<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                      ------------------------------------
                                   FORM 10-K
 
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
                      FOR THE YEAR ENDED DECEMBER 31, 2003
 
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
                        Commission File Number: 0-13976
 
                                  AKORN, INC.
                (Name of registrant as specified in its charter)
 

<Table>
<S>                                             <C>
                 LOUISIANA                                       72-0717400
      (State or other jurisdiction of                (IRS Employer Identification No.)
       incorporation or organization)
</Table>

 
              2500 MILLBROOK DRIVE, BUFFALO GROVE, ILLINOIS 60089
             (Address of principal executive offices and zip code)
 
                 REGISTRANT'S TELEPHONE NUMBER: (847) 279-6100
 
         SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
                                      None
 
         SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
                           Common Stock, No Par Value
                                (Title of Class)
 
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X]  No [ ]
 
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
 
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).  Yes [ ]  No [X]
 
The aggregate market value of the voting stock of the Registrant held by
non-affiliates (affiliates being, for these purposes only, directors, executive
officers and holders of more than 5% of the Registrant's common stock) of the
Registrant as of June 30, 2003 was approximately $12,049,596.
 
The number of shares of the Registrant's common stock, no par value per share,
outstanding as of March 15, 2004 was 19,915,897.

<PAGE>
 
        FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE RESULTS
 
     Certain statements in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act.
When used in this document, the words "anticipate," "believe," "estimate" and
"expect" and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements, including statements
regarding our intent, belief or expectations 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:
 
     -  Our ability to resolve our Food and Drug Administration compliance
        issues at our Decatur, Illinois facilities;
 
     -  Our ability to avoid defaults under debt covenants;
 
     -  Our ability to generate cash from operations sufficient to meet our
        working capital requirements;
 
     -  Our ability to obtain additional funding to operate and grow our
        business;
 
     -  The effects of federal, state and other governmental regulation of our
        business;
 
     -  Our success in developing, manufacturing and acquiring new products;
 
     -  Our ability to bring new products to market and the effects of sales of
        such products on our financial results;
 
     -  The effects of competition from generic pharmaceuticals and from other
        pharmaceutical companies;
 
     -  Availability of raw materials needed to produce our products; and
 
     -  Other factors referred to in this Form 10-K and our other Securities and
        Exchange Commission filings.
 
     See "Item 1. Business -- Factors That May Affect Future Results" on pages 8
through 15. You should read this report completely with the understanding that
Akorn's actual results may differ materially from what we expect. Unless
required by law, we undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
 
                                        1

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                          FORM 10-K TABLE OF CONTENTS
 

<Table>
<Caption>
                                                                           PAGE
                                                                           ----
<S>        <C>                                                             <C>

                                    PART I

Item 1.    Business....................................................      3
           Factors that may affect future results

Item 2.    Properties..................................................     16

Item 3.    Legal Proceedings...........................................     17

Item 4.    Submission of Matters to a Vote of Security Holders.........     19

                                    PART II

Item 5.    Market for Common Equity and Related Stockholder Matters....     20

Item 6.    Selected Registrant's Financial Data........................     21

Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations...................................     21
Item       Quantitative and Qualitative Disclosures about Market
  7A.      Risk........................................................     35

Item 8.    Financial Statements and Supplementary Data.................     35

Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure....................................     65
Item       Controls and Procedures.....................................     66
  9A.

                                   PART III
Item       Directors and Executive Officers of the Registrant..........     68
  10.
Item       Executive Compensation......................................     70
  11.
Item       Security Ownership of Certain Beneficial Owners and
  12.      Management and Related Stockholder Matters..................     73
Item       Certain Relationships and Related Transactions..............     75
  13.
Item       Principal Accounting Fees and Services......................     76
  14.
                                    PART IV
Item       Exhibits, Financial Statement Schedules, and Reports on Form
  15.      8-K.........................................................     78
           Signatures..................................................     82
</Table>

 
                                        2

<PAGE>
 

                                     PART I
 

ITEM 1.  BUSINESS
 
     Akorn, Inc. manufactures and markets diagnostic and therapeutic
pharmaceuticals in specialty areas such as ophthalmology, rheumatology,
anesthesia and antidotes, among others. Our customers include physicians,
optometrists, wholesalers, group purchasing organizations and other
pharmaceutical companies. We are a Louisiana corporation founded in 1971 in
Abita Springs, Louisiana. In 1997, we relocated our headquarters and certain
operations to Illinois. We have a wholly owned subsidiary named Akorn (New
Jersey), Inc. which has operations in Somerset, New Jersey. Our subsidiary is
involved in manufacturing, research and development, and administrative
activities related to our ophthalmic segment.
 
     As described more fully herein, our losses from operations in recent years
and working capital deficiencies, together with the need to successfully resolve
our ongoing compliance matters with the Food and Drug Administration ("FDA"),
raise substantial doubt about our ability to continue as a going concern. For
further information, see Note A "Business and Basis of Presentation" to the
consolidated financial statements included in Item 8 of this report.
 
     We classify our operations into three identifiable business segments,
ophthalmic, injectable and contract services. These three segments are discussed
in greater detail below. For information regarding revenues and gross profit for
each of our segments, see Note M "Segment Information" to the consolidated
financial statements included in Item 8 of this report.
 
     Ophthalmic Segment. We market a line of diagnostic and therapeutic
ophthalmic pharmaceutical products. Diagnostic products, primarily used in the
office setting, include mydriatics and cycloplegics, anesthetics, topical
stains, gonioscopic solutions, angiography dyes and others. Therapeutic
products, sold primarily to wholesalers and other national account customers,
include antibiotics, anti-infectives, steroids, steroid combinations, glaucoma
medications, decongestants/antihistamines and anti-edema medications.
Non-pharmaceutical products include various artificial tear solutions,
preservative-free lubricating ointments, lid cleansers, vitamin supplements and
contact lens accessories. We exited the surgical products business in late 2002.
The impact of the exit was not material to our financial results.
 
     Injectable Segment. We market a line of specialty injectable pharmaceutical
products, including anesthesia and products used in the treatment of rheumatoid
arthritis and pain management. These products are marketed to hospitals through
wholesalers and other national account customers as well as directly to medical
specialists.
 
     Contract Services Segment. We manufacture products for third party
pharmaceutical and biotechnology customers based on their specifications.
 
     Manufacturing. We have two manufacturing facilities located in Decatur,
Illinois and Somerset, New Jersey. See "Item 2. Properties." We manufacture a
diverse group of sterile pharmaceutical products, including solutions, ointments
and suspensions for our ophthalmic and injectable segments. The Decatur
facilities manufacture product for all three of our segments. The Somerset
facility manufactures primarily ointment products for the ophthalmic segment. We
are also in the process of adding freeze-dried (lyophilized) manufacturing
capabilities at our Decatur facilities. However, we cannot assure you that we
can add freeze-dried manufacturing capabilities to our Decatur facilities, or
that such addition, if completed, will prove to be profitable. See "Item 1.
Business -- Factors That May Affect Future Results -- Our growth depends on our
ability to timely develop additional pharmaceutical products and manufacturing
capabilities."
 
     Sales and Marketing. While we are working to expand our proprietary product
base through internal development, the majority of our current products are
non-proprietary. We rely on our efforts in marketing, distribution, development
and low cost manufacturing to maintain and increase market share.
 
     Our ophthalmic segment uses a three-tiered sales effort. Outside sales
representatives sell directly to physicians and group practices. In-house sales
(telemarketing) and customer service (catalog sales) sell to optometrists and
other customers. A national accounts group sells to wholesalers, retail chains
and other group
 
                                        3

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purchasing organizations who represent hospitals in the U.S. This national
accounts group also markets our injectable pharmaceutical products, which we
also sell through telemarketing and direct mail activities to individual
specialty physicians and hospitals. The contract services segment markets our
contract manufacturing services through direct mail, trade shows and direct
industry contacts.
 
     Research and Development. As of December 31, 2003, we had 21 Abbreviated
New Drug Applications ("ANDAs") for generic pharmaceuticals in various stages of
development. We filed one of these ANDAs along with a New Drug Application
("NDA") in 2003. See "Government Regulation." We plan to continue to file ANDAs
on a regular basis as pharmaceutical products come off patent allowing us to
compete by marketing generic equivalents. However, unless and until our issues
pending before the FDA regarding our Decatur facilities are favorably resolved,
we believe it is doubtful that the FDA will approve any NDAs or ANDAs we submit
related to these facilities. We believe our Somerset facility is not impacted by
the FDA issues regarding our Decatur facilities.
 
     On February 18, 2003, we announced that we had received approval from the
FDA for our ANDA for Lidocaine Jelly, 2% ("Lidocaine Jelly"), a bioequivalent to
Xylocaine Jelly(R), a product of AstraZeneca PLC used primarily as a topical
anesthetic by urologists and hospitals. According to industry sources, it is
estimated that the total annual U.S. market for comparable products was
approximately $30 million in 2002. We manufacture this product at our Somerset
facility, and it was commercially available in the third quarter of 2003.
 
     On February 9, 2004, we announced we had received approval from FDA for the
ANDA for Neomycin and Polymyxin B Sulfates, and Bacitracin Zinc Ophthalmic
Ointment USP ("Neomycin and Polymyxin B"). Neomycin and Polymyxin B is
bioequivalent to Neosporin(R) Ophthalmic Ointment, a product of Monarch
Pharmaceuticals, Inc. which is used primarily as an ophthalmic antibiotic
ointment. We anticipated that this product, which will be manufactured at our
Somerset facility, will be commercially available in the third quarter of 2004.
 
     Pre-clinical and clinical trials required in connection with the
development of pharmaceutical products are performed by contract research
organizations under the direction of our personnel. No assurance can be given as
to whether we will file NDAs, or ANDAs, when anticipated, whether we will
develop marketable products based on any filings we do make, or as to the actual
size of the market for any such products, or as to whether our participation in
such market would be profitable. See "Government Regulation" and "Item 1.
Business -- Factors That May Affect Future Results -- Our growth depends on our
ability to timely develop additional pharmaceutical products and manufacturing
capabilities."
 
     We also maintain a business development program that identifies potential
product acquisition or product licensing candidates. We have focused our
business development efforts on niche products that complement our existing
product lines and that have few or no competitors in the market.
 
     At December 31, 2003, 14 of our full-time employees were involved in
research and development and product licensing.
 
     Research and development costs are expensed as incurred. Such costs
amounted to $1,465,000, $1,886,000, and $2,598,000 for the years ended December
31, 2003, 2002 and 2001, respectively.
 
     Patents and Proprietary Rights. We consider the protection of discoveries
in connection with our development activities important to our business. We have
sought, and intend to continue to seek, patent protection in the United States
and selected foreign countries where deemed appropriate. As of December 31,
2003, we had received six U.S. patents and had three additional U.S. patent
applications and one international patent application pending.
 
     We also rely upon trademarks, trade secrets, unpatented proprietary
know-how and continuing technological innovation to maintain and develop our
competitive position. We enter into confidentiality agreements with certain of
our employees pursuant to which such employees agree to assign to us any
inventions relating to our business made by them while in our employ. However,
there can be no assurance that others may not acquire or independently develop
similar technology or, if patents are not issued with respect to products
 
                                        4

<PAGE>
 
arising from research, that we will be able to maintain information pertinent to
such research as proprietary technology or trade secrets. See "Item 1.
Business -- Factors That May Affect Future Results -- Patents and Proprietary
Rights."
 
     Employee Relations. At December 31, 2003, we had 360 full-time employees,
308 of whom were employed by Akorn and 52 by our wholly owned subsidiary, Akorn
(New Jersey), Inc. We believe we enjoy good relations with our employees, none
of whom are represented by a collective bargaining agent.
 
     Competition. The marketing and manufacturing of pharmaceutical products is
highly competitive, with many established manufacturers, suppliers and
distributors actively engaged in all phases of the business. Most of our
competitors have substantially greater financial and other resources, including
greater sales volume, larger sales forces and greater manufacturing capacity.
See "Item 1. Business -- Factors That May Affect Future Results -- Our industry
is very competitive; changes in technology could render our products obsolete."
 
     The companies that compete with our ophthalmic segment include Alcon
Laboratories, Inc., Allergan Pharmaceuticals, Inc., Ciba Vision and Bausch &
Lomb, Inc. ("B&L"). The ophthalmic segment competes primarily on the basis of
price and service. The ophthalmic segment purchases some ophthalmic products
from B&L, which is in direct competition with us in several markets.
 
     The companies that compete with our injectable segment include both generic
and name brand companies such as Abbott Laboratories, Gensia, American
Pharmaceutical Products, Elkin Sinn and American Regent. The injectable segment
competes primarily on the basis of price.
 
     Competitors in our contract services segment include Cook Imaging (Baxter),
Chesapeake Biological Laboratories and Ben Venue. The contract services segment
competes primarily on the basis of price and technical capabilities. The
manufacturing of products in all three segments must be performed under
government mandated Current Good Manufacturing Practices ("cGMP").
 
     Suppliers and Customers. No supplier of products accounted for more than
10% of our purchases in 2003, 2002 or 2001. We require a supply of quality raw
materials and components to manufacture and package pharmaceutical products for
ourselves and for third parties with which we have contracted. The principal
components of our products are active and inactive pharmaceutical ingredients
and certain packaging materials. Many of these components are available from
only a single source and, in the case of many of our ANDAs and NDAs, only one
supplier of raw materials has been identified. Because FDA approval of drugs
requires manufacturers to specify their proposed suppliers of active ingredients
and certain packaging materials in their applications, FDA approval of any new
supplier would be required if active ingredients or such packaging materials
were no longer available from the specified supplier. The qualification of a new
supplier could delay our development and marketing efforts. If for any reason we
are unable to obtain sufficient quantities of any of the raw materials or
components required to produce and package our products, we may not be able to
manufacture our products as planned, which could have a material adverse effect
on our business, financial condition and results of operations.
 
     A small number of large wholesale drug distributors account for a large
portion of our gross sales, revenues and accounts receivable. Those distributors
are:
 
     -  AmerisourceBergen Corporation ("AmerisourceBergen")
 
     -  Cardinal Health, Inc. ("Cardinal"); and
 
     -  McKesson Drug Company ("McKesson").
 
     These three wholesale drug distributors accounted for approximately 54% of
our total gross sales and 44% of our revenues in 2003, and 52% of our gross
accounts receivables as of December 31, 2003. The difference between gross sales
and revenue is that gross sales do not reflect the deductions for chargebacks,
rebates and product returns (See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Critical Accounting Policies).
The percentages of gross sales, revenue and gross trade
 
                                        5

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receivables attributed to each of these three wholesale drug distributors for
the years ended December 31, 2003 and December 31, 2002 were as follows:
 

<Table>
<Caption>
                                         2003                  2003       2002                  2002
                                         GROSS    2003     GROSS ACCT.    GROSS    2002     GROSS ACCT.
                                         SALES   REVENUE   RECEIVABLES    SALES   REVENUE   RECEIVABLES
                                         -----   -------   ------------   -----   -------   ------------
<S>                                      <C>     <C>       <C>            <C>     <C>       <C>
AmerisourceBergen Corporation..........   19%      15%         13%         28%      22%         28%
Cardinal Health, Inc...................   19%      14%         22%         18%      12%         27%
McKesson Drug Company..................   16%      15%         17%         11%       8%          6%
</Table>

 
     AmerisourceBergen, Cardinal and McKesson are distributors of our products
as well as a broad range of health care products for many other companies. None
of these distributors is an end user of our products. If sales to any one of
these distributors were to diminish or cease, we believe that the end users of
our products would find little difficulty obtaining our products either directly
from us or from another distributor. However, the loss of one or more of these
customers, together with a delay or inability to secure an alternative
distribution source for end users, could have a material negative impact on our
revenue, business, financial condition and results of operations. A change in
purchasing patterns, inventory levels, an increase in returns of our products,
delays in purchasing products and delays in payment for products by one or more
distributors also could have a material negative impact on our revenue,
business, financial condition and results of operations. See "Item 1.
Business -- Factors That May Affect Future Results -- Dependence on Small Number
of Distributors."
 
     Backorders. As of December 31, 2003, we had approximately $3.1 million of
products on backorder as compared to approximately $5.4 million of backorders as
of December 31, 2002. This decrease in backorders is due to the fact that in
2002 one of our production rooms at our Decatur, Illinois facility was not fully
operational. This production room was fully operational at the end of 2003. We
anticipate filling all current open backorders during 2004.
 
     Government Regulation. Pharmaceutical manufacturers and distributors are
subject to extensive regulation by government agencies, including the FDA, the
Drug Enforcement Administration ("DEA"), the Federal Trade Commission ("FTC")
and other federal, state and local agencies. The federal Food, Drug and Cosmetic
Act (the "FDC Act"), the Controlled Substance Act and other federal statutes and
regulations govern or influence the development, testing, manufacture, labeling,
storage and promotion of products. The FDA inspects drug manufacturers and
storage facilities to determine compliance with its cGMP regulations,
non-compliance with which can result in fines, recall and seizure of products,
total or partial suspension of production, refusal to approve new drug
applications and criminal prosecution. The FDA also has the authority to revoke
approval of drug products.
 
     FDA approval is required before any drug can be manufactured and marketed.
New drugs require the filing of an NDA, including clinical studies demonstrating
the safety and efficacy of the drug. Generic drugs, which are equivalents of
existing, off-patent brand name drugs, require the filing of an ANDA. An ANDA
does not, for the most part, require clinical studies since safety and efficacy
have already been demonstrated by the product originator. However, the ANDA must
provide data demonstrating the equivalency of the generic formulation in terms
of bioavailability. The time required by the FDA to review and approve NDA's and
ANDA's is variable and beyond our control.
 
