Note at the rate per annum set forth in the Pre-Negotiation Agreement.
Accrued interest on this Tranche C Note shall be payable in accordance with the
terms of the Pre-Negotiation Agreement. After maturity, whether by acceleration
or otherwise, accrued interest shall be payable on demand. Interest on this
Tranche C Note shall be computed for the actual number of days elapsed on the
basis of a year consisting of 360 days. Payments of both principal and interest
are to be made in immediately available funds in lawful money of the United
States of America.

                  Subject to the terms and conditions of the Pre-Negotiation
Agreement, the undersigned agree to pay all reasonable expenses, including
reasonable attorneys' fees and legal expenses, incurred by the holder of this
Tranche C Note in attempting to collect any amounts payable hereunder. The
undersigned irrevocably waive presentment, protest, demand and notice of any
kind in connection herewith.




<PAGE>

                  This Tranche C Note is made under and governed by the internal
laws of the State of Illinois (without regard to conflict of laws provisions
thereof), and shall be deemed to have been executed in the State of Illinois.

                                         AKORN, INC.,
                                         a Louisiana corporation


                                         By: /s/ Ben Pothast
                                            ----------------
                                           Name:  Ben Pothast
                                           Title: C.F.O.


                                         AKORN (NEW JERSEY), INC.,
                                         an Illinois corporation


                                         By: /s/ Ben Pothast
                                            ----------------
                                           Name:  Ben Pothast
                                           Title: C.F.O.






                                      -2-

<PAGE>

                    TRANCHE C LOANS AND PRINCIPAL REPAYMENTS


<TABLE>
<CAPTION>
                                Type of Loan         Amount of       Unpaid
                 Amount of      & Applicable         Principal      Principal     Notation 
    Date         Loan Made      Interest Rate         Repaid         Balance       Made By
-------------------------------------------------------------------------------------------
<S>              <C>            <C>                  <C>            <C>           <C>    

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

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

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

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

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

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

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

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

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

-------------------------------------------------------------------------------------------
</TABLE>
















                                      -3-


<PAGE>
                                                                    EXHIBIT 10.3


                THIRTEENTH AMENDMENT TO PRE-NEGOTIATION AGREEMENT


THIS THIRTEENTH AMENDMENT TO PRE-NEGOTIATION AGREEMENT dated as of July 31, 2003
(this "Thirteenth Amendment"), by and among AKORN, INC., a Louisiana corporation
("Akorn"), AKORN (NEW JERSEY), INC., an Illinois corporation ("Akorn NJ") (Akorn
and Akorn NJ being sometimes referred to herein individually as a "Borrower" and
collectively as the "Borrowers"), and THE NORTHERN TRUST COMPANY, an Illinois
banking corporation (the "Lender");

                                   WITNESSETH:

          WHEREAS, the parties heretofore entered into the Pre-Negotiation
Agreement dated as of September 20, 2002, as amended by the First Amendment
dated as of October 18, 2002, the Second Amendment dated as of November 26,
2002, the Third Amendment dated as of December 30, 2002, the Fourth Amendment
dated as of January 16, 2003, the Fifth Amendment dated as of January 31, 2003,
the Sixth Amendment, dated as of February 14, 2003, the Seventh Amendment dated
as of February 28, 2003, the Eighth Amendment dated as of March 14, 2003, the
Ninth Amendment dated as of April 4, 2003, the Tenth Amendment dated as of May
1, 2003, the Eleventh Amendment dated as of May 9, 2003 and the Twelfth
Amendment dated as of June 30, 2003 (the "Prior Agreement");

          WHEREAS, the
 Borrowers have requested an amendment to Section 4.1 of
the Prior Agreement; and

          WHEREAS, the Lender has agreed to the Borrowers' request, but only on
the terms set forth herein;

          NOW, THEREFORE, in consideration of the premises and the covenants,
agreements and acknowledgments contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:

          Section 1. Defined Terms. All capitalized terms used and not otherwise
defined in this Thirteenth Amendment shall have the same meanings as in the
Prior Agreement.

          Section 2. Amendments.