     FDA Warning Letter. In October 2000, the FDA issued a warning letter to us
following the FDA's routine cGMP inspection of our Decatur manufacturing
facilities. An FDA warning letter is intended to provide notice to a company of
violations of the laws administered by the FDA. We believe 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 obtaining injunctions
against the company and responsible individuals which could include our
employees, officers and directors. The October 2000 warning letter addressed
several deviations from regulatory requirements including general documentation
and cleaning validation issues and requested corrective actions be undertaken by
us. We 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
 
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cleaning validation and process control issues. 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, we responded to the
inspectional findings. This response described our 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 an inspection of the Decatur facility and
identified deviations from cGMPs. We responded to these observations in
September 2002. In response to our actions, the FDA conducted another inspection
of the Decatur facility during the period from December 10, 2002 to February 6,
2003. This inspection identified deviations from regulatory requirements
including the manner in which we process and investigate manufacturing
discrepancies and failures, customer complaints and the thoroughness of
equipment cleaning validations. Certain deviations identified during this
inspection had been raised in previous FDA inspections. We have responded to
these latest findings in writing and in a meeting with the FDA in March 2003. We
set forth our plan for implementing comprehensive corrective actions and have
provided progress reports to the FDA on April 15, May 15 and June 15, 2003.
 
     The Company's is working with the FDA to favorably resolve such compliance
matters and has submitted to the FDA and continues to implement a plan for
comprehensive corrective actions at its Decatur, Illinois facility. On February
11, 2004, the FDA began an inspection of the Decatur facility. This inspection
is still ongoing at the time of this filing.
 
     Upon completion of the inspection, the FDA may take any of the following
actions: (i) find that the Decatur facility is in substantial compliance; (ii)
require us to undertake further corrective actions, which could include a recall
of certain products, and then conduct another inspection to assess the success
of those efforts; (iii) seek to enjoin us from further violations, which may
include temporary suspension of some or all operations and potential monetary
penalties; or (iv) take other enforcement action which may include seizure of
our products. At this time, it is not possible to predict the FDA's course of
action.
 
     If the FDA chooses option (iii) or (iv), such action could significantly
impair our ability to continue to manufacture and distribute our current product
line and generate cash from our operations and could result in a covenant
violation under our senior debt, any or all of which would have a material
adverse effect on our liquidity and our ability to continue as a going concern.
Any monetary penalty assessed by the FDA also could have a material adverse
effect on our liquidity.
 
     We believe that unless and until the issues identified by the FDA have been
successfully corrected and the corrections have been verified through
inspection, it is doubtful that the FDA will approve any NDAs or ANDAs that may
be submitted by us for products to be manufactured at our Decatur facility. This
has adversely impacted, and is likely to continue to adversely impact, our
ability to grow sales. However, we believe that unless and until the FDA chooses
option (iii) or (iv), we will be able to continue manufacturing and distributing
our current product lines. See "Item 1. Business -- Factors That May Affect
Future Results -- Our Decatur, Illinois manufacturing facility is the subject of
an FDA Warning Letter."
 
     Product Recalls. In February 2003, we recalled two products, Fluress and
Fluoracaine, due to container/ closure integrity problems resulting in leaking
containers. The recall has been classified by the FDA as a Class II Recall,
which means that the use of, or exposure to, a violative product may cause
temporary or medically reversible adverse health consequences or that the
probability of serious health consequences as a result of such use or exposure
is remote. We had not received any notification or complaints from end users of
the recalled products. Because we had curtailed the production of these items
due to the above container/ closure integrity issues, the financial impact to us
of this recall was not material as our customers did not hold significant
inventories of these products.
 
     In March 2003, as a result of the December 10, 2002 to February 6, 2003 FDA
inspection, we recalled twenty-four lots of product produced from the period
December 2001 to June 2002 in one of our production rooms at our Decatur
manufacturing facilities. The majority of the lots recalled were for third party
contract customer products. Subsequent to this decision and after discussions
with the FDA, eight of the original twenty-four lots have been exempted from the
recall due to medical necessity. The recall has been classified by the FDA as a
Class II Recall. We had not received any notification or complaints from end
users of the
 
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<PAGE>
 
recalled products. Due to the passage of time between the production of these
lots and the recall, the financial impact of this recall was not material as our
customers did not hold significant inventories of these products.
 
     DEA Consent Decree. We also manufacture and distribute several
controlled-drug substances, the distribution and handling of which are regulated
by the DEA. Failure to comply with DEA regulations can result in fines or
seizure of product. See "Item 1. Business -- Factors That May Affect Future
Results -- Government Regulation."
 
     On March 6, 2002, we received a letter from the United States Attorney's
Office, Central District of Illinois, Springfield, Illinois, advising us that
the DEA had referred a matter to that office for a possible civil legal action
for alleged violations of the Comprehensive Drug Abuse Prevention Control Act of
1970, 21 U.S.C. sec. 801, et. seq. and regulations promulgated under the Act.
The alleged violations relate to record keeping and controls surrounding the
storage and distribution of controlled substances. On November 6, 2002, we
entered into a Civil Consent Decree with the DEA. Under terms of the Civil
Consent Decree, without admitting any of the allegations in the complaint from
the DEA, we agreed to pay a fine of $100,000, upgrade our security system and to
remain in substantial compliance with the Comprehensive Drug Abuse Prevention
Control Act of 1970. If we do not remain in substantial compliance during the
two-year period following the entry of the Civil Consent Decree, we, in addition
to other possible sanctions, may be held in contempt of court and ordered to pay
an additional $300,000 fine. We completed the upgrades to our security system in
2003.
 
     We do not anticipate any material adverse effect from compliance with
federal, state and local provisions that have been enacted or adopted regulating
the discharge of materials into the environment, or otherwise relating to the
protection of the environment.
 
FACTORS THAT MAY AFFECT FUTURE RESULTS
 
WE MUST OBTAIN ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS.
 
     We will require additional funds to operate and grow our business. We may
seek additional funds through public and private financing, including equity and
debt offerings. However, adequate funds through the financial markets or from
other sources may not be available when needed or on terms favorable to us. In
addition, because our common stock currently is quoted on the Pink Sheets (See

I
tem 5. -- "Market for Common Equity and Related Stockholder Matters"), we may
experience further difficulty accessing the capital markets. Without sufficient
additional funding, we may be required to delay, scale back or abandon some or
all of our product development, manufacturing, acquisition, licensing and
marketing initiatives, or operations. Further, such additional financing, if
obtained, 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.
 
OUR DECATUR, ILLINOIS MANUFACTURING FACILITY IS THE SUBJECT OF AN FDA WARNING
LETTER.
 
     Unless we can successfully resolve the FDA's concerns, we may be subject to
fines, suspension of our Decatur operations, seizure of products or forced
product recalls. Our Decatur, Illinois manufacturing facility has been the
subject of a warning letter issued by the FDA in October 2000 following the
FDA's routine cGMP inspection of the facility. The warning letter addressed
several deviations from regulatory requirements and requested corrective actions
be undertaken. Since then, we have undergone further FDA inspections which have
identified that certain previously reported deviations continue to be unresolved
and that there are additional deviations from regulatory requirements. The
noncompliance of the Decatur facility with FDA requirements has prevented us
from developing additional products at Decatur, some of which cannot be
developed at our other facilities. The inability to fully use our Decatur
facility has had a material adverse effect on our business, financial condition
and results of operations.
 
     Upon future inspections, the FDA could take various actions including (i)
requiring us to undertake further corrective actions, which could include a
recall of certain products; (ii) seeking to enjoin us from further violations,
and/or suspend some or all of our operations at Decatur; (iii) assess monetary
penalties; or
 
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<PAGE>
 
(iv) take other enforcement action which may include seizure of our products.
Action taken by the FDA could significantly impair our ability to continue to
manufacture and distribute our current product line and generate cash from our
operations, which could have a material adverse effect on our business,
financial condition and results of operations, any or all of which would have a
material adverse effect on our liquidity and our ability to continue as a going
concern. Any monetary penalty assessed by the FDA also could have a material
adverse effect on our liquidity. See Item 3 -- "Legal Proceedings" for further
description of these matters.
 
     Unless we can successfully resolve the FDA's concerns, we believe it is
doubtful that the FDA will approve any NDAs or ANDAs that may be submitted by us
for products to be manufactured in Decatur. We believe that unless and until the
issues identified by the FDA have been successfully corrected and the
corrections have been verified through inspection, it is doubtful that the FDA
will approve any NDAs or ANDAs that may be submitted by us for products to be
manufactured at our Decatur facility. This has adversely impacted, and is likely
to continue to adversely impact, our ability to grow sales. See Item 3 -- "Legal
Proceedings" for further description of these matters.
 
     Past product recalls could continue to effect us. In February 2003, we
recalled two products, Fluress and Fluoracaine in a Class II Recall due to
container/closure integrity problems resulting in leaking containers. In
connection with the recall we temporarily suspended production of pending
requalifications in a new container. A delay beyond the second quarter of 2004
in restarting production of these products could adversely effect revenue and
cash from operations.
 
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS THAT INCREASE OUR COSTS AND
COULD SUBJECT US TO FINES, PREVENT US FROM SELLING OUR PRODUCTS OR PREVENT US
FROM OPERATING OUR FACILITIES.
 
     Federal and state government agencies regulate virtually all aspects of our
business. The development, testing, manufacturing, processing, quality, safety,
efficacy, packaging, labeling, record keeping, distribution, storage and
advertising of our products, and disposal of waste products arising from such
activities, are subject to regulation by the FDA, DEA, FTC, the Consumer Product
Safety Commission, the Occupational Safety and Health Administration and the
Environmental Protection Agency. Similar state and local agencies also have
jurisdiction over these activities. Noncompliance with applicable United States
regulatory requirements can result in fines, injunctions, penalties, mandatory
recalls or seizures, suspensions of production, recommendations by the FDA
against governmental contracts and criminal prosecution and could have a
material adverse effect on our business, financial condition and results of
operations.
 
     New, modified and additional regulations, statutes or legal interpretation,
if any, could, among other things, require changes to manufacturing methods,
expanded or different labeling, the recall, replacement or discontinuation of
certain products, additional record keeping and expanded documentation of the
properties of certain products and scientific substantiation. Such changes or
new legislation could have a material adverse effect on our business, financial
condition and results of operations.
 
     FDA regulations. All pharmaceutical manufacturers, including Akorn, are
subject to regulation by the FDA under the authority of the FDC Act. Under the
FDC Act, the federal government has extensive administrative and judicial
enforcement powers over the activities of pharmaceutical manufacturers to ensure
compliance with FDA regulations. Those powers include, but are not limited to,
the authority to initiate court action to seize unapproved or non-complying
products, to enjoin non-complying activities, to halt manufacturing operations
that are not in compliance with cGMP, to recall products which present a health
risk, and to seek civil monetary and criminal penalties. Other enforcement
activities include refusal to approve product applications or the withdrawal of
previously approved applications. Any such enforcement activities, including the
restriction or prohibition on sales of products we market or the halting of our
manufacturing operations could have a material adverse effect on our business,
financial condition and results of operations. In addition, product recalls may
be issued at our discretion, or at the direction of the FDA or other government
agencies having regulatory authority for pharmaceutical product sales. Recalls
may occur due to disputed labeling claims, manufacturing issues, quality defects
or other reasons. No assurance can be given that restriction or prohibition on
sales, halting of manufacturing operations or recalls of our pharmaceutical
products will not
 
                                        9

<PAGE>
 
occur in the future. Any such actions could have a material adverse effect on
our business, financial condition and results of operations. Further, such
actions, in certain circumstances, could constitute an event of default under
our senior debt.
 
     We must obtain approval from the FDA for each pharmaceutical product that
we market. The FDA approval process is typically lengthy and expensive, and
approval is never certain. Our new products could take a significantly longer
time than we expect to gain regulatory approval and may never gain approval.
Even if the FDA or another regulatory agency approves a product, the approval
may limit the indicated uses for a product, may otherwise limit our ability to
promote, sell and distribute a product or may require post-marketing studies or
impose other post-marketing obligations.
 
     We and our third-party manufacturers are subject to periodic inspection by
the FDA to assure regulatory compliance regarding the manufacturing,
distribution, and promotion of sterile pharmaceutical products. The FDA imposes
additional stringent requirements on the manufacture of sterile pharmaceutical
products to ensure the sterilization processes and related control procedures
consistently produce a sterile product. Pharmaceutical products must be
distributed, sampled and promoted in accordance with FDA requirements. The FDA
also regulates drug labeling and the advertising of prescription drugs. A
finding by a governmental agency or court that we are not in compliance could
have a material adverse effect on our business, financial condition and results
of operations.
 
     If the FDA changes its regulatory position, it could force us to delay or
suspend indefinitely, our manufacturing, distribution or sales of certain
products. While we believe that all of our current pharmaceuticals are lawfully
marketed in the United States under current FDA enforcement policies or have
received the requisite agency approvals for manufacture and sale, such marketing
authority is subject to withdrawal by the FDA. In addition, modifications or
enhancements of approved products are in many circumstances subject to
additional FDA approvals which may or may not be granted and which may be
subject to a lengthy application process. Any change in the FDA's enforcement
policy or any decision by the FDA to require an approved NDA or ANDA for one of
our products not currently subject to the approved NDA or ANDA requirements or
any delay in the FDA approving an NDA or ANDA for one of our products could have
a material adverse effect on our business, financial condition and results of
operations.
 
     A number of products we market are "grandfathered" drugs that are permitted
to be manufactured and marketed without FDA-issued ANDAs or NDAs on the basis of
their having been marketed prior to enactment of relevant sections of the FDC
Act. The regulatory status of these products is subject to change and/or
challenge by the FDA, which could establish new standards and limitations for
manufacturing and marketing such products, or challenge the evidence of prior
manufacturing and marketing upon which grandfathering status is based. We are
not aware of any current efforts by the FDA to change the status of any of our
"grandfathered" products, but there can be no assurance that such initiatives
will not occur in the future. Any such change in the status of our
"grandfathered" products could have a material adverse effect on our business,
financial condition and results of operations.
 
     We are subject to extensive DEA regulation, which could result in our being
fined or otherwise penalized. We also manufacture and sell drugs which are
"controlled substances" as defined in the federal Controlled Substances Act and
similar state laws, which established, among other things, certain licensing,
security and record keeping requirements administered by the DEA and similar
state agencies, as well as quotas for the manufacture, purchase and sale of
controlled substances. The DEA could limit or reduce the amount of controlled
substances which we are permitted to manufacture and market. On November 6,
2002, we entered into a Civil Consent Decree with respect to violations alleged
by the DEA relating to record keeping and controls surrounding the storage and
distribution of controlled substances. Under the terms of the Civil Consent
Decree, we, without admitting any of the allegations in the complaint from the
DEA, agreed to pay a fine of $100,000, upgrade our security and to remain in
substantial compliance with the Comprehensive Drug Abuse Prevention Control Act
of 1970. If we do not remain in substantial compliance during the two-year
period following the entry of the Civil Consent Decree, we, in addition to other
possible sanctions, may be held in contempt of court and ordered to pay an
additional $300,000 fine. See Item 3. "Legal Proceedings." A
 
                                        10

<PAGE>
 
failure to comply with DEA requirements or the Civil Consent Decree could have a
material adverse effect on our business, financial condition and results of
operations.
 
OUR GROWTH DEPENDS ON OUR ABILITY TO TIMELY DEVELOP ADDITIONAL PHARMACEUTICAL
PRODUCTS AND MANUFACTURING CAPABILITIES.
 
     Our strategy for growth is dependent upon our ability to develop products
that can be promoted through current marketing and distributions channels and,
when appropriate, the enhancement of such marketing and distribution channels.
As of December 31, 2003, we had 21 ANDAs in various stages of development. See
"Item 1. Description of Business -- Research and Development." We may not meet
our anticipated time schedule for the filing of ANDAs and NDAs or may decide not
to pursue ANDAs or NDAs that we have submitted or anticipate submitting. Our
internal development of new pharmaceutical products is dependent upon the
research and development capabilities of our personnel and our infrastructure.
There can be no assurance that we will successfully develop new pharmaceutical
products or, if developed, successfully integrate new products into our existing
product lines. In addition, there can be no assurance that we will receive all
necessary approvals from the FDA or that such approvals will not involve delays,
which adversely affect the marketing and sale of our products. Unless and until
our issues pending before the FDA are resolved, it is doubtful that the FDA will
approve any NDAs or ANDAs we submit for products to be manufactured at our
Decatur facility. Our failure to develop new products, to successfully resolve
the compliance issues at our Decatur facility or to receive FDA approval of
ANDAs or NDAs, could have a material adverse effect on our business, financial
condition and results of operations.
 
     Another part of our growth strategy is to develop the capability to
manufacture lyophilized (freeze-dried) pharmaceutical products. While we have
devoted resources to developing these capabilities, we may not be successful in
developing these capabilities, or we may not realize the anticipated benefits
from developing these capabilities.
 
     Generic Substitution. Our branded pharmaceutical products are subject to
competition from generic equivalents and alternative therapies. Generic
pharmaceuticals are the chemical and therapeutic equivalents of brand-name
pharmaceuticals and represent an increasing proportion of pharmaceuticals
dispensed in the United States. There is no proprietary protection for most of
the branded pharmaceutical products sold by Akorn and other pharmaceutical
companies selling generic and other substitutes for branded pharmaceutical
products. In addition, governmental and cost-containment pressures regarding the
dispensing of generic equivalents will likely result in generic substitution and
competition generally for our branded pharmaceutical products. Although our
attempts to mitigate the effect of this substitution through, among other
things, creation of strong brand-name recognition and product-line extensions
for our branded pharmaceutical products, there can be no assurance that we will
be successful in these efforts. Increased competition in the sale of generic
pharmaceutical products could have a material adverse effect on our business,
financial condition and results of operations.
 
OUR SUCCESS DEPENDS ON THE DEVELOPMENT OF GENERIC AND OFF-PATENT PHARMACEUTICAL
PRODUCTS WHICH ARE PARTICULARLY SUSCEPTIBLE TO COMPETITION, SUBSTITUTION
POLICIES AND REIMBURSEMENT POLICIES.
 
     Our success depends, in part, on our ability to anticipate which branded
pharmaceuticals are about to come off patent and thus permit us to develop,
manufacture and market equivalent generic pharmaceutical products. Generic
pharmaceuticals must meet the same quality standards as branded pharmaceuticals,
even though these equivalent pharmaceuticals are sold at prices that are
significantly lower than that of branded pharmaceuticals. Generic substitution
is regulated by the federal and state governments, as is reimbursement for
generic drug dispensing. There can be no assurance that substitution will be
permitted for newly approved generic drugs or that such products will be subject
to government reimbursement. In addition, generic products that third parties
develop may render our generic products noncompetitive or obsolete. Although we
have successfully brought generic pharmaceutical products to market in a timely
manner in the past, there can be no assurance that we will be able to
consistently bring these products to market quickly and efficiently in the
future. An increase in competition in the sale of generic pharmaceutical
products or our failure to bring
 
                                        11

<PAGE>
 
such products to market before our competitors could have a material adverse
effect on our business, financial condition and results of operations.
 
WE ARE SUBJECT TO LEGAL PROCEEDINGS AGAINST US, WHICH MAY PROVE COSTLY AND
TIME-CONSUMING EVEN IF MERITLESS.
 
     As discussed above, we are currently involved in several pending or
threatened legal actions with both private parties and certain government
agencies. See Item 3. "Legal Proceedings." While we believe that our positions
in these various matters are meritorious, to the extent that our personnel must
spend time and we must expend resources to pursue or contest these various
matters, or any additional matters that may be asserted from the time to time in
the future, this represents time and money that is not available for other
actions that we might otherwise pursue which could be beneficial to our future.
In addition, to the extent that we are unsuccessful in any legal proceedings,
the consequences could have a negative impact on our business, financial
condition and results of operations. These consequences could include, but not
be limited to, fines, penalties, injunctions, the loss of patent or other
rights, the need to write down or off the value of assets (which could
negatively impact our earnings and/or cause the violation of debt covenants) and
a wide variety of other potential remedies or actions that could be taken
against us. While we will continue to vigorously pursue our rights in all such
matters, no assurance can be given that we will be successful in any of these
proceedings or, even if successful, that we would be able to recoup any of the
money expended in pursuing such matters.
 
WE MAY IMPLEMENT PRODUCT RECALLS AND COULD BE EXPOSED TO SIGNIFICANT PRODUCT
LIABILITY CLAIMS; WE MAY HAVE TO PAY SIGNIFICANT AMOUNTS TO THOSE HARMED AND MAY
SUFFER FROM ADVERSE PUBLICITY AS A RESULT.
 
     The manufacturing and marketing of pharmaceuticals involves an inherent
risk that our products may prove to be defective and cause a health risk. In
that event, we may voluntarily implement a recall or market withdrawal or may be
required to do so by a regulatory authority. We have recalled products in the
past and, based on this experience, believe that the occurrence of a recall
could result in significant costs to us, potential disruptions in the supply of
our products to our customers and adverse publicity, all of which could harm our
ability to market our products.
 
     Although we are not currently subject to any material product liability
proceedings, we may incur material liabilities relating to product liability
claims in the future. Even meritless claims could subject us to adverse
publicity, hinder us from securing insurance coverage in the future and require
us to incur significant legal fees. Successful product liability claims brought
against us could have a material adverse effect on our business, financial
condition and results of operations.
 
     We currently have product liability insurance in the amount of $5.0 million
for aggregate annual claims with a $50,000 deductible per incident and a
$250,000 aggregate annual deductible. However, there can be no assurance that
such insurance coverage will be sufficient to fully cover potential claims.
Additionally, there can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim would not have a material adverse effect on our business,
financial condition and results of operations.
 
THE FDA MAY AUTHORIZE SALES OF SOME PRESCRIPTION PHARMACEUTICALS ON A
NON-PRESCRIPTION BASIS, WHICH WOULD REDUCE THE PROFITABILITY OF OUR PRESCRIPTION
PRODUCTS.
 
     From time to time, the FDA elects to permit sales of some pharmaceuticals
currently sold on a prescription basis, without a prescription. Approval by the
FDA of the sale of our products without a prescription would reduce demand for
our competing prescription products and, accordingly, reduce our profits.
 
OUR INDUSTRY IS VERY COMPETITIVE; CHANGES IN TECHNOLOGY COULD RENDER OUR
PRODUCTS OBSOLETE.
 
     We compete with other pharmaceutical companies, including major
pharmaceutical companies with financial resources substantially greater than
ours, in developing, acquiring, manufacturing and marketing pharmaceutical
products. The selling prices of pharmaceutical products typically decline as
competition
                                        12

<PAGE>
 
increases. Further, other products now in use, under development or acquired by
other pharmaceutical companies, may be more effective or offered at lower prices
than our current or future products. The industry is characterized by rapid
technological change that may render our products obsolete, and competitors may
develop their products more rapidly than we can. Competitors may also be able to
complete the regulatory process sooner, and therefore, may begin to market their
products in advance of our products. We believe that competition in sales of our
products is based primarily on price, service and technical capabilities. There
can be no assurance that: (i) we will be able to develop or acquire commercially
attractive pharmaceutical products; (ii) additional competitors will not enter
the market; or (iii) competition from other pharmaceutical companies will not
have a material adverse effect on our business, financial condition and results
of operations.
 
MANY OF THE RAW MATERIALS AND COMPONENTS USED IN OUR PRODUCTS COME FROM A SINGLE
SOURCE SO INTERRUPTIONS IN THE SUPPLY OF THESE RAW MATERIALS AND COMPONENTS
COULD DISRUPT OUR MANUFACTURING OF SPECIFIC PRODUCTS AND CAUSE OUR SALES AND
PROFITABILITY TO DECLINE.
 
     We require a supply of quality raw materials and components to manufacture
and package pharmaceutical products for ourselves and for third parties with
which we have contracted. The principal components of our products are active
and inactive pharmaceutical ingredients and certain packaging materials. Many of
these components are available from only a single source and, in the case of
many of our ANDAs and NDAs, only one supplier of raw materials has been
identified. Because FDA approval of drugs requires manufacturers to specify
their proposed suppliers of active ingredients and certain packaging materials
in their applications, FDA approval of any new supplier would be required if
active ingredients or such packaging materials were no longer available from the
specified supplier. The qualification of a new supplier could delay our
development and marketing efforts. If for any reason we are unable to obtain
sufficient quantities of any of the raw materials or components required to
produce and package our products, we may not be able to manufacture our products
as planned, which could have a material adverse effect on our business,
financial condition and results of operations.
 
OUR REVENUES DEPEND ON SALE OF PRODUCTS MANUFACTURED BY THIRD-PARTIES, WHICH WE
CANNOT CONTROL.
 
     We derive a significant portion of our revenues from the sale of products
manufactured by third parties, including our competitors in some instances.
There can be no assurance that our dependence on third parties for the
manufacture of such products will not adversely affect our profit margins or our
ability to develop and deliver our products on a timely and competitive basis.
If for any reason we are unable to obtain or retain third-party manufacturers on
commercially acceptable terms, we may not be able to distribute certain of our
products as planned. No assurance can be made that the manufacturers we use will
be able to provide us with sufficient quantities of our products or that the
products supplied to us will meet our specifications. Any delays or difficulties
with third-party manufacturers could adversely affect the marketing and
distribution of certain of our products, which could have a material adverse
effect on our business, financial condition and results of operations.
 
DEPENDENCE ON SMALL NUMBER OF DISTRIBUTORS
 
     A small number of large wholesale drug distributors account for a large
portion of our gross sales, revenues and accounts receivable. The following
three distributors, AmerisourceBergen, Cardinal and McKesson, accounted for
approximately 54% of total gross sales and 44% of total revenues in 2003, and
52% of gross trade receivables as of December 31, 2003. In addition to acting as
distributors of our products, these three companies also distribute a broad
range of health care products for many other companies. None of these
distributors is an end user of our products. If sales to any one of these
distributors were to diminish or cease, we believe that the end users of our
products would find little difficulty obtaining our products either directly
from us or from another distributor. However, the loss of one or more of these
customers, together with a delay or inability to secure an alternative
distribution source for end users, could have a material negative impact on our
revenue and results of operations and lead to a violation of debt covenants. A
change in purchasing patterns, inventory levels, an increase in returns of our
products, delays in purchasing products and
 
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<PAGE>
 
delays in payment for products by one or more distributors also could have a
material negative impact on our revenue and results of operations and lead to a
violation of debt covenants.
 
PATENTS AND PROPRIETARY RIGHTS
 
     The patent position of competitors in the pharmaceutical industry generally
is highly uncertain, involves complex legal and factual questions, and is the
subject of much litigation. There can be no assurance that any patent
applications relating to our potential products or processes will result in
patents being issued, or that the resulting patents, if any, will provide
protection against competitors who: (i) successfully challenge our patents; (ii)
obtain patents that may have an adverse effect on our ability to conduct
business; or (iii) are able to circumvent our patent position. It is possible
that other parties have conducted or are conducting research and could make
discoveries of pharmaceutical formulations or processes that would precede any
discoveries made by us, which could prevent us from obtaining patent protection
for these discoveries or marketing products developed therefrom. Consequently,
there can be no assurance that others will not independently develop
pharmaceutical products similar to or obsoleting those that we are planning to
develop, or duplicate any of the our products. Our inability to obtain patents
for our products and processes or the ability of competitors to circumvent or
obsolete our patents could have a material adverse effect on our business,
financial condition and results of operations.
 
EXERCISE OF WARRANTS, CONVERSION OF SUBORDINATED DEBT AND PREFERRED STOCK, MAY
HAVE DILUTIVE EFFECT
 
     Under the terms of a $5,000,000 subordinated debt transaction, which we
entered into on July 12, 2001 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, our current Chairman of the Board of Directors, the Kapoor Trust agreed
to provide us with $5,000,000 of subordinated debt in two separate tranches of
$3,000,000 ("Tranche A") and $2,000,000 ("Tranche B"). In return for providing
the subordinated debt, the Kapoor Trust was granted Warrants to purchase
1,000,000 shares of common stock, at a purchase price of $2.85 per share for
Tranche A and 667,000 shares of common stock, at a purchase price of $2.25 per
share, for Tranche B. In addition, Tranche A, plus the interest on Tranche A, is
convertible into shares of our common stock at a price of $2.28 per share, and
Tranche B, plus the interest on Tranche B, is convertible into shares of our
common stock at a price of $1.80 per share. The subordinated debt warrants
mature on December 20, 2006.
 
     Our restructuring consultants, AEG Partners LLC ("AEG") alleges that we are
required to issue 1,250,000 warrants to purchase our common stock at an exercise
price of $1.00 per warrant share under a success fee arrangement entered between
AEG and Akorn. We dispute that AEG is owed this success fee, including the
warrants. See Item 3 -- "Legal Proceedings".
 
     In connection with the Exchange Transaction (see "Financial Conditions and
Liquidity"), we issued 257,172 shares of our Series A 6.0% Participating
Convertible Preferred Stock ("Preferred Stock"). The Preferred Stock accrues
dividends at a rate of 6.0% per annum, which rate is fully cumulative, accrues
daily and compounds quarterly, provided that in the event stockholder approval
authorizing sufficient shares of common stock to be authorized and reserved for
conversion of all of the Preferred Stock and warrants issued in connection with
the Exchange Transaction ("Stockholder Approval") has not been received by
October 7, 2004, such rate is to increase to 10.0% until Stockholder Approval
has been received and sufficient shares of Common Stock are authorized and
reserved. Subject to certain limitations, on October 31, 2011, we are required
to redeem all shares of Preferred Stock for an amount equal to $100 per share,
as may be adjusted from time to time as set forth in our Articles of Amendment
to the Articles of Incorporation (the "Articles of Incorporation") (the "Stated
Value"), plus all accrued but unpaid dividends on such shares. Shares of
Preferred Stock have liquidation rights in preference over junior securities,
including the common stock, and have certain antidilution protections. The
Preferred Stock is convertible at any time into a number of shares of common
stock equal to the quotient obtained by dividing (x) the Stated Value plus any
accrued but unpaid dividends by (y) $0.75, as such numbers may be adjusted from
time to time pursuant to the terms of the Articles of Incorporation. Provided
that Stockholder Approval has been received and sufficient shares of common
stock are authorized and reserved for conversion, all shares of Preferred Stock
shall convert to shares of common stock on the earlier to occur of (i) October
8, 2006 and (ii) the date on which the closing price per
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<PAGE>
 
share of common stock for at least 20 consecutive trading days immediately
preceding such date exceeds $4.00 per share.
 
     In addition, we have agreed to issue to each of the Kapoor Trust and Arjun
Waney, respectively, on each anniversary of the date of the consummation of the
Exchange Transaction, warrants to purchase an additional number of shares of
common stock equal to 0.08 multiplied by the principal dollar amount of the our
indebtedness then guaranteed by them under the New Credit Facility entered with
in connection with the Exchange Transaction. The warrants issued in exchange for
these guarantees have an exercise price of $1.10 per share. See "Financial
Condition and Liquidity."
 
     We also issued to the holders of the 2003 Subordinated Notes, warrants to
purchase an aggregate of 276,714 shares of common stock with an exercise price
of $1.10 per share. All unexercised subordinated debt warrants expire on October
7, 2006.
 
     The warrants issued in connection with the Exchange Transaction are
exercisable at any time prior to expiration on October 7, 2006. Of those
warrants, warrants for 8,572,400 shares of common stock have an exercise price
of $1.00 per share and warrants for the remaining 1,236,714 shares of common
stock have an exercise price of $1.10 per share.
 
     If the price per share of our common stock at the time of exercise of the
Warrants or conversion of the subordinated debt is in excess of the various
Warrant exercise or conversion prices, exercise of the Warrants and conversion
of the subordinated debt would have a dilutive effect on our common stock. The
amount of such dilution, however, cannot currently be determined as it would
depend on the difference between the stock price and the price at which the
warrants were exercised or the subordinated debt was converted at the time of
exercise or conversion.
 
WE MUST CONTINUE TO ATTRACT AND RETAIN KEY PERSONNEL TO BE ABLE TO COMPETE
SUCCESSFULLY.
 
     Our performance depends, to a large extent, on the continued service of our
key research and development personnel, other technical employees, managers and
sales personnel and its ability to continue to attract and retain such
personnel. Competition for such personnel is intense, particularly for highly
motivated and experienced research and development and other technical
personnel. We are facing increasing competition from companies with greater
financial resources for such personnel. There can be no assurance that we will
be able to attract and retain sufficient numbers of highly-skilled personnel in
the future, and the inability to do so could have a material adverse effect on
our business, operating results and financial condition and results of
operations.
 
DEPENDENCE ON KEY EXECUTIVE OFFICERS
 
     Our success will depend, in part, on its ability to attract and retain key
executive officers. The inability to find or the loss of one or more of our key
executive officers could have a material adverse effect on our business,
financial condition and results of operations.
 
QUARTERLY FLUCTUATION OF RESULTS; POSSIBLE VOLATILITY OF STOCK PRICE
 
     Our results of operations may vary from quarter to quarter due to a variety
of factors including, but not limited to, the timing of the development and
marketing of new pharmaceutical products, the failure to develop such products,
delays in obtaining government approvals, including FDA approval of NDAs or
ANDAs for our products, expenditures to comply with governmental requirements
for manufacturing facilities, expenditures incurred to acquire and promote
pharmaceutical products, changes in the our customer base, a customer's
termination of a substantial account, the availability and cost of raw
materials, interruptions in supply by third-party manufacturers, the
introduction of new products or technological innovations by our competitors,
loss of key personnel, changes in the mix of products sold by us, changes in
sales and marketing expenditures, competitive pricing pressures, expenditures
incurred to pursue or contest pending or threatened legal action and our ability
to meet our financial covenants. There can be no assurance that the we will be
 
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<PAGE>
 
successful in avoiding losses in any future period. Such fluctuations may result
in volatility in the price of our common stock.
 
RELATIONSHIPS WITH OTHER ENTITIES; CONFLICTS OF INTEREST
 
     Mr. John N. Kapoor, Ph.D., our current Chairman of the Board and Chief
Executive Officer from March 2001 to December 2002, and a principal shareholder,
is affiliated with EJ Financial Enterprises, Inc., a health care consulting
investment company ("EJ Financial"). EJ Financial is involved in the management
of health care companies in various fields, and Dr. Kapoor is involved in
various capacities with the management and operation of these companies. The
Kapoor Trust, the beneficiary and sole trustee of which is Dr. Kapoor, is a
principal shareholder of each of these companies. As a result, Dr. Kapoor does
not devote his full time to our business. Although such companies do not
currently compete directly with us, certain companies with which EJ Financial is
involved are in the pharmaceutical business. Discoveries made by one or more of
these companies could render our products less competitive or obsolete. In
addition, one of these companies, NeoPharm, Inc. of which Dr. Kapoor is Chairman
and a major stockholder, recently entered into a loan agreement with us. We also
believe we owe EJ Financial $18,000 in consulting fees for each of 2003, 2002
and 2001, as well as expense reimbursements of approximately $2,000 and $182,000
for 2002 and 2001, respectively. Further, the Kapoor Trust has loaned us
$5,000,000 resulting in Dr. Kapoor effectively becoming a major creditor of ours
as well as a major shareholder. See "Financial Condition and Liquidity."
Potential conflicts of interest could have a material adverse effect on our
business, financial condition and results of operations.
 
     As part of the Exchange Transaction, we also issued subordinated promissory
notes in the aggregate principal amount of approximately $2,767,000 (the "2003
Subordinated Notes"), to the Kapoor Trust, Arjun Waney and Argent Fund
Management, Ltd. ("Argent"). Mr. Waney, a new director of Akorn, Mr. Waney
serves as Chairman and Managing Director of Argent, 51% of which is owned by Mr.
Waney. The 2003 Subordinated Notes mature on April 7, 2006 and bear interest at
prime plus 1.75%, but interest payments are currently prohibited under the terms
of subordination arrangements. Consequently, Mr. Waney and Argent are also
creditors of ours. See "Financial Condition and Liquidity."
 