          2.1 Section 1.1 of the Prior Agreement is hereby amended by replacing
the definition of "Existing Events" with the following:

          "Existing Events" shall mean the Payment Default and the Events of
     Default arising under Section 8.1(e) of the Credit Agreement due to
     defaults by the Borrowers under (i) the Promissory Note dated as of
     December 20, 2001 made by Akorn in favor of NeoPharm, Inc., as a result of
     the Borrowers' failure to remove by June 30, 2003 all sanctions arising as
     a result of the 483 M Warning Letter issued by the FDA and (ii) the
     Convertible Bridge Loan and Warrant Agreement dated as of July 12, 2001, as
     amended, 


<PAGE>

     between Akorn and the John K. Kapoor Trust Dtd 9/20/89, which are described
     in the letter dated July 21, 2003 from the John K. Kapoor Trust Dtd 9/20/89
     to Akorn.

          2.2 Section 4.1 of the Prior Agreement is hereby amended to read as
     follows:

          4.1 Forbearance Period. Subject to compliance by each Borrower with
     each of the terms and conditions of this Agreement, and without waiving the
     Existing Events, the Lender hereby agrees to forbear from enforcing its
     rights or remedies pursuant to the Loan Documents and applicable law
     (including, without limitation, to make a demand for payment as a result of
     the Payment Default) as a result of the Existing Events from the Agreement
     Closing Date until the earlier to occur of the following (as the case may
     be, the "Forbearance Termination Date"): (i) August 22, 2003 and (ii) the
     date on which a Borrowing Condition Failure occurs.

          Section 3. Pre-Negotiation Agreement and Documents to Remain In
Effect; Confirmation of Obligations; References. Except as expressly modified
and amended by this Thirteenth Amendment, the Prior Agreement shall remain in
full force and effect as originally executed and delivered by the parties. In
order to induce the Lender to enter into this Thirteenth Amendment, the
Borrowers hereby (i) confirm and reaffirm all of their obligations under the
Documents, as modified and amended as described above and under the
Pre-Negotiation Agreement, as modified and amended as described above; (ii)
acknowledge and agree that the Lender, by entering into this Thirteenth
Amendment, does not waive any existing or future default or event of default
under any of the Documents or the Prior Agreement, or any rights, powers or
remedies under any of the Documents or the Pre-Negotiation Agreement; (iii)
acknowledge and agree that the Lender has not heretofore waived any Borrowing
Condition Failure, or any rights or remedies under any of the Documents or the
Prior Agreement; and (iv) acknowledge that they do not have any defense, set-off
or counterclaim to the payment or performance of any of their obligations under
the Documents or the Prior Agreement, as amended hereby. All references to the
Prior Agreement shall henceforth be deemed to refer to the Prior Agreement as
modified by this Thirteenth Amendment and as hereafter modified by any
amendment, modification or supplement thereto.

          Section 4. Confirmation of Certifications, Representations and
Warranties. In order to induce the Lender to enter into this Thirteenth
Amendment the Borrowers hereby certify, represent and warrant to the Lender
that, except as otherwise disclosed to the Lender in writing prior to the date
hereof, including in the Pre-Negotiation Agreement and in the Exhibits and
Schedules attached thereto and/or in documents submitted to the Lender prior to
the date hereof (including, but not limited to, any and all financial statements
and reports, budgets, statements of cash flow and governmental reports and
filings) (collectively referred to herein as "Disclosures"), all certifications,
representations and warranties contained in the Documents and in the
Pre-Negotiation Agreement and in all certificates heretofore delivered to the
Lender are true and correct as of the date hereof in all material respects, and,
subject to such Disclosures, all such certifications, representations and
warranties are hereby remade and made to speak as of the date of this Thirteenth
Amendment.