ITEM 2.  DESCRIPTION OF PROPERTIES
 
     Since August 1998, our headquarters and certain administrative offices, as
well as a finished goods warehouse, have been located in leased space at 2500
Millbrook Drive, Buffalo Grove, Illinois. We leased approximately 24,000 square
feet until June 2000 at which time it expanded to the current occupied space of
approximately 48,000 square feet.
 
     We own a 76,000 square foot facility located on 15 acres of land in
Decatur, Illinois. This facility is currently used for packaging, distribution,
warehousing and office space. In addition, we own a 55,000 square-foot
manufacturing facility in Decatur, Illinois. The Decatur facilities support all
three of our segments. Our Akorn (New Jersey) subsidiary also leases
approximately 35,000 square feet of space in Somerset, New Jersey. This space is
used for manufacturing, research and development and administrative activities
related to the ophthalmic segment. We do not have any idled manufacturing
facilities, however, the capacity utilization at both our Decatur and Somerset
facilities was approximately 62% during the year ended December 31, 2003. We can
produce approximately 65 batches, per month, at normal capacity. Operating the
manufacturing facilities at the reduced level has led to lower gross margins due
to unabsorbed fixed manufacturing costs.
 
     We are in the process of completing an expansion of our Decatur, Illinois
manufacturing facility to add capacity to provide lyophilization manufacturing
services, which manufacturing capability we currently do not have. Subject to
among other things, our ability to generate operating cash flow or to obtain new
financing for future operations and capital expenditures, we anticipate the
completion of the lyophilization expansion in the first half of 2005. As of
December 31, 2003, we had spent approximately $17.9 million on the expansion and
anticipate 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
 
                                        16

<PAGE>
 
facility is validated, we will proceed to produce stability batches to provide
the data necessary to allow the Lyophilization facility to be inspected and
approved by the FDA.
 
     The current combined space is considered adequate to accommodate our
manufacturing needs for the foreseeable future. Lyophilization capabilities are
not currently needed by us, but would give us the capability to manufacture
additional products for our contract customers, allow us to pursue ANDA
products, and allow us to internally produce one of our currently outsourced
products.
 

ITEM 3.  LEGAL PROCEEDINGS
 
     On March 27, 2002, we received a letter informing us 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
us and seek an order requiring us to be enjoined from engaging in certain
conduct. The staff alleged that we misstated our income for fiscal years 2000
and 2001 by allegedly failing to reserve for doubtful accounts receivable and
overstating our accounts receivable balance as of December 31, 2000. The staff
alleged that internal control and books and records deficiencies prevented us
from accurately recording, reconciling and aging our accounts receivable. We
were also notified that certain of our former officers, as well as a then
current employee had received similar notifications. Subsequent to the issuance
of our consolidated financial statements for the year ended December 31, 2001,
we determined the need to restate our financial statements for 2000 and 2001,
resulting in the recording of a $7.5 million increase to the allowance for
doubtful accounts as of December 31, 2000, which we had originally recorded as
of March 31, 2001.
 
     On September 25, 2003, we consented to the entry of an administrative cease
and desist order to resolve the issues arising from the staff's investigation
and proposed enforcement action as discussed above. Without admitting or denying
the findings set forth therein, the consent order finds that we failed to
promptly and completely record and reconcile cash and credit remittances,
including those from our top five customers, to invoices posted in our accounts
receivable sub-ledger. According to the findings in the consent order, our
problems resulted from, among other things, internal control and books and
records deficiencies that prevented us from accurately recording, reconciling
and aging our receivables. The consent order finds that our 2000 Form 10-K and
first quarter 2001 Form 10-Q misstated our account receivable balance or,
alternatively, failed to disclose the impairment of our accounts receivable and
that our 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 consent order also finds that we failed to keep
accurate books and records and failed to devise and maintain a system of
adequate internal accounting controls with respect to our accounts receivable in
violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The
consent order does not impose a monetary penalty against us or require any
additional restatement of our financial statements. The consent order contains
an additional commitment by us 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 our
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 we are keeping
accurate books and records and have devised and maintained a system of adequate
internal accounting controls with respect to our accounts receivables. On
October 27, 2003, we engaged Jefferson Wells, International ("Jefferson Wells")
to serve as consultant in this capacity. On February 6, 2004, Jefferson Wells
reported its findings to the special committee, such findings being that we have
made the necessary personnel changes and procedural improvements required to
maintain control over the accounts receivable process and establish the
necessary reserves. Jefferson Wells' report was delivered to the SEC on February
13, 2004.
 
     In October 2000, the FDA issued a warning letter to us following the FDA's
routine cGMP inspection of our Decatur manufacturing facilities. An FDA warning
letter is intended to provide notice to a company of violations of the laws
administered by the FDA. We believe 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
                                        17

<PAGE>
 
individuals. The October 2000 warning letter addressed several deviations from
regulatory requirements including general documentation and cleaning validation
issues and requested corrective actions be undertaken by us. We 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 validation and process control
issues. 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, we responded to the inspectional findings. This response described
our 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 an inspection of the
Decatur facility and identified deviations from cGMPs. We responded to these
observations in September 2002. In response to our actions, the FDA conducted
another inspection of the Decatur facility during the period from December 10,
2002 to February 6, 2003. This inspection identified deviations from regulatory
requirements including the manner in which we process and investigates
manufacturing discrepancies and failures, customer complaints and the
thoroughness of equipment cleaning validations. Certain deviations identified
during this inspection had been raised in previous FDA inspections. We have
responded to these latest findings in writing and in a meeting with the FDA in
March 2003. We set forth our plan for implementing comprehensive corrective
actions and have provided progress report to the FDA on April 15, May 15 and
June 15, 2003.
 
     We continued to have discussions with the FDA relating to our ongoing
compliance matters and continue to complete our current corrective plan for the
Decatur facility in the fourth quarter of 2003. On February 11, 2004, the FDA
began an inspection of the Decatur facility. This inspection is still ongoing at
the time of this filing.
 
     Upon completion of the inspection, the FDA may take any of the following
actions: (i) find that the Decatur facility is in substantial compliance; (ii)
require us to undertake further corrective actions, which could include a recall
of certain products, and then conduct another inspection to assess the success
of those efforts; (iii) seek to enjoin us from further violations, which may
include temporary suspension of some or all operations and potential monetary
penalties; or (iv) take other enforcement action which may include seizure of
our products. At this time, it is not possible to predict the FDA's course of
action.
 
     If the FDA chooses option (iii) or (iv), such action could significantly
impair our ability to continue to manufacture and distribute our current product
line and generate cash from our operations and could result in a covenant
violation under our senior debt, any or all of which would have a material
adverse effect on our liquidity and our ability to continue as a going concern.
Any monetary penalty assessed by the FDA also could have a material adverse
effect on our liquidity.
 
     We believe that unless and until the issues identified by the FDA have been
successfully corrected and the corrections have been verified through
inspection, it is doubtful that the FDA will approve any NDAs or ANDAs that may
be submitted by us for products to be manufactured at our Decatur facility. This
has adversely impacted, and is likely to continue to adversely impact, our
ability to grow sales. However, we believe that unless and until the FDA chooses
option (iii) or (iv), we will be able to continue manufacturing and distributing
our current product lines.
 
     On December 19, 2002 and January 22, 2003, we received demand letters
regarding claimed wrongful deaths allegedly associated with the use of the drug
Inapsine, which we produced. The total amount claimed was $3.8 million. In July
2003, we agreed to a settlement with respect to one of the claims alleged by
these demand letters. We do not believe that this settlement or the outcome of
the second alleged claim will have a material impact on our financial position.
 
     On August 9, 2003, Novadaq Technologies, Inc. ("Novadaq") notified us that
it had requested arbitration with the International Court of Arbitration ("ICA")
related to or dispute with Novadaq regarding the issuance of a Right of
Reference to Novadaq from Akorn for Novadaq's NDA and Drug Master File ("DMF")
for specified indications for Akorn's drug IC Green. In its request for
arbitration, Novadaq asserts that we are obligated to provide the Right of
Reference as described above pursuant to an amendment dated September 26, 2002
to the January 4, 2002 Supply Agreement between the two companies. We do not
believe we are obligated to provide the Right of Reference which, if provided,
would likely reduce the required
                                        18

<PAGE>
 
amount of time for clinical trials and reduce Novadaq's cost of developing a
product for macular degeneration. We are also contemplating the possible
development of a separate product for macular degeneration which, if developed,
could face competition from any product developed by Novadaq. Even if the Right
of Reference is provided, the approval process for such a product is expected to
take several years. On October 17, 2003, the ICA notified us that it decided
that this matter shall proceed to arbitration. The arbitration has been
scheduled for the week of June 7, 2004. We are in the process of preparing for
arbitration on this matter and will defend ourselves vigorously.
 
     In connection with the request for arbitration described above, on August
22, 2003, Novadaq filed a lawsuit and a Notice of Emergency Motion in the
Circuit Court of Cook County, Illinois, County Department, Chancery Division for
interim relief related to the issuance of the Right of Reference from Akorn to
Novadaq. On September 22, 2003, Akorn and Novadaq entered into an Agreed Order
whereby we would provide the requested Right of Reference to Novadaq. The Agreed
Order terminates upon the settlement of the dispute between the parties or in
the event that the final disposition of the arbitration filed with the ICA
results in a final decision against Novadaq or a failure to hold that Novadaq
has a right to the Right of Reference.
 
     On October 8, 2003, pursuant to the terms of the Letter Agreement dated
September 26, 2002 between Akorn and AEG, as amended (the "AEG Letter
Agreement"), we terminated our consultant AEG Partners LLC ("AEG"). AEG contends
that, as a result of the Exchange Transaction, we must pay it a "success fee"
consisting of $686,000 and a warrant to purchase 1,250,000 shares of our common
stock at $1.00 per share, and adjust the terms of the warrant, pursuant to
certain anti-dilution provisions, to take into account the impact of the
convertible preferred stock issued in connection with the exchange transaction.
We dispute that AEG is owed this success fee. Pursuant to the AEG Letter
Agreement, we and AEG are trying to resolve the dispute. If this fails, the AEG
Letter Agreement provides for mandatory and binding arbitration. On January 9,
2004, AEG filed a demand for arbitration. A single arbitrator has been chosen,
but no arbitration date has been set. We are in the process of preparing for
arbitration and will vigorously defend ourselves and assert any appropriate
counterclaims in regards to this matter.
 
     On October 14, 2003, Leerink Swann & Co., Inc. ("Leerink") filed a
complaint in the Supreme Court of the State of New York alleging a breach of
contract regarding our payment of fees by for investment banking services.
Leerink alleged we were obligated to pay $1,765,032 pursuant to a written
agreement dated May 8, 2003 between Leerink and Akorn (the "Leerink Agreement").
We disputed that Leerink was owed $1,765,032. On December 5, 2003, we reached a
settlement with Leerink where, among other things, we paid $750,000 to Leerink,
and we extended the Leerink Agreement for an additional year. As a result of the
settlement, the above mentioned complaint was dismissed on December 8, 2003.
 
     On February 23, 2004, we were sued in the United States District Court for
the District of Arizona for damages resulting from the death of an Arabian show
horse allegedly injected with the drug Sarapin in the summer of 2003. The
complaint alleges that we are liable in strict products liability, in negligence
and for injury to property for manufacturing and selling the Sarapin injected
into the horse. The complaint alleges that the Sarapin was sold at a time when
several lots of Sarapin were being recalled due to a "lack of sterility
assurances." The complaint seeks unspecified special, general and punitive
damages against us in an amount in excess of $75,000. We tendered the defense of
the complaint to our insurer, and the insurer has indicated that the tender will
be accepted subject to a reservation of rights as to the punitive damage claim.
 
     We are party to legal proceedings and potential claims arising in the
ordinary course of our business. The amount, if any, of ultimate liability with
respect to such matters cannot be determined. Despite the inherent uncertainties
of litigation, we at this time do not believe that such proceedings will have a
material adverse impact on our financial condition, results of operations, or
cash flows.
 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of security holders during the quarter
ended December 31, 2003.
 
                                        19

<PAGE>
 

                                    PART II
 

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     Our common stock was traded on the NASDAQ National Market under the symbol
AKRN until June 24, 2002. Because our Form 10-K for the year ended December 31,
2001 contained unaudited financial statements, our common stock was delisted for
the NASDAQ on June 25, 2002, for non-compliance with the NASDAQ report filing
requirements. Subsequently, our common stock has traded on the Pink Sheets under
the symbol AKRN.
 
     On March 15, 2004, there were approximately 589 holders of record of our
common stock. This number does not include shareholders for which shares are
held in a "nominee" or "street" name. The closing price of our common stock on
March 15, 2004 was $3.35 per share. The bid prices below reflect the high and
low bid quotations from the NASDAQ National Market and the Pink Sheets, as
applicable, for the periods set forth in the first paragraph above.
 
     High and low bid prices for the periods indicated were:
 

<Table>
<Caption>
                                                              HIGH     LOW
                                                              -----   -----
<S>                                                           <C>     <C>
Year Ended December 31, 2003:
  1st Quarter...............................................  $1.55   $0.50
  2nd Quarter...............................................   1.30    0.50
  3rd Quarter...............................................   1.19    0.45
  4th Quarter...............................................   2.35    1.22
Year Ended December 31, 2002:
  1st Quarter...............................................  $4.00   $3.31
  2nd Quarter...............................................   3.73    0.60
  3rd Quarter...............................................   1.60    0.60
  4th Quarter...............................................   1.50    0.60
</Table>

 
     We did not pay cash dividends in 2003, 2002 or 2001 and do not expect to
pay dividends on our common stock in the foreseeable future. Moreover, we are
currently prohibited by our New Credit Facility from making any dividend
payment. See "Financial Conditions and Liquidity beginning on page 25."
 
                                        20

<PAGE>
 

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
 
     The following table sets forth our selected consolidated financial
information for the years ended December 31, 2003, 2002, 2001, 2000, and 1999.
 

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                             ---------------------------------------------------
                                               2003       2002       2001       2000      1999
                                             --------   --------   --------   --------   -------
<S>                                          <C>        <C>        <C>        <C>        <C>
OPERATIONS DATA (000's)
Revenues...................................  $ 45,491   $ 51,419   $ 41,545   $ 66,221   $64,632
Gross profit...............................    12,148     20,537      6,398     28,131    33,477
Operating income (loss)....................    (6,276)    (3,565)   (21,074)    (1,731)   12,122
Interest and other expense.................    (6,220)    (3,150)    (3,768)    (2,400)   (1,921)
Pretax income (loss).......................   (12,496)    (6,713)   (24,926)    (4,014)   10,639
Income tax provision (benefit).............      (171)     6,239     (9,780)    (1,600)    3,969
Net income (loss)..........................  $(12,325)  $(12,952)  $(15,146)  $ (2,414)  $ 6,670
Weighted average shares outstanding:
  Basic....................................    19,745     19,589     19,337     19,030    18,269
  Diluted..................................    19,745     19,589     19,337     19,030    18,573
PER SHARE
Equity.....................................  $   0.58   $   0.58   $   1.23   $   1.85   $  1.85
Net income:
  Basic....................................     (0.62)     (0.66)     (0.78)     (0.13)     0.37
  Diluted..................................     (0.62)     (0.66)     (0.78)     (0.13)     0.36
Price: High................................      2.35       4.00       6.44      13.63      5.56
      Low..................................      0.45       0.60       1.03       3.50      3.50
BALANCE SHEET (000's)
Current assets.............................  $ 10,595   $ 13,239   $ 28,580   $ 37,522   $35,851
Net property plant & equipment.............    33,907     35,314     33,518     34,031    20,812
Total assets...............................    59,415     63,538     84,546     91,917    76,098
Current liabilities including debt in
  default..................................    11,959     43,803     52,937     15,768     9,693
Long-term obligations, less current
  installments.............................    36,065      8,383      7,779     40,918    32,015
Shareholders' equity.......................    11,391     11,352     23,830     35,231    34,390
CASH FLOW DATA (000's)
From operations............................  $ (1,932)  $  9,359   $   (444)  $    362   $   131
Dividends paid.............................        --         --         --         --        --
From investing.............................    (1,743)    (5,315)    (4,126)   (17,688)   (6,233)
From financing.............................     3,529     (9,035)     9,118     18,108     5,391
Change in cash and cash equivalents........      (146)    (4,991)     4,548        782      (711)
</Table>

 

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
RESULTS OF OPERATIONS
 
     Our losses from operations in recent years and working capital
deficiencies, together with the need to successfully resolve our ongoing
compliance matters with the Food and Drug Administration ("FDA"), have raised
substantial doubt about our ability to continue as a going concern.
 
     On October 7, 2003, a significant threat to our ability to continue as a
going concern was resolved when we consummated a transaction with a group of
investors that resulted in the extinguishment of our then outstanding senior
bank debt in the amount of approximately $37,731,000 in exchange for shares of
Akorn's
 
                                        21

<PAGE>
 
convertible preferred stock, warrants to purchase shares of Akorn's common
stock, subordinated promissory notes in the aggregate amount of $2,767,139 and a
new credit facility under which approximately $7,000,000 was outstanding as of
the date of the transaction, $5,473,862 of which was paid to the investors in
the transaction. For more information regarding this transaction, see Note
G -- "Financing Arrangements".
 
     Although we have refinanced our debt on a long-term basis as described
above, it continues to be subject to ongoing FDA compliance matters that could
have a material adverse effect on us. See Note N -- "Commitments and
Contingencies" for further description of these matters. We are working with the
FDA to favorably resolve such compliance matters and have submitted to the FDA
and continue to implement a plan for comprehensive corrective actions at our
Decatur, Illinois facility. On February, 11, 2004, the FDA began an inspection
of the Decatur facility. This inspection is still ongoing at the time of this
filing. The management of Akorn believe that Akorn will successfully resolve
these compliance matters with the FDA. In addition, if we are enjoined from
further violations, including a temporary suspension of some or all operations
of the Decatur facility, management believes it will be able to successfully
manage through this situation. There can be no guarantee that the FDA matters
will be successfully resolved, and if we are not successful in doing so, there
remains substantial doubt about our ability to continue as a going concern.
 