          Section 5. RELEASE. EACH BORROWER ON BEHALF OF ITSELF AND ITS
AFFILIATES, SUBSIDIARIES, SUCCESSORS, ASSIGNS, PRINCIPALS, 





                                      -2-

<PAGE>

SHAREHOLDERS, BENEFICIARIES, OFFICERS, MANAGERS, DIRECTORS, AGENTS,
REPRESENTATIVES, ADVISORS, EMPLOYEES AND ATTORNEYS, HEREBY JOINTLY AND SEVERALLY
RELEASES, WAIVES AND FOREVER DISCHARGES EACH OF THE LENDER AND ITS AFFILIATES,
SUBSIDIARIES, SUCCESSORS, ASSIGNS, PRINCIPALS, SHAREHOLDERS, BENEFICIARIES,
OFFICERS, MANAGERS, DIRECTORS, AGENTS, REPRESENTATIVES, ADVISORS, EMPLOYEES AND
ATTORNEYS OF, FROM, AND WITH RESPECT TO ANY AND ALL MANNER OF ACTIONS, CAUSES OF
ACTIONS, SUITS, DISPUTES, CLAIMS, COUNTERCLAIMS AND/OR LIABILITIES, CROSS
CLAIMS, DEFENSES THAT ARE KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, PAST OR
PRESENT, ASSERTED OR UNASSERTED, CONTINGENT OR LIQUIDATED, WHETHER OR NOT WELL
FOUNDED IN FACT OR LAW, WHETHER IN CONTRACT, IN TORT OR OTHERWISE, AT LAW OR IN
EQUITY, BASED UPON, RELATING TO OR ARISING OUT OF ANY AND ALL TRANSACTIONS,
RELATIONSHIPS OR DEALINGS WITH OR LOANS MADE TO THE BORROWERS PURSUANT TO THE
LOAN DOCUMENTS AND/OR THE PRIOR AGREEMENT PRIOR TO THE EFFECTIVENESS HEREOF.

          Section 6. Entire Agreement. This Thirteenth Amendment sets forth all
of the covenants, promises, agreements, conditions and understandings of the
parties relating to the subject matter of this Thirteenth Amendment, and there
are no covenants, promises, agreements, conditions or understandings, either
oral or written, between them relating to the subject matter of this Thirteenth
Amendment other than as are herein set forth.

          Section 7. Successors. This Thirteenth Amendment shall inure to the
benefit of and shall be binding upon the parties and their respective
successors, assigns and legal representatives.

          Section 8. Severability. In the event any provision of this Thirteenth
Amendment shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.

          Section 9. Amendments, Changes and Modifications. This Thirteenth
Amendment may be amended, changed, modified, altered or terminated only by a
written instrument executed by all of the parties hereto:

          Section 10. Construction.

          (a) The words "hereof," "herein," and "hereunder," and other words of
a similar import refer to this Thirteenth Amendment as a whole and not to the
individual Sections in which such terms are used.

          (b) References to Sections and other subdivisions of this Thirteenth
Amendment are to the designated Sections and other subdivisions of this
Thirteenth Amendment as originally executed.

          (c) The headings of this Thirteenth Amendment are for convenience only
and shall not define or limit the provisions hereof.



                                      -3-

<PAGE>

          (d) Where the context so requires, words used in singular shall
include the plural and vice versa, and words of one gender shall include all
other genders.

          (e) Each party to this Thirteenth Amendment and legal counsel for each
party have participated in the drafting of this Thirteenth Amendment, and
accordingly the general rule of construction to the effect that any ambiguities
in a contract are to be resolved against the party drafting the contract shall
not be employed in the construction and interpretation of this Thirteenth
Amendment.

          Section 11. Execution of Counterparts. This Thirteenth Amendment may
be simultaneously executed in several counterparts, each of which shall be an
original and all of which shall constitute but one and the same instrument.

          Section 12. Governing Law. This Thirteenth Amendment shall be governed
by and be construed and enforced in accordance with the laws of the State of
Illinois.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                      -4-

<PAGE>


                  IN WITNESS WHEREOF, the parties hereto have caused this
Thirteenth Amendment to be executed by their respective officers thereunto duly
authorized, as of the date first written above.

Address for Notices:                                  AKORN, INC.