     We have added key management personnel, including the appointment in early
2003 of a new chief executive officer and additional personnel in critical
areas. Management has reduced our cost structure, improved our processes and
systems and implemented strict controls over capital spending. Management
believes these activities will continue to improve our results of operations,
cash flow from operations and our future prospects.
 
     As a result of all of the factors cited in the preceding paragraphs, we
believe that we should be able to sustain our 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 we
will be able to continue as a going concern.
 
                                        22

<PAGE>
 
     Our revenues are derived from sales of diagnostic and therapeutic
pharmaceuticals by the ophthalmic segment, from sales of diagnostic and
therapeutic pharmaceuticals by the injectable segment, and from contract
services revenue. The following table sets forth the percentage relationships
that certain items from our Consolidated Statements of Operations bear to
revenues for the years ended December 31, 2003, 2002 and 2001.
 

<Table>
<Caption>
                                                                 YEARS ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                              2003   2002   2001
                                                              ----   ----   ----
<S>                                                           <C>    <C>    <C>
Revenues
  Ophthalmic................................................   57%    58%    41%
  Injectable................................................   27     25     23
  Contract Services.........................................   16     17     36
                                                              ---    ---    ---
Total revenues..............................................  100    100    100
Gross profit/(Loss).........................................
  Ophthalmic................................................   18%    27%    (2)%
  Injectable................................................    9     12      7
  Contract Services.........................................    0      1     10
                                                              ---    ---    ---
Total Gross Profit..........................................   27     40     15
Selling, general and administrative expenses................   36     41     45
Provision for bad debts.....................................   (1)    --     11
Amortization of intangibles.................................    3      3      4
Research and development expenses...........................    3      4      6
Operating loss..............................................  (14)    (7)   (51)
Net loss....................................................  (27)   (25)   (36)
</Table>

 
COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2003 AND 2002
 
     Consolidated revenues decreased 11.5% for the year ended December 31, 2003
compared to the prior year. Ophthalmic segment revenues decreased 11.9%, or
$3,523,000, partially due to the temporary suspension throughout 2003 of
production of Fluress and Flouracaine due to leaking containers, as well as
increased customer purchases of angiography and ointment products in the fourth
quarter of 2002, which resulted in surplus customer inventory and lower sales
during the first half of 2003. Injectable segment revenues decreased 6.3%, or
$822,000 for the year, reflecting the lower volumes of anesthesia and antidote
products partially offset by sales of our newly introduced product, Lidocaine
Jelly. Contract services revenues decreased by 17.9%, or $1,583,000, due mainly
to customer concerns about the status of the ongoing FDA compliance matters at
our Decatur facilities as well as the temporary closure of an aseptic production
room at that same facility.
 
     We anticipate that revenues from all of our product segments are not likely
to substantially grow until the issues surrounding the FDA review are resolved.
The FDA compliance matters are not anticipated to be resolved prior to the
second quarter of 2004; however, no assurance can be made that these matters
will be resolved by such time, or ever. See Part II -- Item 1 -- "Legal
Proceedings." The production of Fluress and Flouracaine, two of our opthalmic
products, remains suspended pending development of a new container closure
system for those products. We do not expect to resume production of Fluress and
Flouracaine prior to the second quarter of 2004. As a result, we expect that
revenues and cash flow from operations for the first quarter of 2004 will be
adversely impacted and that revenues and cash flows in the second quarter of
2004 and beyond could be adversely impacted if we are unable to resume
production of Fluress and Flouracaine in the second quarter of 2004.
 
                                        23

<PAGE>
 
     The chargeback and rebate expense for the year ended December 31, 2003
declined to $12,836,000 from $15,418,000 in 2002, due to a general decrease in
volume and the increase in the product sales mix of lower chargeback and rebate
percentage items.
 
     The 2003 consolidated gross margin of $12,148,000 was 26.7% for 2003 as
compared to a gross margin of $20,537,000, or 39.9% for 2002. The gross profit
by each of our segments also decreased due to the decrease in volume across all
revenue categories as well as increased costs and reduced capacity associated
with the resolution of our current FDA compliance matters.
 
     Selling, general and administrative ("SG&A") expenses decreased 23.2%, to
$16,015,000 from $20,860,000, for the year ended December 31, 2003 as compared
to the same period in 2002. Included in 2002 results were $1,559,500, $257,000
and $545,000 asset impairment charges related to the Johns Hopkins patents,
intangible assets and construction-in-progress. Excluding these charges, SG&A
decreased by 13.4% due to lower personnel and marketing costs.
 
     Provision, net of recoveries, for bad debts was a $471,000 net recovery
year to date, reflecting a $309,000 provision, which was offset by $780,000 in
recoveries for the same period. The bad debt expense net of recoveries for the
same period in 2002 was a net $55,000 recovery.
 
     Research and development ("R&D") expense decreased 22.3% in 2003, to
$1,465,000 from $1,886,000 for the year ended December 31, 2002, due to
refocusing resources away from R&D activities to resolve issues related to FDA
compliance.
 
     Interest and other expense for the full year 2003 was $6,220,000, a 97.5%,
or $3,070,000 increase compared to the same period in the prior year, reflecting
a $3,102,000 loss on the Exchange Transaction disclosed in Note G of the
financial statements offset by lower interest rates and a lower debt balance as
a result of the Exchange Transaction.
 
     We recorded a valuation allowance of $4,816,000 for the twelve months
ending December 31, 2003, which offset the deferred income tax asset recorded in
that period. The net income tax benefit of $171,000 for the year relates to
state tax refunds. The net income tax provision of $6,239,000 for the same
period in 2002 includes a $9,216,000 deferred income tax valuation allowance
established against deferred income tax assets recorded in 2002 and in prior
periods.
 
     We reported a net loss of $12,325,000 or $0.62 per weighted average share
for the twelve month period ended December 31, 2003, versus $12,952,000 or $0.66
per weighted average share for the comparable prior year. The decrease in net
loss was due primarily to the impact of the deferred income tax valuation
allowance established in 2002 against previously recorded income tax assets, as
well as reduced SG&A, R&D and interest expenses offset by lower sales, gross
profit and the loss on the Exchange Transaction in 2003.
 
COMPARISON OF TWELVE MONTHS ENDED DECEMBER 31, 2002 AND 2001
 
     Consolidated revenues increased 23.8% for the year ended December 31, 2002
compared to the prior year. Results for 2002 exclude shipments made at or near
the end of the year for which shipping terms are FOB destination and,
accordingly, revenue is not recognized until delivery occurs. The revenue
related to these shipments recognized in the first quarter of 2003 was $601,000.
Prior year revenues reflect virtually all shipments to customers during the
applicable year as virtually all sales terms were FOB shipping point. See Note
B -- "Summary of Significant Accounting Policies" to the consolidated financial
statements included in Item 8.
 
     Ophthalmic segment revenues increased 74.7%, or $12,643,000, primarily
reflecting lower charges related to chargebacks and returns in 2002 (See Note
B -- "Summary of Significant Accounting Policies" to the consolidated financial
statements included in Item 8.) as compared to 2001, and, to a lesser extent,
increased angiography and ointment product sales. The 2002 sales mix reflects
our shift in sales and marketing efforts within the Ophthalmic segment to those
key product lines that generate higher margins. Injectable revenues increased
34.3%, or $3,314,000 compared to the same period in 2001 primarily due to the
lower level of chargebacks and returns and a 52% increase in anesthesia and
antidote product sales in 2002. Contract
 
                                        24

<PAGE>
 
Services revenues decreased 40.7%, or $6,083,000 compared to the same period in
2001 due mainly to customer concerns about the status of the ongoing FDA issues
at our Decatur facility.
 
     Consolidated gross margin of $20,537,000 was an increase of 39.9% from
$6,398,000, or 15.4% from the prior year, due primarily to the aforementioned
increase in revenues in 2002 as compared to 2001, as well as an increase in the
reserve for slow-moving, unsaleable and obsolete inventory items recorded in
2001. Improvements in gross margin also resulted from our continued focus on
shifting the product mix to higher gross margin products in the angiography,
antidote and ointment product lines.
 
     SG&A expenses increased 10.4%, from 18,900,000 to $20,860,000 for the year
due to a $1,559,500 impairment charge related to the JHU/APL settlement (See
Note N -- "Commitments and Contingencies" to the consolidated financial
statements included in Item 8), a $545,000 asset impairment charge related to
abandoned construction projects, a $257,000 intangible asset charge and higher
legal and marketing expenditures in 2002. SG&A expenses in 2001 included
$1,117,000 of restructuring-related charges consisting primarily of severance
and lease costs.
 
     The provision for bad debt decreased from $4,480,000 in 2001 to a $55,000
recovery in 2002. The decrease is primarily related to our increased efforts to
collect past due receivables.
 
     Amortization of intangibles decreased from $1,493,000 to $1,411,000, or
5.5% over the comparable period in the prior year, reflecting the write-off of
intangibles which were determined to have been impaired in 2002, offset in part
by inception of the intangible amortization related to the product launch of
Paremyd.
 
     R&D expense decreased 27.4% for the year reflecting our scaled back
research activities to preserve capital and to focus on strategic product niches
such as controlled substances and ophthalmic products which we believe will add
greater value. The lower level of R&D in 2002 also reflects our refocusing of
resources away from R&D to resolve issues in the FDA's Form 483 notification.
 
     Interest expense of $3,150,000 was 16.4% lower than the $3,768,000 recorded
in 2001, due to a lower debt balance and lower interest rates in 2002.
 
     An income tax provision of $6,239,000 was recorded for 2002, compared to an
income tax benefit of $9,780,000 recorded in 2001. The 2002 income tax provision
primarily relates to the valuation allowance of $9,216,000 recorded during 2002.
In performing its analysis of whether a valuation allowance to reduce the
deferred tax asset was necessary, we considered both negative and positive
evidence, which could be objectively verified. Based upon this analysis, the
negative evidence, primarily the three consecutive years of operating losses,
outweighed the positive evidence in determining the amount of the deferred
income tax assets that is more likely than not to be realized. Based upon its
analysis, beginning with the September 30, 2002 deferred tax assets, we
established a valuation allowance to reduce the deferred tax assets to zero.
 
     Net loss for 2002 was $12,952,000, or $0.66 per share, compared to a net
loss of $15,146,000, or $0.78 per share, for the prior year. The improvement in
revenue and gross profit was offset by the increase in the provision for income
taxes reflecting the reduction of deferred income tax balance to zero.
 
FINANCIAL CONDITION AND LIQUIDITY
 
  OVERVIEW
 
     We have experienced losses from operations in 2003 and 2002 of $6,300,000
and $3,600,000, respectively. The net losses for these years were $12,300,000
and $13,000,000, respectively.
 
     As of December 31, 2003, we had cash and cash equivalents of $218,000. The
net working capital deficiency at December 31, 2003 was $1,364,000 versus
$30,564,000 at December 31, 2002, resulting primarily from the retirement of the
defaulted The Northern Trust Company ("Northern Trust") debt in the Exchange
Transaction.
 
     During the year ended December 31, 2003, we used $1,932,000 in cash from
operations, as the net loss for the year was partially offset by reductions in
inventory. Investing activities, which include the purchase of equipment,
required $1,743,000 in cash and included $1,504,000 related to the lyophilized
(freeze-dried)
                                        25

<PAGE>
 
pharmaceuticals manufacturing line expansion. Financing activities provided
$3,529,000 in cash primarily for borrowings on our line of credit. The balance
on our line of credit with our primary lender was $1,500,000 at December 31,
2003.
 
     On October 7, 2003, a group of investors (the "Investors") purchased all of
Akorn's then outstanding senior bank debt from Northern Trust, a balance of
$37,731,000, at a discount and exchanged such debt with Akorn (the "Exchange
Transaction") for (i) 257,172 shares of Series A 6.0% Participating Convertible
Preferred Stock of Akorn, ("Preferred Stock") (ii) subordinated promissory notes
in the aggregate principal amount of approximately $2,767,000 (the "2003
Subordinated Notes"), (iii) warrants to purchase an aggregate of 8,572,400
shares of Akorn's common stock with an exercise price of $1.00 per share
("Exchange Warrants"), and (iv) $5,473,862 in cash from the proceeds of the term
loan under the New Credit Facility described in a following paragraph. The 2003
Subordinate Notes and cash were issued by Akorn to (a) 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, Akorn's Chairman of the Board of Directors and the holder
of a significant stock position in Akorn, (b) Arjun Waney, a newly-elected
director and the holder of a significant stock position in Akorn, and (c) Argent
Fund Management Ltd., for which Mr. Waney serves as Chairman and Managing
Director and 51% of which is owned by Mr. Waney. Akorn also issued to the
holders of the 2003 Subordinated Notes warrants to purchase an aggregate of
276,714 shares of common stock with an exercise price of $1.10 per share. A
portion of the legal fees of the Investors was paid for by Akorn.
 
     Simultaneously with the consummation of the Exchange Transaction, we
entered into a credit agreement with LaSalle Bank providing us with a $7,000,000
term loan and a revolving line of credit of up to $5,000,000 to provide for
working capital needs (collectively, the "New Credit Facility") secured by
substantially all of the assets of Akorn. Our obligations under the New Credit
Facility have been guaranteed by the Kapoor Trust and Arjun Waney. In exchange
for this guaranty, we issued additional warrants to purchase 880,000 and 80,000
shares of common stock to the Kapoor Trust and Arjun Waney, respectively, and
have agreed to issue to each of them, on each anniversary of the date of the
consummation of the Exchange Transaction, warrants to purchase an additional
number of shares of common stock equal to 0.08 multiplied by the principal
dollar amount of the our indebtedness then guaranteed by them under the New
Credit Facility. The warrants issued in exchange for these guarantees have an
exercise price of $1.10 per share.
 
     The primary impact of the Exchange Transaction and New Credit Facility on
our liquidity and capital resources was as follows:
 
     - The then-existing default on our senior bank debt with Northern Trust was
       eliminated, as the associated debt was retired;
 
     - The then-existing defaults on our subordinated loans from NeoPharm, Inc.
       and the Kapoor Trust were waived;
 
     - The total amount of our senior bank debt was reduced from $37,731,000 as
       of September 30, 2003 to $7,000,000 as of the closing of those
       transactions;
 
     - The interest rate on our senior bank debt was reduced from prime plus
       3.0% to prime plus 1.75% for the new term loans and prime plus 1.50% for
       the new revolving line of credit;
 
     - We obtained a revolving line of credit of up to $5,000,000 and an
       additional $1,000,000 pursuant to the term loan under the New Credit
       Facility to meet working capital needs and fund future operations;
 
     - We issued additional subordinated debt with an aggregate principal amount
       of approximately $2,767,000, which accrues interest at a rate of prime
       plus 1.75% per annum;
 
     - We issued preferred stock with an aggregate initial stated value of
       $25,717,200, which accrues dividends at a rate of 6.0% per annum; and
 
     - The Investors acquired Preferred Stock and warrants that, as of the
       closing, had the right to acquire approximately 44,000,000 shares of our
       common stock, or more than 220% of the outstanding shares of common stock
       prior to the closing.
 
                                        26

<PAGE>
 
     As of March 15, 2004, we had approximately $375,000 in cash and
approximately $2,000,000 of undrawn availability under the New Credit Facility
with LaSalle Bank.
 
     We believe that our new line of credit and cash flow from operations will
be sufficient to operate our business. However, we incurred operating losses for
the last three years and although we were able to generate positive cash flow
from operations in 2002, cash flow from operations for 2003 was ($1,932,000).
 
     If the new line of credit and cash flow from operations are not sufficient
to fund the operation of our business, we may be required to seek additional
financing. Such additional financing may not be available when needed or on
terms favorable to Akorn and its shareholders. Any such additional financing, if
obtained, will likely require the granting of rights, preferences or privileges
senior to those of the common stock and result in additional dilution of the
existing ownership interests of the common stockholders.
 
     We continue to be subject to potential claims by the FDA that could have a
material adverse effect on us. See part II -- Item 1 -- "Legal Proceedings."
There can be no guarantee that we will successfully resolve the ongoing
compliance matters with the FDA. However, we have submitted to the FDA and have
implemented a plan for comprehensive corrective actions at our Decatur, Illinois
facility.
 
     Our recurring losses, working capital deficiencies and FDA compliance
issues raise substantial doubt as to our ability to continue as a going concern.
 
  NEW CREDIT FACILITY
 
     As described in Note G -- "Financing Arrangements" -- to the Consolidated
Financial Statements, we entered into a New Credit Facility with LaSalle Bank.
The New Credit Facility with LaSalle Bank consists of a $5,500,000 term loan A,
a $1,500,000 term loan B (collectively, the "Term Loans"), as well as a
revolving line of credit of up to $5,000,000 (the "Revolver") secured by
substantially all of our assets. The New Credit Facility matures on October 7,
2005. The Term Loans bear interest at prime plus 1.75% and require principal
payments of $195,000 per month commencing October 31, 2003, with the payments
first to be applied to term loan B. The Revolver bears interest at prime plus
1.50%.
 
     Availability under the Revolver is determined by the sum of (i) 80% of
eligible accounts receivable, (ii) 30% of raw material, finished goods and
component inventory excluding packaging items, not to exceed $2.5 million, and
(iii) the difference between 90% of the forced liquidation value of machinery
and equipment ($4,092,000) and the sum of $1,750,000 and the outstanding balance
under term loan B. The New Credit Facility contains certain restrictive
covenants including but not limited to certain financial covenants such as
minimum EDITDA levels, Fixed Charge Coverage Ratios, Senior Debt to EBITDA
ratios and Total Debt to EBITDA ratios. If we are not in compliance with the
covenants of the New Credit Facility, LaSalle Bank has the right to declare an
event of default and all of the outstanding balances owed under the New Credit
Facility would become immediately due and payable. The New Credit Facility also
contains subjective covenants providing that we would be in default if, in the
judgment of the lenders, there is a material adverse change in our financial
condition. We have negotiated an amendment to the New Credit Facility effective
December 31, 2003 that will clarify certain covenant computations and waive
certain technical violations. Because the New Credit Facility also requires us
to maintain our deposit accounts with LaSalle, the existence of these subjective
covenants, pursuant to EITF Abstract No. 95-22, require that we classify
outstanding borrowings under the Revolver as a current liability
 
  FDA COMPLIANCE MATTERS
 
     As described in more detail in Part II -- Item 1 -- "Legal Proceedings," we
continue to be subject to potential claims by the FDA. While we are cooperating
with the FDA and seeking to resolve our ongoing compliance matters, an
unfavorable outcome may have a material impact on our operations and its
financial condition, results of operations and/or cash flows and may constitute
a covenant violation under the New Credit Facility, any or all of which could
have a material adverse effect on our liquidity and ability to continue as a
going concern.
 