2500 Millbrook Drive
Buffalo Grove, IL  60089
Attention: Chief Financial Officer                    By /s/ Ben Pothast
                                                        ------------------------
Telecopier No.: (847) 279-6191                          Name: Ben Pothast
Telephone No.: (847) 279-6100                           Title:   C.F.O

                                                      AKORN (NEW JERSEY), INC.



                                                      By /s/ Ben Pothast
                                                        ------------------------
                                                         Name:  Ben Pothast
                                                         Title:    C.F.O.

50 South LaSalle Street                               THE NORTHERN TRUST COMPANY
Chicago, Illinois  60675
Attention:  Olga Georgiev
Telecopier No.: (312) 630-6105
Telephone No.: (312) 444-2438                         By /s/ Olga Georgiev
                                                        ------------------------
                                                         Name:  Olga Georgiev
With a copy to                                           Title:

White & Case LLP
200 S. Biscayne Blvd., Suite 4900
Miami, FL  33131
Attention: John K. Cunningham, Esq.




                                      -5-



<PAGE>
                                                                   EXHIBIT 10.4

                       SUBORDINATION AND STANDBY AGREEMENT

          WHEREAS, AKORN, INC., a Louisiana corporation (hereinafter, together
with its successors and assigns, called "Akorn"), and AKORN (NEW JERSEY), INC.,
an Illinois corporation ("Akorn NJ"; together with Akorn, the "Borrowers" and
each individually a "Borrower") may from time to time hereafter become indebted
to the undersigned, including, without limitation, indebtedness under
Subordinated Note A and Subordinated Note B referred to below, and the Borrowers
have requested, and may from time to time hereafter request, THE NORTHERN TRUST
COMPANY, an Illinois banking corporation (hereinafter, together with its
successors and assigns, called the "Bank"), 50 South LaSalle Street, Chicago,
Illinois 60675, to make or agree to make loans, advances or other financial
accommodations to the Borrowers pursuant to the terms of the Credit Agreement
(as hereinafter defined); and

          WHEREAS, the Borrowers and the Bank are party to that certain Amended
and Restated Credit Agreement dated as of September 15, 1999 (as amended,
restated or supplemented from time to time, the "Credit Agreement"; capitalized
terms not otherwise defined herein shall have the same meanings herein as in the
Credit
 Agreement); and

          WHEREAS, Akorn has incurred an indebtedness to the undersigned in the
principal amount of $3,000,000 pursuant to a Convertible Promissory Note dated
July 12, 2001 ("Subordinated Note A"), a copy of which is attached hereto as
Schedule A; and

          WHEREAS, Akorn intends to incur an additional indebtedness to the
undersigned in the principal amount of $2,000,000 pursuant to a second
Convertible Promissory Note ("Subordinated Note B") in the form attached hereto
as Schedule B; and

          WHEREAS, the undersigned is a shareholder of Akorn and as such will
benefit from the continued making of loans, advances and other financial
accommodations from the Bank to the Borrowers;

          NOW, THEREFORE, to induce the Bank, from time to time, at its option,
to make or agree to make loans, advances or other financial accommodations
(including, without limitation, renewals or extensions of, or forbearances with
respect to, any loans or advances heretofore or hereafter made) to Borrowers,
and for other valuable consideration, receipt whereof is hereby acknowledged,
the undersigned agrees as follows:

          1. All obligations of each of the Borrowers, howsoever created,
arising or evidenced, whether direct or indirect, absolute or contingent or now
or hereafter existing, or due or to become due, are hereinafter called
"Liabilities". All Liabilities to the Bank (other than any arising solely by
reason of any pledge or assignment made to the Bank pursuant to paragraph 2(c)
hereof) are hereinafter called "Senior Liabilities"; and all Liabilities to the
undersigned, including under Subordinated Note A and Subordinated Note B
(including any that may be pledged or assigned to the Bank pursuant to paragraph
2(c) hereof), are hereinafter called "Junior Liabilities"; it being expressly
understood and agreed that the term "Senior Liabilities", as used herein, shall
include, without limitation, any and all interest accruing on any of the Senior
Liabilities after the commencement of any proceedings referred to in paragraph 4
hereof, 







<PAGE>

notwithstanding any provision or rule of law which might restrict the rights of
the Bank, as against the Borrowers or anyone else, to collect such interest.

          2. The undersigned will, from time to time, (a) promptly notify the
Bank of the creation of any Junior Liabilities, and of the issuance of any
promissory note or other instrument to evidence any Junior Liabilities, (b) upon
request by the Bank, cause any Junior Liabilities which are not evidenced by a
promissory note or other instrument of either of the Borrowers to be so
evidenced, and (c) upon request by the Bank, and as collateral security for all
Senior Liabilities, indorse without recourse, deliver and pledge to the Bank any
or all promissory notes or other instruments evidencing Junior Liabilities, and
otherwise assign to the Bank any or all Junior Liabilities and any or all
security therefor and guaranties thereof, all in a manner satisfactory to the
Bank.

          3. Except as the Bank may hereafter otherwise expressly consent in
writing, which consent may be given or withheld by the Bank in its sole and
absolute discretion, the payment of all Junior Liabilities shall be postponed
and subordinated to the payment in full of all Senior Liabilities, and no
payments or other distributions whatsoever in respect of any Junior Liabilities
shall be made by either of the Borrowers, or accepted by the undersigned, nor
shall any property or assets of rather of the Borrowers be applied by them, or
accepted by the undersigned, to or for the purchase or other acquisition or
retirement of any Junior Liabilities.

          4. In the event of any dissolution, winding up, liquidation,
readjustment, reorganization or other similar proceedings relating to any
Borrower or its creditors, as such, or to their property (whether voluntary or
involuntary, partial or complete, and whether in bankruptcy, insolvency or
receivership, or upon an assignment for the benefit of creditors, or any other
marshalling of the assets and liabilities of any Borrower, or any sale of all or
substantially all of the assets of any Borrower, or otherwise), the Senior
Liabilities shall first be paid in full before the undersigned shall be entitled
to receive and to retain any payment or distribution in respect of the Junior
Liabilities, and, in order to implement the foregoing, (a) all payments and
distributions of any kind or character in respect of the Junior Liabilities to
which the undersigned would be entitled if the Junior Liabilities were not
subordinated, or subordinated and pledged or assigned, pursuant to this
Agreement shall be made directly to the Bank, (b) the undersigned shall promptly
file a claim or claims, in the form required in such proceedings, for the full
outstanding amount of the Junior Liabilities, and shall cause said claim or
claims to be approved and all payments and other distributions in respect
thereof to be made directly to the Bank, and (c) the undersigned hereby
irrevocably agrees that the Bank may, at its sole discretion, in the name of the
undersigned or otherwise, demand, sue for, collect, receive and receipt for any
and all such payments or distributions, and file, prove, and vote or consent in
any such proceedings with respect to, any and all claims of the undersigned
relating to the Junior Liabilities.

          5. In the event that the undersigned receives any payment or other
distribution of any kind or character from any Borrower or from any other source
whatsoever in respect of any of the Junior Liabilities, other than as expressly
permitted by the terms of this Agreement, such payment or other distribution
shall be received in trust for the Bank and promptly turned over by the
undersigned to the Bank. The undersigned will mark its books and records, and
cause the applicable Borrower to mark its books and records, so as to clearly
indicate that the Junior Liabilities are subordinated in accordance with the
terms of this Agreement, and will cause to be 




                                      -2-

<PAGE>

clearly inserted in any promissory note or other instrument which at any time
evidences any of the Junior Liabilities a statement to the effect that the
payment thereof is subordinated in accordance with the terms of this Agreement.
The undersigned will execute such further documents or instruments and take such
further action as the Bank may reasonably from time to time request to carry out
the intent of this Agreement.