                                        27

<PAGE>
 
  FACILITY EXPANSION
 
     In 2000, we began an expansion project at our Decatur, Illinois facility to
add capacity to provide Lyophilization manufacturing services, which is a
capability we do not have currently. Subject to our ability to generate
operating cash flow or obtain new financing for future operations and capital
expenditures, we anticipate the completion of the Lyophilization expansion in
the first half of 2005. As of December 31, 2003, we had spent approximately
$17.9 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, we
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, we entered into a $5,000,000 convertible subordinated
debt transaction with the Kapoor Trust. 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 convertible subordinated
debt, we 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 convertible
subordinated debt. All unexercised warrants will expire on December 20, 2006.
 
     Under the terms of the Trust Agreement, the convertible subordinated debt,
which is due December 20, 2006, bears interest at prime plus 3%, but interest
payments are currently prohibited under the terms of a subordination
arrangement. The convertible feature of the Trust Agreement, as amended, allows
for conversion of the subordinated debt plus interest into common stock of
Akorn, 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, we entered into a $3,250,000 five-year loan with
NeoPharm, Inc. ("NeoPharm") to fund our efforts to complete our lyophilization
facility located in Decatur, Illinois. Prior to its amendment and restatement in
connection with the Exchange Transaction, the Promissory Note, dated December
20, 2001 (the "NeoPharm Promissory Note"), provided for interest to accrue at
the initial rate of 3.6% and 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 NeoPharm Promissory Note also provided for
all principal and accrued interest to be due and payable on or before maturity
on December 20, 2006, and required us to use the proceeds of the loan solely to
validate and complete the lyophilization facility located in Decatur, Illinois.
The NeoPharm Promissory 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 lyophilization facility each year. As of September 30, 2003, we
were in default under the NeoPharm Promissory Note as a result of its failure to
remove all FDA warning letter sanctions related to the our Decatur, Illinois
facility by June 30, 2003. Dr. John N. Kapoor, the Chairman of our Board of
Directors, is also chairman of NeoPharm and holds a substantial stock position
in NeoPharm as well as in Akorn.
 
     Contemporaneous with the completion of the NeoPharm Promissory Note between
us and NeoPharm in 2001, we entered into an agreement with the Kapoor Trust,
which amended the Trust Agreement. The amendment extended the maturity of the
Trust Agreement to terminate concurrently with the NeoPharm 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
our common stock. 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. In
 
                                        28

<PAGE>
 
September 2003, we defaulted under the Trust Agreement as a result of a
cross-default to the NeoPharm Promissory Note.
 
     In connection with the Exchange Transaction, NeoPharm waived all existing
defaults under the NeoPharm Promissory Note and we and NeoPharm entered into an
Amended and Restated Promissory Note dated October 7, 2003 (the "Amended
NeoPharm Note"). Interest under the Amended NeoPharm Note accrues at 1.75% above
LaSalle Bank's prime rate, but interest payments are currently prohibited under
the terms of subordination arrangements. The Amended NeoPharm Note also requires
us to make quarterly payments of $150,000 beginning on the last day of the
calendar quarter during which all indebtedness under the New Credit Facility has
been paid. All remaining amounts owed under the Amended NeoPharm Note are
payable at maturity on December 20, 2006. The NeoPharm subordinated debt is
subordinated to our bank debt under the New Credit Facility and is senior to our
debt to the Kapoor Trust and to the 2003 Subordinated Notes.
 
     In connection with the Exchange Transaction, the Kapoor Trust waived all
existing defaults under the Trust Agreement and we and the Kapoor Trust entered
into an amendment to the Trust Agreement. That amendment did not change the
interest rate or the maturity date of the loans made under the Trust Agreement.
The debt owed under the Trust Agreement is subordinated to our bank debt under
the New Credit Facility, the subordinated debt under the Amended NeoPharm Note
and the 2003 Subordinated Notes issued in connection with the Exchange
Transaction.
 
     As part of the Exchange Transaction, we issued the 2003 Subordinated Notes
to the Kapoor Trust, Arjun Waney and Argent Fund Management, Ltd. The 2003
Subordinated Notes mature on April 7, 2006 and bear interest at prime plus
1.75%, but interest payments are currently prohibited under the terms of
subordination arrangements. The 2003 Subordinated Notes are subordinated to the
New Credit Facility and the Amended NeoPharm Note but senior to Trust Loan
Agreement with the Kapoor Trust. We also issued to the holders of the 2003
Subordinated Notes warrants to purchase an aggregate of 276,714 shares of our
common stock with an exercise price of $1.10 per share.
 
  OTHER INDEBTEDNESS
 
     In June 1998, we entered into a $3,000,000 mortgage agreement with Standard
Mortgage Investors, LLC of which there were outstanding borrowings of $1,623,000
and $1,917,000 at December 31, 2003 and 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.
 
     The fair value of the debt obligations approximated the recorded value as
of December 31, 2003.
 
  PREFERRED STOCK AND WARRANTS
 
     In connection with the Exchange Transaction, we issued 257,172 shares of
Preferred Stock. The Preferred Stock accrues dividends at a rate of 6.0% per
annum, which rate is fully cumulative, accrues daily and compounds quarterly,
provided that in the event stockholder approval authorizing sufficient shares of
common stock to be authorized and reserved for conversion of all of the
Preferred Stock and warrants issued in connection with the Exchange Transaction
("Stockholder Approval") has not been received by October 7, 2004, such rate is
to increase to 10.0% until Stockholder Approval has been received and sufficient
shares of common stock are authorized and reserved. Subject to certain
limitations, on October 31, 2011, we are required to redeem all shares of
Preferred Stock for an amount equal to $100 per share, as may be adjusted from
time to time as set forth in the Articles of Amendment to the Articles of
Incorporation (the "Articles of Incorporation") (the "Stated Value"), plus all
accrued but unpaid dividends on such shares. Shares of Preferred Stock have
liquidation rights in preference over junior securities, including the common
stock, and have certain antidilution protections. The Preferred Stock is
convertible at any time into a number of shares of common stock equal to the
quotient obtained by dividing (x) the Stated Value plus any accrued but unpaid
dividends by (y) $0.75, as such numbers may be adjusted from time to time
pursuant to the terms of the Articles of Incorporation. Provided that
Stockholder Approval has been received and sufficient shares of common stock are
authorized and reserved for conversion, all shares of Preferred Stock shall
convert to shares
                                        29

<PAGE>
 
of common stock on the earlier to occur of (i) October 8, 2006 and (ii) the date
on which the closing price per share of common stock for at least 20 consecutive
trading days immediately preceding such date exceeds $4.00 per share. For more
information regarding the Preferred Stock, including the voting rights of the
Preferred Stock, see Note G -- "Financing Arrangements" -- to the Condensed
Consolidated Financial Statements.
 
     The warrants issued in connection with the Exchange Transaction are
exercisable at any time prior to expiration on October 7, 2006. Of those
warrants, warrants for 8,572,400 shares of common stock have an exercise price
of $1.00 per share and warrants for the remaining 1,236,714 shares of common
stock have an exercise price of $1.10 per share. We have also agreed to issue to
each of the Kapoor Trust and Arjun Waney, on each anniversary of the date of the
consummation of the Exchange Transaction, warrants to purchase an additional
number of shares of common stock equal to 0.08 multiplied by the principal
dollar amount of the our indebtedness then guaranteed by them under the New
Credit Facility. The warrants issued in exchange for these guarantees have an
exercise price of $1.10 per share. This is in addition to warrants outstanding
prior to the Exchange Transaction for 1,000,000 and 667,000 shares of common
stock with per share exercise prices of $2.85 and $2.25, respectively.
 
CONTRACTUAL OBLIGATIONS
(In Thousands)
 
     The following table details our future contractual obligations through
2008. Our ability to satisfy these obligations is primarily dependent upon our
ability to generate sufficient working capital or to obtain additional
financing.
 

<Table>
<Caption>
                                                           PAYMENT DUE -- BY PERIOD
                                                 ---------------------------------------------
DESCRIPTION                                       TOTAL     2004    2005-6    2007-8    2009+
-----------                                      -------   ------   -------   ------   -------
<S>                                              <C>       <C>      <C>       <C>      <C>
Long Term Debt, including current maturities...  $20,555   $4,156   $15,797   $  602   $    --
Preferred Stock, if redeemed...................   21,132                                21,132
Operating Leases...............................    7,046    1,557     3,106    2,242       141
Other Long Term Liabilities....................    1,156       --     1,156       --        --
                                                 -------   ------   -------   ------   -------
     Total:....................................  $49,889   $5,713   $20,059   $2,844   $21,273
</Table>

 
SELECTED QUARTERLY FINANCIAL DATA
In Thousands, Except Per Share Amounts
 

<Table>
<Caption>
                                                                         NET INCOME (LOSS)
                                                                  --------------------------------
                                                         GROSS               PER SHARE   PER SHARE
                                             REVENUES   PROFIT     AMOUNT      BASIC      DILUTED
                                             --------   -------   --------   ---------   ---------
<S>                                          <C>        <C>       <C>        <C>         <C>
Year Ended December 31, 2003:
  1st Quarter..............................  $12,782    $ 5,844   $    182    $ 0.01      $ 0.01
  2nd Quarter..............................    8,840        535     (4,197)    (0.21)      (0.21)
  3rd Quarter..............................   14,349      5,075       (343)    (0.02)      (0.02)
  4th Quarter..............................    9,520        694   $ (7,967)   $(0.40)     $(0.40)
                                             -------    -------   --------    ------      ------
     Total.................................  $45,491    $12,148    (12,325)    (0.62)      (0.62)
Year Ended December 31, 2002:
  1st Quarter..............................  $13,443    $ 6,349   $    151    $ 0.01      $ 0.01
  2nd Quarter..............................   14,165      6,366       (783)    (0.04)      (0.04)
  3rd Quarter..............................   12,121      4,456     (9,387)    (0.48)      (0.48)
  4th Quarter..............................   11,690      3,366     (2,933)    (0.15)      (0.15)
                                             -------    -------   --------    ------      ------
     Total.................................  $51,419    $20,537   $(12,952)   $(0.66)     $(0.66)
</Table>

 
                                        30

<PAGE>
 
CRITICAL ACCOUNTING POLICIES
 
 REVENUE RECOGNITION
 
     We recognize revenue upon the shipment of goods or upon the delivery of
goods, depending on the sales terms. Revenue is recognized when all of our
obligations have been fulfilled and collection of the related receivable is
probable. We record a provision at the time of sale for estimated chargebacks,
rebates and product returns. Additionally, we maintain an allowance for doubtful
accounts and slow moving and obsolete inventory. These provisions and allowances
are analyzed and adjusted, if necessary, at each balance sheet date.
 
 ALLOWANCE FOR CHARGEBACKS AND REBATES
 
     We maintain an allowance for chargebacks and rebates. These allowances are
reflected as a reduction of accounts receivable.
 
     We enter 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 us by the wholesaler. We track sales and submitted chargebacks by product
number for each wholesaler. Utilizing this information, we estimate a chargeback
percentage for each product. We reduce gross sales and increases the chargeback
allowance by the estimated chargeback amount for each product sold to a
wholesaler. We reduce the chargeback allowance when we process a request for a
chargeback from a wholesaler. Actual chargebacks processed can vary materially
from period to period.
 
     We obtain wholesaler inventory reports to aid in analyzing the
reasonableness of the chargeback allowance. We assess the reasonableness of our
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, we maintain 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
we sell our products to its rebate-eligible customers. Rebate percentages vary
by product and by volume purchased by each eligible customer. We track 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. We reduce gross sales and increases the rebate allowance by
the estimated rebate amount for each product sold to an eligible customer. We
reduce the rebate allowance when we process a customer request for a rebate. At
each balance sheet date, we evaluate the allowance against actual rebates
processed and such amount can vary materially from period to period.
 
     The recorded allowances reflect our current estimate of the future
chargeback and rebate liability to be paid or credited to the wholesaler under
the various contracts and programs. For the years ended December 31, 2003, 2002
and 2001, we recorded chargeback and rebate expense of $12,836,000, $15,418,000,
and $28,655,000, respectively. The allowance for chargebacks and rebates was
$4,804,000 and $4,302,000 as of December 31, 2003 and 2002, respectively.
 
 ALLOWANCE FOR PRODUCT RETURNS
 
     We also maintain an allowance for estimated product returns. This allowance
is reflected as a reduction of accounts receivable balances. We evaluate 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, we also consider the wholesaler's inventory
information to assess the magnitude of unconsumed product that may result in a
product return to us in the future. Actual returns processed can vary materially
from period to period. For the years ended December 31, 2003, 2002, and 2001 we
recorded a provision for product returns of $2,085,000, $2,574,000, and
$4,103,000, respectively. The allowance for potential product returns was $
1,077,000 and $1,166,000 at December 31, 2003 and 2002, respectively.
 
                                        31

<PAGE>
 
 ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
     We maintain an allowance for doubtful accounts, which reflects trade
receivable balances owed to us that are believed to be uncollectible. This
allowance is reflected as a reduction of accounts receivable balances. In
estimating the allowance for doubtful accounts, we have:
 
     - 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 or "channel"
       factors).
 
     - 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) information
       regarding external factors, particularly in respect of major customers.
 
     - 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 and other external
       factors that might affect collectibility of outstanding balances -- based
       upon information available at the time.
 
     For the years ended December 31, 2003, 2002 and 2001, we recorded a
provision (recovery) for doubtful accounts of ($471,000), ($55,000), and
$4,480,000, respectively. The allowance for doubtful accounts was $609,000, and
$1,200,000 as of December 31, 2003 and 2002, respectively. As of December 31,
2003, we had a total of $2,118,000 of past due gross accounts receivable, of
which $506,000 was over 60 days past due. We perform monthly a detailed analysis
of the receivables due from our wholesaler customers and provide a specific
reserve against known uncollectible items for each of the wholesaler customers.
We also include in the allowance for doubtful accounts an amount that we
estimate 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
$609,000, the portion related to the wholesaler customers is $385,000 with the
remaining $224,000 reserve for all other customers.
 
 ALLOWANCE FOR DISCOUNTS
 
     We maintain 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. We evaluate the allowance
balance against actual discounts taken. For the years ended December 31, 2003,
2002 and 2001, we recorded a provision for discounts of $689,000, $1,014,000 and
$886,000, respectively. Prior to 2001, we did not grant discounts. The allowance
for discounts was $94,000 and $172,000 as of December 31, 2003 and 2002,
respectively.
 
 ALLOWANCE FOR SLOW-MOVING INVENTORY
 
     We maintain an allowance for slow-moving and obsolete inventory. For
finished goods inventory, we estimate the amount of inventory that may not be
sold prior to its expiration or is slow moving based upon recent sales activity
by unit and wholesaler inventory information. We also analyze our raw material
and component inventory for slow moving items. For the years ended December 31,
2003, 2002 and 2001, we recorded a provision for inventory obsolescence of
$940,000, $838,000, and $1,830,000, respectively. The allowance for inventory
obsolescence was $917,000 and $1,206,000 as of December 31, 2003 and 2002,
respectively.
 
 INCOME TAXES
 
     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
                                        32

<PAGE>
 
those used for financial reporting purposes. We record a valuation allowance to
reduce the deferred tax assets to the amount that is more likely than not to be
realized. In performing our analysis of whether a valuation allowance to reduce
the deferred tax asset is necessary, we considered both negative and positive
evidence. Based upon this analysis, the negative evidence outweighed the
positive evidence in determining the amount of the deferred tax assets that is
more likely than not to be realized. Based upon our analysis, beginning with the
September 30, 2002 deferred tax assets, we have established a valuation
allowance to reduce the deferred tax assets to zero. The 2002 expense of $9.2
million related to establishing the deferred tax assets valuation allowance has
been recorded in the income tax provision (benefit).
 
 INTANGIBLES
 
     Intangibles consist primarily of product licensing and other such costs
that are capitalized and amortized on the straight-line method over the lives of
the related license periods or the estimated life of the acquired product, which
range from 17 months to 18 years. Accumulated amortization at December 31, 2003
and 2002 was $9,958,000 and $8,543,000, respectively. We annually assess the
impairment of intangibles based on several factors, including estimated fair
market value and anticipated cash flows. On July 3, 2002, we settled a License
Agreement dispute with JHU/APL (See Note N -- "Commitments and Contingencies" to
the consolidated financial statements in Item 8) on two licensed patents. As a
result of the resolved dispute, we recorded an asset impairment charge of
$1,559,500 in the second quarter of 2002, representing the net value of the
asset recorded on the balance sheet less the $300,000 payment abated by JHU/APL
and the $125,000 payment received from JHU/APL.
 
     During the third quarter of 2002, we recorded an impairment charge of
$257,000 related to the product license intangible assets for the products
Sublimaze, Inapsine, Paradrine and Dry Eye test. We determined that projected
profitability on the products was not sufficient to support the carrying value
of the intangible asset. The recording of this charge reduced the carrying value
of the intangible assets related to these product licenses to zero. These
charges are reflected in the selling, general and administrative expense
category of the consolidated statement of operations. See Note R -- "Asset
Impairment Charges" to the consolidated financial statements in Item 8.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     In April 2002, the FASB issued SFAS No. 145 "Rescission 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 Extinguishments of Debt", which required all gains and losses
from extinguishments 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 Opinion No. 30 will now be used to classify those gains and losses. SFAS
No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements",
amended SFAS No. 4, is no longer necessary because SFAS No. 4 has been
rescinded. SFAS No. 145 amends SFAS No. 13 "Accounting for Leases", to require
that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Certain provisions of SFAS No. 145 are effective
for 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 has not had a material impact on our financial statements but did have
an impact on the classification of the net gain from extinguishment of debt
resulting from the Exchange Transaction in 2003.
 