          6. All payments and distributions received by the Bank in respect of
the Junior Liabilities, to the extent received in or converted into cash, may be
applied by the Bank first to the payment of any and all expenses (including
attorneys fees and legal expenses) paid or incurred by the Bank in enforcing
this Agreement or in endeavoring to collect or realize upon any of the Junior
Liabilities or any security therefor, and any balance thereof shall, solely as
between the undersigned and the Bank, be applied by the Bank, in such order of
application as the Bank may from time to time select, toward the payment of the
Senior Liabilities remaining unpaid; but, as between any Borrower and its
respective creditors, no such payments or distributions of any kind or character
shall be deemed to be payments or distributions in respect of the Senior
Liabilities; and, notwithstanding any such payments or distributions received by
the Bank in respect of the Junior Liabilities and so applied by the Bank toward
the payment of the Senior Liabilities, the undersigned shall be subrogated to
the lien existing rights of the Bank, if any, in respect of the Senior
Liabilities only at such time as this Agreement shall have been discontinued and
the Bank shall have received payment of the full amount of the Senior
Liabilities, as provided for in paragraph 9 hereof.

          7. The Undersigned hereby waives: (a) notice of acceptance by the Bank
of this Agreement; (b) notice of the existence or creation or non-payment of all
or any of the Senior Liabilities; and (c) all diligence in collection or
protection of or realization upon the Senior Liabilities or any thereof or any
security therefor.

          8. The undersigned will not without the prior written consent of the
Bank: (a) cancel, waive, forgive, transfer or assign, or attempt to enforce or
collect, or subordinate to any Liabilities other than the Senior Liabilities,
any Junior Liabilities or any rights in respect thereof; (b) take any collateral
security for any Junior Liabilities; or (c) commence, or join with any other
creditor in commencing, any bankruptcy, reorganization or insolvency proceedings
with respect to any Borrower.

          9. This Agreement shall in all respects be a continuing agreement and
shall remain in full force and effect (notwithstanding, without limitation, the
death, incompetency or dissolution of the undersigned or that at any time or
from time to time all Senior Liabilities may have been paid in full), subject to
discontinuance only upon receipt by the Bank of payment in full of all Senior
Liabilities and termination of any and all commitments by the Bank to extend
credit to either of the Borrowers.

          10. The Bank may, from time to time, whether before or after any
discontinuance of this Agreement, at its sole discretion and without notice to
the undersigned, take any or all of the following actions: (a) retain or obtain
a security interest in any property to secure any of the Senior Liabilities, (b)
retain or obtain the primary or secondary obligation of any other obligor or
obligors with respect to any of the Senior Liabilities, (c) extend or renew or
forbear for one or more periods (whether or not longer than the original
period), alter or exchange any of the Senior Liabilities, or release or
compromise any obligation of any nature of any obligor with respect to any of
the Senior 





                                      -3-

<PAGE>

Liabilities, and (d) release its security interest in, or surrender, release or
permit any substitution or exchange for, all or any part of any property
securing any of the Senior Liabilities, or extend or renew or forbear for one or
more periods (whether or not longer than the original period) or release,
compromise, alter or exchange any obligations of any nature of any obligor with
respect to any such property.

          11. The Bank may, from time to time, whether "before or after any
discontinuance of this Agreement, without notice to the undersigned, assign or
transfer any or all of the Senior Liabilities or any interest therein; and,
notwithstanding any such assignment or transfer or any subsequent assignment or
transfer thereof, such Senior Liabilities shall be and remain Senior Liabilities
for the purposes of this Agreement, and every immediate and successive assignee
or transferee of any of the Senior Liabilities or of any interest therein shall,
to the extent of the interest of such assignee or transferee in the Senior
Liabilities, be entitled to the benefits of this Agreement to the same extent as
if such assignee or transferee were the Bank; provided, however, that, unless
the Bank shall otherwise consent in writing, the Bank shall have an unimpaired
right, prior and superior to that of any such assignee or transferee, to enforce
this Agreement, for the benefit of the Bank, as to those of the Senior
Liabilities which the Bank has not assigned or transferred.

          12. The Bank shall not be prejudiced in its rights under this
Agreement by any act or failure to act of any Borrower or the undersigned, or
any noncompliance of any Borrower or the undersigned with any agreement or
obligation, regardless of any knowledge thereof which the Bank may have or with
which the Bank may be charged, and no action of the Bank permitted hereunder
shall in any way affect or impair the rights of the Bank and the obligations of
the undersigned under this Agreement.