     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires us 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. We
adopted SFAS No. 146 in 2003. Adoption of this standard did not have a material
effect on our 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 SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a
 
                                        33

<PAGE>
 
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure in both annual and interim
financial statements. We adopted the revised disclosure requirements in 2003.
 
     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 Nos. 5, 57 and 107 and a rescission of FASB Interpretation No. 34".
This Interpretation elaborates on the disclosure to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation were applicable to guarantees issued or
modified after December 31, 2002 and did not have a material effect on our
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 sufficient voting rights to direct decisions about the entity, 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. We determined that FIN 46 will not
have an impact on our financial condition, results of operations or cash flows.
 
     On December 17, 2003, the Staff of the SEC issued Staff Accounting Bulletin
No. 104 (SAB 104), Revenue Recognition, which supercedes SAB 101, Revenue
Recognition in Financial Statements. SAB 104's primary purpose is to rescind
accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, superceded as a result of the issuance of EITF 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104
rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers (the FAQ) issued with SAB 101 that had been codified in
SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. The adoption of SAB 104 did not materially affect our
revenue recognition policies, nor our results of operations, financial position
or cash flows.
 
     In April 2003, FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities
("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133. SFAS 149 is effective for
contracts and hedging relationships entered into or modified after June 30,
2003. We adopted the provisions of SFAS 149 effective June 30, 2003 and such
adoption did not have a material impact on its consolidated financial statements
since we have not entered into any derivative or hedging transactions.
 
     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards for how entities classify and measure in their statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. The provisions of SFAS 150 are effective for financial
statements entered into or modified after May 31, 2003. As a result of SFAS No.
150, we have reflected the Preferred Stock issued as part of the Exchange
Transaction as a long-term liability until approval by the our shareholders.
 
                                        34

<PAGE>
 

I
TEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     We are subject to market risk associated with changes in interest rates. As
previously disclosed, all debt under our Credit Agreement with The Northern
Trust Company, which bore interest at prime plus 3.0%, was retired as part of
the Exchange Transaction. Our interest rate exposure currently involves four
debt instruments. Term loan debt under the New Credit Agreement, as well as debt
under the Amended NeoPharm Note and the 2003 Subordinated Promissory Notes,
bears interest at prime plus 1.75%. Revolver debt under the New Credit Agreement
bears interest at prime plus 1.50%. The subordinated convertible debentures
issued to the Kapoor Trust under the Trust Agreement bear interest at prime plus
3.0%. All of our remaining long-term debt is at fixed interest rates. We
estimate that a change of 1.0% in our variable rate debt from the interest rates
in effect at December 31, 2003 would result in a $230,000 pre-tax change in
annual interest expense.
 
     Our 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 our bank borrowings under our debt instruments 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 December 31, 2003.
 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The following financial statements are included in Part II, Item 8 of this
Form 10-K.
 

<Table>
<S>                                                            <C>
INDEX:
Report of Independent Certified Public Accountants..........    36
Independent Auditors' Report................................    37
Consolidated Balance Sheets as of December 31, 2003 and
  2002......................................................    38
Consolidated Statements of Operations for the years ended
  December 31, 2003, 2002 and 2001..........................    39
Consolidated Statements of Shareholders' Equity for the
  years ended December 31, 2003, 2002 and 2001..............    40
Consolidated Statements of Cash Flows for the years ended
  December 31, 2003, 2002 and 2001..........................    41
Notes to Consolidated Financial Statements..................    42

</Table>

 
                                        35

<PAGE>
 

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
Board of Directors and Shareholders
Akorn, Inc.
Buffalo Grove, Illinois
 
     We have audited the accompanying consolidated financial statements of
Akorn, Inc. and Subsidiary as of December 31, 2003 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
 
     We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Akorn, Inc.
and Subsidiary at December 31, 2003 and the results of their operations and cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
 
     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note A to the
consolidated financial statements, the Company has suffered recurring losses
from operations in recent years, has a net working capital deficiency at
December 31, 2003, and is involved in certain ongoing governmental proceedings
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note A. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
 
BDO Seidman, LLP
 
Chicago, Illinois
February 20, 2004

 
                                        36

<PAGE>
 

                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Shareholders of Akorn, Inc.:
 
     We have audited the accompanying consolidated financial statements of
Akorn, Inc. and subsidiary (the "Company") as of December 31, 2002, and for each
of the two years in the period ended December 31, 2002, as listed in the Index
at Item 8. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Akorn, Inc. and subsidiary at
December 31, 2002, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
 
     The accompanying consolidated financial statements for the year ended
December 31, 2002 have been prepared assuming that the Company will continue as
a going concern. As discussed in Note A to the consolidated financial
statements, the Company's losses from operations in recent years, working
capital deficiency as of December 31, 2002, the need to refinance or extend its
debt on a long-term basis and the need to successfully resolve the ongoing
governmental proceedings, raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note A. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
Deloitte & Touche LLP
 
Chicago, Illinois
May 9, 2003

 
                                        37

<PAGE>
 
                                  AKORN, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                 (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
 

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2003       2002
                                                              --------   --------
<S>                                                           <C>        <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents.................................  $    218   $    364
  Trade accounts receivable (less allowance for doubtful
     accounts of $609 and $1,200 at December 31, 2003 and
     2002, respectively)....................................     1,626      1,421
  Inventories...............................................     7,807     10,401
  Income taxes recoverable..................................        45        670
  Prepaid expenses and other current assets.................       899        383
                                                              --------   --------
     TOTAL CURRENT ASSETS...................................    10,595     13,239
OTHER ASSETS
  Intangibles, net..........................................    12,872     14,142
  Investment in Novadaq Technologies........................       713        713
  Other.....................................................     1,328        130
                                                              --------   --------
     TOTAL OTHER ASSETS.....................................    14,913     14,985
PROPERTY, PLANT AND EQUIPMENT, NET..........................    33,907     35,314
                                                              --------   --------
     TOTAL ASSETS...........................................  $ 59,415   $ 63,538
                                                              ========   ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Current installments of long-term debt....................  $  4,156   $ 35,859
  Trade accounts payable....................................     5,411      5,756
  Accrued compensation......................................       510        836
  Accrued expenses and other liabilities....................     1,882      1,352
                                                              --------   --------
     TOTAL CURRENT LIABILITIES..............................    11,959     43,803
Long-term debt, less current installments...................    13,777      7,799
Redeemable preferred stock, $1.00 par value -- 5,000,000
  shares authorized; 257,172 issued as of December 31,
  2003......................................................    21,132         --
Other long-term liabilities.................................     1,156        584
                                                              --------   --------
     TOTAL LIABILITIES......................................    48,024     52,186
                                                              --------   --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
  Common stock, no par value -- 40,000,000 shares
     authorized; 19,825,296 and 19,656,582 shares issued and
     outstanding at December 31, 2003 and 2002,
     respectively...........................................    25,506     25,350
  Warrants to acquire common stock..........................    13,724      1,516
  Accumulated deficit.......................................   (27,839)   (15,514)
                                                              --------   --------
     TOTAL SHAREHOLDERS' EQUITY.............................    11,391     11,352
                                                              --------   --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................  $ 59,415   $ 63,538
                                                              ========   ========
</Table>

 
See notes to the consolidated financial statements.
 
                                        38

<PAGE>
 
                                  AKORN, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2003       2002       2001
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Revenues....................................................  $ 45,491   $ 51,419   $ 41,545
Cost of sales...............................................    33,343     30,882     35,147
                                                              --------   --------   --------
  GROSS PROFIT..............................................    12,148     20,537      6,398
Selling, general and administrative expenses................    16,015     20,860     18,900
Provision (recovery) for bad debts..........................      (471)       (55)     4,480
Amortization of intangibles.................................     1,415      1,411      1,494
Research and development expenses...........................     1,465      1,886      2,598
                                                              --------   --------   --------
  OPERATING EXPENSES........................................    18,424     24,102     27,472
                                                              --------   --------   --------
  OPERATING LOSS............................................    (6,276)    (3,565)   (21,074)
Interest expense............................................    (3,157)    (3,150)    (3,768)
Loss on Exchange Transaction................................    (3,102)        --         --
Other income (expense), net.................................        39          2        (84)
                                                              --------   --------   --------
LOSS BEFORE INCOME TAXES....................................   (12,496)    (6,713)   (24,926)
Income tax (benefit) provision..............................      (171)     6,239     (9,780)
                                                              --------   --------   --------
  NET LOSS..................................................  $(12,325)  $(12,952)  $(15,146)
                                                              ========   ========   ========
  NET LOSS PER SHARE:
     BASIC..................................................  $  (0.62)  $  (0.66)  $  (0.78)
                                                              ========   ========   ========
     DILUTED................................................  $  (0.62)  $  (0.66)  $  (0.78)
                                                              ========   ========   ========
  SHARES USED IN COMPUTING NET LOSS PER SHARE:
     BASIC..................................................    19,745     19,589     19,337
                                                              ========   ========   ========
     DILUTED................................................    19,745     19,589     19,337
                                                              ========   ========   ========
</Table>

 
See notes to the consolidated financial statements.
 
                                        39

<PAGE>
 
                                  AKORN, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                                 (IN THOUSANDS)
 

<Table>
<Caption>
                                                                WARRANTS      RETAINED
                                              COMMON STOCK     TO ACQUIRE     EARNINGS
                                            ----------------     COMMON     (ACCUMULATED
                                            SHARES   AMOUNT      STOCK        DEFICIT)      TOTAL
                                            ------   -------   ----------   ------------   --------
<S>                                         <C>      <C>       <C>          <C>            <C>
Balances at December 31, 2000.............  19,247   $22,647    $    --       $ 12,584     $ 35,231
Net loss..................................      --        --         --        (15,146)     (15,146)
Warrants issued in connection with
  convertible debentures..................      --        --      1,516             --        1,516
Intrinsic value of conversion feature in
  connection with the issuance of
  convertible debentures..................      --     1,508         --             --        1,508
Exercise of stock options.................     175       583         --             --          583
Shares issued in connection with the
  employee stock purchase plan............      44       138         --             --          138
                                            ------   -------    -------       --------     --------
Balances at December 31, 2001.............  19,466    24,876      1,516         (2,562)      23,830
Net loss..................................                                     (12,952)     (12,952)
Intrinsic value of conversion feature in
  connection with the issuance of
  convertible debentures..................      --       114         --             --          114
Exercise of stock options.................      92       253         --             --          253
Shares issued in connection with the
  employee stock purchase plan............      99       107         --             --          107
                                            ------   -------    -------       --------     --------
Balances at December 31, 2002.............  19,657    25,350      1,516        (15,514)      11,352
Net loss..................................      --        --         --        (12,325)     (12,325)
Exchange Transaction Warrants:
  Issued to preferred stockholders........      --        --      9,188             --        9,188
  Issued to bank note guarantors..........      --        --      1,166             --        1,166
  Issued to subordinate noteholders.......      --        --        336             --          336
  Due to consultants......................      --        --      1,518             --        1,518
Exercise of stock options.................      42        40         --             --           40
Shares issued in connection with the
  employee stock purchase plan............     127       116         --             --          116
                                            ------   -------    -------       --------     --------
Balances at December 31, 2003.............  19,826   $25,506    $13,724       $(27,839)    $ 11,391
                                            ======   =======    =======       ========     ========
</Table>

 
See notes to the consolidated financial statements.
 
                                        40

<PAGE>
 
                                  AKORN, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
 

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2003       2002       2001
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Net loss....................................................  $(12,325)  $(12,952)  $(15,146)
  Adjustments to reconcile net loss to net cash from
     operating activities:
     Depreciation and amortization..........................     4,128      4,510      4,286
     Impairment of long-lived assets........................        --      2,362      2,132
     Non-cash net loss on exchange transaction..............    (1,518)        --         --
     Non-cash expense on related to preferred stock.........       589         --         --
     Loss (gain) on disposal of long-lived assets...........       (36)       (23)        78
     Deferred income taxes..................................        --      5,919     (2,813)
     Amortization of debt discount..........................       509        519        431
     Changes in operating assets and liabilities:
       Trade accounts receivable............................      (350)     4,481     10,722
       Income taxes recoverable.............................       625      5,870     (6,540)
       Inventory............................................     2,594     (2,266)     5,923
       Prepaid expenses and other assets....................       257        179        428
       Trade accounts payable...............................      (217)     2,721     (2,865)
       Accrued expenses and other liabilities...............       776     (1,963)     2,920
                                                              --------   --------   --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES.........    (1,932)     9,357       (444)
INVESTING ACTIVITIES
Purchases of property, plant and equipment..................    (1,819)     (5440)    (3,626)
Proceeds from sale of long-lived assets.....................        76        125         --
Purchase of product intangibles and product licensing
  fees......................................................                            (500)
                                                              --------   --------   --------
NET CASH USED IN INVESTING ACTIVITIES.......................    (1,743)    (5,315)    (4,126)
FINANCING ACTIVITIES
Proceeds under stock option and stock purchase plans........       156        474        721
Repayments of long-term debt................................    (6,352)   (11,994)    (1,153)
Proceeds from issuance of long-term debt....................     9,166      2,487      8,034
Increase in current line of credit..........................     1,500         --         --
Costs incurred in exchange transaction......................      (941)        --         --
Proceeds from issuance of stock warrants....................        --         --      1,516
                                                              --------   --------   --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.........     3,529     (9,033)     9,118
                                                              --------   --------   --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............      (146)    (4,991)     4,548
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..............       364      5,355        807
                                                              --------   --------   --------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................  $    218   $    364   $  5,355
                                                              ========   ========   ========
</Table>

 
See notes to the consolidated financial statements.
 
                                        41

<PAGE>
 
                                  AKORN, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE A -- BUSINESS AND BASIS OF PRESENTATION
 
     Business: Akorn, Inc. and its wholly owned subsidiary, Akorn (New Jersey),
Inc. (collectively, the "Company") manufacture and market diagnostic and
therapeutic pharmaceuticals in specialty areas such as ophthalmology,
rheumatology, anesthesia and antidotes, among others. Customers, including
physicians, optometrists, wholesalers, group purchasing organizations and other
pharmaceutical companies, are served primarily from three operating facilities
in the United States.
 
     Basis of Presentation: The Company's losses from operations in recent years
and working capital deficiencies, together with the need to successfully resolve
its ongoing compliance matters with the Food and Drug Administration ("FDA"),
have raised substantial doubt about the Company's ability to continue as a going
concern. 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.
 
     On October 7, 2003, a significant threat to the Company's ability to
continue as a going concern was resolved when the Company consummated a
transaction with a group of investors that resulted in the extinguishment of the
Company's then outstanding senior bank debt in the amount of approximately
$37,731,000 in exchange for shares of the Company's convertible preferred stock,
warrants to purchase shares of the Company's common stock, subordinated
promissory notes in the aggregate amount of $2,767,139 and a new credit facility
under which approximately $7,000,000 was outstanding as of the date of the
transaction, $5,473,862 of which was paid to the investors in the transaction.
For more information regarding this transaction, see Note G -- "Financing
Arrangements".
 
     While the Company generated positive cash flow from operations in 2002 it
used $1,932,000 in cash from operations in 2003. As of December 31, 2003, the
Company had $218,000 in cash and cash equivalents and had approximately $3.5
million of undrawn availability under its new line of credit. The Company
believes that the new line of credit, together with cash generated from
operations, will be sufficient to meet the cash requirements for operating the
Company's business, although there can be no assurance of this sufficiency.
 
     Although the Company has refinanced its debt on a long-term basis as
described above, it continues to be subject to ongoing FDA compliance matters
that could have a material adverse effect on the Company. See Note
N -- "Commitments and Contingencies" for further description of these matters.
The Company is working with the FDA to favorably resolve such compliance matters
and has submitted to the FDA and continues to implement a plan for comprehensive
corrective actions at its Decatur, Illinois facility. On February, 11, 2004, the
FDA began an inspection of the Decatur facility. This inspection is still
ongoing at the time of this filing. The management of the Company believes that
the Company will successfully resolve these compliance matters with the FDA. In
addition, if the Company is enjoined from further violations, including a
temporary suspension of some or all operations of the Decatur facility,
management believes it will be able to successfully manage through this
situation. There can be no guarantee that the FDA matters will be successfully
resolved, and if the Company is not successful in doing so, there remains
substantial doubt about the Company's ability to continue as a going concern.
 
     The Company has added key management personnel, including the appointment
in early 2003 of a new chief executive officer and additional personnel in
critical areas. 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 will continue to improve the
Company's results of operations, cash flow from operations and its future
prospects.
 
     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
                                        42

<PAGE>
 
NOTE A -- BUSINESS AND BASIS OF PRESENTATION -- (CONTINUED)

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.
 
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Consolidation: The accompanying consolidated financial statements include
the accounts of Akorn, Inc. and its wholly owned subsidiary, Akorn (New Jersey)
Inc. Intercompany transactions and balances have been eliminated in
consolidation.
 
     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 for the
Company relate to the allowance for doubtful accounts, the allowance for
chargebacks, the allowance for rebates, the reserve for slow-moving and obsolete
inventories, the allowance for product returns, the allowance for discounts, the
carrying value of intangible assets and the carrying value of deferred income
tax assets.
 
     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 certain 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.
 
     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.
 
     Provision for estimated doubtful accounts, 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.
 
     Cash Equivalents: The Company considers all highly liquid investments with
maturity of three months or less, when purchased, to be cash equivalents.
 