          13. No delay on the part of the Bank in the exercise of any right or
remedy shall operate as a waiver thereof, and no single or partial exercise by
the Bank of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy, nor shall any modification or
waiver of any of the provisions of this Agreement be binding upon the Bank
except as expressly set forth m a writing duly signed and delivered on behalf of
the Bank. For the purposes of this Agreement, Senior Liabilities shall include
all obligations of each of the Borrowers to the Bank, notwithstanding any right
or power of either Borrower or anyone else to assert any claim or defense as to
the invalidity or unenforceability of any such obligation, and no such claim or
defense shall affect or impair the agreements and obligations of the undersigned
hereunder.

          14. This Agreement shall be binding upon the undersigned and upon the
heirs, legal representatives, successors and assigns of the undersigned; and, to
the extent that either Borrower or the undersigned is either a partnership or a
corporation, all references herein to such Borrower and to the undersigned,
respectively, shall be deemed to include any successor or successors, whether
immediate or remote, to such partnership or corporation. If more than one party
shall execute this Agreement, the term "undersigned" as used herein shall mean
all parties executing this Agreement and each of them, and all such parties
shall be jointly and severally obligated hereunder.





                                      -4-

<PAGE>

          15. This Agreement shall be construed in accordance with and governed
by the laws of the State of Illinois. Wherever possible each provision of this
Agreement shall be interpreted in such manner as to the effective and valid
under applicable law, but if any provision of this Agreement shall be prohibited
by or invalid under such law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.

          16. THE UNDERSIGNED HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY. THE UNDERSIGNED HEREBY ABSOLUTELY AND IRREVOCABLY CONSENTS AND SUBMITS
TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS HAVING SITUS IN COOK
COUNTY, ILLINOIS OR THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF
ILLINOIS IN CONNECTION WITH ANY SUITS, ACTIONS OR PROCEEDINGS BROUGHT AGAINST
THE UNDERSIGNED BY THE BANK ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH SUIT, ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE UNDERSIGNED HEREBY
WAIVES AND AGREES NOT TO ASSERT IN SUCH SUIT, ACTION OR PROCEEDING, IN EACH
CASE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (A) THE
UNDERSIGNED IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT; (B)
THE UNDERSIGNED IS IMMUNE FROM SUIT OR ANY LEGAL PROCESS (WHETHER THROUGH
SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION,
EXECUTION OR OTHERWISE) WITH RESPECT TO IT OR ITS PROPERTY (C) ANY SUCH SUIT,
ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM; (D) THE VENUE OF ANY
SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER; OR (E) THIS AGREEMENT, MAY NOT BE
ENFORCED IN OR BY ANY SUCH COURT. NOTHING CONTAINED HEREIN SHALL AFFECT ANY
RIGHT THAT THE BANK MAY HAVE TO BRING ANY SUIT, ACTION OR PROCEEDING RELATING TO
THIS AGREEMENT AGAINST THE UNDERSIGNED OR ITS PROPERTY IN THE COURTS OF ANY
OTHER JURISDICTION.

                       [SIGNATURE PAGE(S) AND EXHIBIT(S),
                            IF ANY, FOLLOW THIS PAGE]




                                      -5-

<PAGE>

         IN WITNESS WHEREOF, this Agreement has been made and delivered at
Chicago, Illinois as of the 12th day of July, 2001.

                                                  THE JOHN N. KAPOOR TRUST 
                                                  DATED SEPTEMBER 20, 1989


                                                  By /s/ John N. Kapoor
                                                  ------------------------------
                                                  Name:  John N. Kapoor
                                                  Title:  Trustee


                                      -6-

<PAGE>


                         ACKNOWLEDGMENT OF SUBORDINATION

         The Borrowers each hereby acknowledge receipt of a copy of the
foregoing Subordination and Standby Agreement, waive notice of acceptance
thereof by the Bank, and agree to be bound by the terms and provisions thereof,
to make no payments or distributions contrary to the terms and provisions
thereof, and to do every other act and thing necessary or appropriate to carry
out such terms and provisions. In the event of any violation of any of the terms
and provisions of the foregoing Subordination and Standby Agreement, then, at
the election of the Bank, any and all obligations of each of the Borrowers to
the Bank shall forthwith become due and payable and any and all agreements of
the Bank to make loans, advances or other financial accommodations to the
Borrowers, or to forbear from exercising remedies, shall forthwith terminate,
notwithstanding any provisions thereof to the contrary.

Dated as of July 12, 2001                       AKORN, INC.


                                                By: /s/ Kevin N. Harris
                                                    ----------------------------
                                                    Name:  Kevin N. Harris
                                                    Title:    C.F.O.


Dated as of July 12, 2001                       AKORN (NEW JERSEY), INC.


                                                By: /s/ Kevin N. Harris
                                                    ----------------------------
                                                    Name:  Kevin N. Harris
                                                    Title:    C.F.O.




                                      -7-



<PAGE>
                                                                    Exhibit 31.1

                    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 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 report;

    3. Based on my knowledge, the financial statements, and other financial
    information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:

         A)   Designed such disclosure controls and procedures, or caused such
              disclosure controls and procedures to be designed under our
              supervision, 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 report is being prepared;

         B)   Evaluated the effectiveness of the registrant's disclosure
              controls and procedures and presented in this report our
              conclusions about the effectiveness of the disclosure controls and
              procedures, as of the end of the period covered by this report,
              based on such evaluation; and

         C)   Disclosed in this report any change in the registrant's internal
              control over financial reporting that occurred during the
              registrant's most recent fiscal quarter that has materially
              affected, or is reasonably likely to materially affect, the
              registrant's internal control over financial reporting; and


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

         A)   All significant deficiencies and material weaknesses in the design
              or operation of internal control over financial reporting which
              are reasonably likely to adversely affect the registrant's ability
              to record, process, summarize and report financial information; 
              and

         B)   Any fraud, whether or not material, that involves management or
              other employees who have a significant role in the registrant's
              internal control over financial reporting.


Date:  August 14, 2003                      /s/ ARTHUR S. PRZYBYL
                                            -----------------------------------
                                            Name:  Arthur S. Przybyl
                                            Title: Chief Executive Officer




<PAGE>
                                                                    Exhibit 31.2

                    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 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 report;

    3. Based on my knowledge, the financial statements, and other financial
    information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:

         A)   Designed such disclosure controls and procedures, or caused such
              disclosure controls and procedures to be designed under our
              supervision, 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 report is being prepared;

         B)   Evaluated the effectiveness of the registrant's disclosure
              controls and procedures and presented in this report our
              conclusions about the effectiveness of the disclosure controls and
              procedures, as of the end of the period covered by this report,
              based on such evaluation; and

         C)   Disclosed in this report any change in the registrant's internal
              control over financial reporting that occurred during the
              registrant's most recent fiscal quarter that has materially
              affected, or is reasonably likely to materially affect, the
              registrant's internal control over financial reporting; and


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

         A)   All significant deficiencies and material weaknesses in the design
              or operation of internal control over financial reporting which
              are reasonably likely to adversely affect the registrant's ability
              to record, process, summarize and report financial information; 
              and

         B)   Any fraud, whether or not material, that involves management or
              other employees who have a significant role in the registrant's
              internal control over financial reporting.


Date: August 14, 2003                         /s/ BERNARD J. POTHAST
                                             ----------------------------------
                                             Name:    Bernard J. Pothast
                                             Title:   Chief Financial Officer





<PAGE>

                                                                    Exhibit 32.1


                            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 June 30, 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) Except as disclosed in the Explanatory Note on page 3 of the Report, 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: August 14, 2003

                                              /s/ ARTHUR S. PRZYBYL
                                     ------------------------------------------
                                                 Arthur S. Przybyl
                                              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 June 30, 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) Except as disclosed in the Explanatory Note on page 3 of the Report, 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: August 14, 2003

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