     Accounts Receivable: The nature of the Company's business inherently
involves, in the ordinary course, significant amounts and substantial volumes of
transactions and estimates relating to allowances for doubtful accounts, 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 Akorn the amount of deductions that were earned under the
respective terms with end-user customers (which, in turn, depends on which
end-user customer with different pricing arrangements might be entitled to a
particular deduction). This process can lead to "partial payments" against
outstanding invoices as the wholesalers take the claimed deductions at the time
of payment.
 
     Unless otherwise noted, the provisions and allowances for the following
customer deductions are reflected in the accompanying financial statements as
reductions of revenues and trade accounts receivable, respectively.
 
     Chargebacks and Rebates: 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 that buy the product from the
Company. When a wholesaler sells products to one of the third parties that is
subject to a contractual price
                                        43

<PAGE>
 
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

agreement, the difference between the price paid to the Company by 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 certain 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. 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 when the Company sells its
products to its rebate-eligible customers. 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 its wholesaler
customers under the various contracts and programs. For the years ended December
31, 2003, 2002 and 2001, the Company recorded chargeback and rebate expense of
$12,836,000, $15,418,000, and $28,655,000, respectively. The allowance for
chargebacks and rebates was $4,804,000 and $4,302,000 as of December 31, 2003
and 2002.
 
     Product Returns: Certain of the Company's products are sold with the
customer having the right to return the product within specified periods and
guidelines for a variety of reasons, including but not limited to pending
expiration dates. Provisions are made at the time of sale based upon tracked
historical experience, by customer in some cases. In evaluating month end
allowance balances, the Company considers actual returns to date that are in
process, the expected impact of product recalls and 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 years ended December 31, 2003, 2002,
and 2001 the Company recorded a provision for product returns of $2,085,000,
$2,574,000, and $4,103,000, respectively. The allowance for potential product
returns was $1,077,000 and $1,166,000 at December 31, 2003 and 2002,
respectively.
 
     Doubtful Accounts: Provisions for doubtful accounts, which reflects trade
receivable balances owed to the Company that are believed to be uncollectible,
are recorded as a component of selling general and administrative expenses. In
estimating the allowance for doubtful accounts, the Company has:
 
     - 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, "channel"
       factors, etc.).
 
     - 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) information
       regarding exogenous factors, particularly in respect of major customers.
 
                                        44

<PAGE>
 
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

     - 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 and other exogenous
       factors that might affect collectibility of outstanding balances -- based
       upon information available at the time.
 
     For the years ended December 31, 2003, 2002 and 2001, the Company recorded
a provision (recovery) for doubtful accounts of ($471,000), ($55,000), and
$4,480,000, respectively. The allowance for doubtful accounts was $609,000, and
$1,200,000 as of December 31, 2003 and 2002, respectively. As of December 31,
2003, the Company had a total of $2,118,000 of past due gross accounts
receivable, of which $506,000 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 as of December 31, 2003 of $609,000, the portion
related to the wholesaler customers is $385,000 with the remaining $224,000
reserve for all other customers.
 
     Discounts: Cash discounts are available to certain customers based on
agreed upon terms of sale. The Company evaluates the discount reserve balance
against actual discounts taken. For the years ended December 31, 2003, 2002 and
2001, the Company recorded a provision for discounts of $689,000, $1,014,000 and
$886,000 respectively. Prior to 2001, the Company did not grant discounts. The
allowance for discounts was $94,000 and $172,000 as of December 31, 2003 and
2002, respectively.
 
     Inventories: Inventories are stated at the lower of cost (average cost
method) or market (see Note D -- "Inventories"). The Company maintains an
allowance for slow-moving and obsolete inventory. For finished goods inventory,
the Company estimates the amount of inventory that may not be sold prior to its
expiration or is slow moving based upon recent sales activity by unit and
wholesaler inventory information. The Company also analyzes its raw material and
component inventory for slow moving items. For the years ended December 31,
2003, 2002 and 2001, the Company recorded a provision for inventory obsolescence
of $940,000, $838,000, and $1,830,000, respectively. The allowance for inventory
obsolescence was $917,000 and $1,206,000 as of December 31, 2003 and 2002,
respectively.
 
     Intangibles: Intangibles consist primarily of product licensing and other
such costs that are capitalized and amortized on the straight-line method over
the lives of the related license periods or the estimated life of the acquired
product, which range from 17 months to 18 years. Accumulated amortization at
December 31, 2003 and 2002 was $9,958,000 and $8,543,000 respectively.
Amortization Expenses was $1,415,000, $1,411,000 and $1,494,000 for the years
ending December 31, 2003, 2002 and 2001, respectively. The Company regularly
assesses the impairment of intangibles based on several factors, including
estimated fair market value and anticipated cash flows. In 2002, the Company
recorded impairment charges on certain intangible assets (see Note R -- "Asset
Impairment Charges").
 
     The amortization expense of acquired intangible assets, absent any further
impairments, for each of the five years ending December 31, 2008 will be as
follows (in thousands):
 

<Table>
<S>                                                            <C>
For the year ended 12/31/04.................................   $1,430
For the year ended 12/31/05.................................    1,383
For the year ended 12/31/06.................................    1,311
For the year ended 12/31/07.................................    1,282
For the year ended 12/31/08.................................    1,282
</Table>

 
     Property, Plant and Equipment: Property, plant and equipment is stated at
cost, less accumulated depreciation. Depreciation is provided using the
straight-line method in amounts considered sufficient to amortize the cost of
the assets to operations over their estimated service lives or lease terms. The
average
 
                                        45

<PAGE>
 
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

estimated service lives of buildings, leasehold improvements, furniture and
equipment, and automobiles are approximately 30, 10, 10, and 5 years,
respectively. Depreciation Expense was $3,058,000, $3,098,000 and $2,799,000 for
2003, 2002 and 2001, respectively.
 
     Net Loss Per Common Share: Basic net loss per common share is based upon
weighted average common shares outstanding. Diluted net loss per common share is
based upon the weighted average number of common shares outstanding, including
the dilutive effect, if any, of stock options, warrants and convertible
securities using the treasury stock and if converted methods. However, due to
net losses in each of the last three years, the Company had no dilutive stock
options, warrants or convertible securities. Antidilutive shares excluded from
the computation of diluted net loss per share include 8,053,000, 7,528,000 and
7,412,000 for 2003, 2002 and 2001, respectively, related to options, warrants
and convertible debt. Additionally, for 2003 antidilutive shares include
45,349,000 related to warrants and the convertible Preferred Stock issued in the
Exchange Transaction.
 
     Stock Based Compensation: The Company applies the intrinsic-value-based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" to account for its fixed-plan
stock options. Under this method, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has elected
to continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123. The
Company accounts for the plans under APB Opinion No. 25, under which no
compensation cost has been recognized for the stock option awards to employees,
since the exercise price of the options granted is equal to the market value on
the date of the grant. See Note J -- "Stock Options and Employee Stock Purchase
Plan".
 
     Had compensation cost for the Company's stock-based compensation plans been
determined based on SFAS No. 123, the Company's loss and net loss per share for
the years ended December 31, 2003, 2002 and 2001 would have been the pro forma
amounts indicated below (in thousands, except per share amounts):
 

<Table>
<Caption>
                                                                2003       2002       2001
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net loss, as reported.......................................  $(12,325)  $(12,952)  $(15,146)
Add stock based employee compensation expense, included in
  reported net loss, net of tax.............................        --         --         --
Deduct total stock-based employee compensation expense
  determined under fair-value-based method for all rewards,
  net of income tax.........................................  $ (1,969)  $ (1,665)  $ (1,754)
                                                              --------   --------   --------
Pro forma net loss..........................................  $(14,294)  $(14,617)  $(16,900)
Basic and diluted loss per common share of stock
  As reported...............................................  $  (0.62)  $  (0.66)  $  (0.78)
                                                              ========   ========   ========
  Pro forma.................................................  $  (0.72)  $  (0.75)  $  (0.87)
                                                              ========   ========   ========
</Table>

 
     Income Taxes: Deferred income tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities, and net operating loss and other tax credit carryforwards. These
items are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company records a valuation
allowance to reduce the deferred income tax assets to the amount that is more
likely than not to be realized.
 
     Fair Value of Financial Instruments: The Company's financial instruments
include cash and cash equivalents, accounts receivable, accounts payable and
term debt. The fair values of cash and cash equivalents,
 
                                        46

<PAGE>
 
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

accounts receivable and accounts payable approximate fair value because of the
short maturity of these instruments. The carrying amounts of the Company's bank
and subordinated borrowings approximate fair value because the interest rates
are reset periodically to reflect current market rates.
 
     Reclassifications: Certain prior year amounts have been reclassified to
conform to 2003's presentation.
 
NOTE C -- ALLOWANCE FOR CUSTOMER DEDUCTIONS
 
     The activity in various allowance accounts is as follows (in thousands):
 

<Table>
<Caption>
                                       DOUBTFUL ACCOUNTS YEARS ENDED             RETURNS
                                               DECEMBER 31,             YEARS ENDED DECEMBER 31,
                                       -----------------------------   ---------------------------
                                        2003       2002       2001      2003      2002      2001
                                       -------   --------   --------   -------   -------   -------
<S>                                    <C>       <C>        <C>        <C>       <C>       <C>
Balance at beginning of year.........  $1,200    $ 3,706    $ 8,321    $ 1,166   $   548   $   232
Provision (recovery).................    (471)       (55)     4,480      2,085     2,574     4,103
Charges..............................    (120)    (2,451)    (9,095)    (2,174)   (1,956)   (3,787)
                                       ------    -------    -------    -------   -------   -------
Balance at end of year...............  $  609    $ 1,200    $ 3,706    $ 1,077   $ 1,166   $   548
                                       ======    =======    =======    =======   =======   =======
</Table>

 

<Table>
<Caption>
                                               DISCOUNTS              CHARGEBACKS AND REBATES
                                       YEARS ENDED DECEMBER 31,       YEARS ENDED DECEMBER 31,
                                       -------------------------   ------------------------------
                                        2003     2002      2001      2003       2002       2001
                                       ------   -------   ------   --------   --------   --------
<S>                                    <C>      <C>       <C>      <C>        <C>        <C>
Balance at beginning of year.........  $ 172    $  143    $   0    $  4,302   $  4,190   $  3,296
Provision (recovery).................    689     1,014      886      12,836     15,418     28,655
Charges..............................   (767)     (985)    (743)    (12,334)   (15,306)   (27,761)
                                       -----    ------    -----    --------   --------   --------
Balance at end of year...............  $  94    $  172    $ 143    $  4,804   $  4,302   $  4,190
                                       =====    ======    =====    ========   ========   ========
</Table>

 
NOTE D -- INVENTORIES
 
     The components of inventories are as follows (in thousands):
 

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              ----------------
                                                               2003     2002
                                                              ------   -------
<S>                                                           <C>      <C>
Finished goods..............................................  $3,510   $ 3,460
Work in process.............................................   1,385     1,877
Raw materials and supplies..................................   2,912     5,064
                                                              ------   -------
                                                              $7,807   $10,401
                                                              ======   =======
</Table>

 
     In addition to the above, the Company has prepaid for future deliveries of
inventories from its vendors of $648,000 and $65,000 as of December 31, 2003 and
2002, respectively. The Company maintains an allowance for excess and obsolete
inventory. The activity in this account is as follows:
 

<Table>
<Caption>
                                                               YEARS ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2003      2002      2001
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Balance at beginning of year................................  $ 1,206   $ 1,845   $ 3,171
Provision (recovery)........................................      940       838      1830
Charges.....................................................   (1,229)   (1,477)   (3,156)
                                                              -------   -------   -------
Balance at end of year......................................  $   917   $ 1,206   $ 1,845
                                                              =======   =======   =======
</Table>

 
NOTE E -- INVESTMENT IN NOVADAQ TECHNOLOGIES
 
     In the first quarter of 2002, 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
                                        47

<PAGE>
 
NOTE E -- INVESTMENT IN NOVADAQ TECHNOLOGIES -- (CONTINUED)

part of the settlement between the Company and Novadaq (See Note N --
"Commitments and Contingencies"). 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.
 
     In the fourth quarter of 2002, the Company received an additional 132,000
shares of Novadaq, valued at $23,000 which was recorded as a gain in 2002
pursuant to a pre-existing agreement with another third party.
 
NOTE F -- PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment consists of the following (in thousands):
 

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2003       2002
                                                              --------   --------
<S>                                                           <C>        <C>
Land........................................................  $    396   $    396
Buildings and leasehold improvements........................     8,890      8,890
Furniture and equipment.....................................    27,117     27,390
Automobiles.................................................        55         55
                                                              --------   --------
                                                                36,458     36,731
Accumulated depreciation....................................   (21,636)   (19,236)
                                                              --------   --------
                                                                14,822     17,495
Construction in progress....................................    19,085     17,819
                                                              --------   --------
                                                              $ 33,907   $ 35,314
                                                              ========   ========
</Table>

 
     Construction in progress represents capital expenditures principally
related to the Company's lyophilization project that will enable the Company to
perform processes in-house, which are currently being performed by a
sub-contractor. The Company capitalized interest expense related to the
lyophilization project of $1,166,000 and $1,150,000 in 2003 and 2002,
respectively. Subject to the Company's ability to generate sufficient operating
cash flow or obtain new financing for future operations and capital
expenditures, the Company anticipates completion of the lyophilization project
(principally including only validation of the process as of December 31, 2003)
in the first half of 2005. Future costs are estimated to be $1.0 million
excluding capitalized interest. The Company can make no assurances that it will
be able to complete this project within its estimated timeframe or at all, and
if not, material impairment charges may be required. In the third quarter of
2002, the Company recorded a charge of $545,000 in Selling General &
Administrative expense to write off abandoned construction projects and dispose
of certain other fixed assets.
 
                                        48

<PAGE>
 
NOTE G -- FINANCING ARRANGEMENTS
 
     The Company's long-term debt consists of (in thousands):
 

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2003      2002
                                                              -------   -------
<S>                                                           <C>       <C>
Credit Agreement with The Northern Trust Company............  $    --   $35,565
Credit Agreement with LaSalle Bank:
  Line of Credit............................................    1,500        --
  Term Loans................................................    6,415        --
Convertible subordinated debentures.........................    5,000     5,000
Mortgages payable...........................................    1,623     1,917
Promissory note to NeoPharm, Inc............................    3,250     3,250
2003 Subordinated Notes.....................................    2,767        --
                                                              -------   -------
                                                               20,555    45,732
Less unamortized discount on debt...........................    2,622     2,074
Less current portion........................................    4,156    35,859
                                                              -------   -------
Long-term debt..............................................  $13,777   $ 7,799
                                                              -------   -------
</Table>

 
     Maturities of debt are as follows (in thousands):
 

<Table>
<S>                                                            <C>
Year ending December 31:
2004........................................................   $ 4,156
2005........................................................     4,415
2006........................................................    11,382
2007........................................................       394
2008........................................................       208
                                                               -------
  Total.....................................................   $20,555
                                                               =======
</Table>

 
     In December 1997, the Company entered into a $15,000,000 revolving credit
agreement with The Northern Trust Company ("Northern Trust"), which was
increased to $25,000,000 on June 30, 1998 and to $45,000,000 on December 28,
1999. Borrowings under this credit agreement were secured by substantially all
of the assets of the Company and bore floating interest rates that were 7.25% at
September 30, 2003 and December 31, 2002, respectively.
 
     The Company went into default under the Northern Trust credit agreement in
2002 and thereafter operated under an agreement under which Northern Trust would
agree to forbear from exercising its remedies (the "Forbearance Agreement") and
the Company acknowledged its then-current default. The Forbearance Agreement
provided for borrowings and was extended on numerous occasions in 2003.
 
     On October 7, 2003, a group of investors (the "Investors") purchased all of
the Company's then outstanding senior bank debt from The Northern Trust Company,
a balance of $37,731,000, at a discount and exchanged such debt with the Company
(the "Exchange Transaction") for (i) 257,172 shares of Series A 6.0%
Participating Convertible Preferred Stock of the Company ("Preferred Stock"),
(ii) subordinated promissory notes in the aggregate principal amount of
$2,767,139 (the "2003 Subordinated Notes"), (iii) warrants to purchase an
aggregate of 8,572,400 shares of the Company's common stock with an exercise
price of $1.00 per share ("Exchange Warrants"), and (iv) $5,473,862 in cash from
the proceeds of the term loan under the New Credit Facility described in a
following paragraph. The 2003 Subordinate Notes and cash were issued by the
Company to (a) 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 and the holder of a significant stock
position in the Company, (b) Arjun Waney, a newly-elected director and the
holder of a significant stock position in the Company, and (c) Argent Fund
Management
 
                                        49

<PAGE>
 
NOTE G -- FINANCING ARRANGEMENTS -- (CONTINUED)

Ltd., for which Mr. Waney serves as Chairman and Managing Director and 51% of
which is owned by Mr. Waney. The Company also issued to the holders of the 2003
Subordinated Notes warrants to purchase an aggregate of 276,714 shares of common
stock with an exercise price of $1.10 per share.
 
     As a result of the Exchange Transaction, the Company recorded transaction
costs of approximately $3.1 million. The transaction costs consisted principally
of cash and securities owed to restructuring and investment banking
professionals that provided services directly related to the extinguishments.
 
     In accounting for the Exchange Transaction, the Company first reduced the
carrying amount of the Northern Trust debt by the cash paid to Investors. The
remaining carrying value was then allocated among the three securities issued to
fully extinguish the debt based on the relative fair values of those securities.
Accordingly, the Preferred Stock, the 2003 Subordinated notes and the Exchange
Warrants were initially recorded at $20,874,000, $2,046,000 and $9,337,000,
respectively, before, in the case of the 2003 Subordinated Notes, the discount
described below and before, in the case of the securities, related issuance
costs of $480,000. The fair value of the Exchange Warrants was estimated by the
Company using the same method and estimates as described for the warrants issued
with the 2003 Subordinated Debt Notes. All unexercised warrants expire on
October 7, 2006.
 
     Simultaneously with the consummation of the Exchange Transaction, the
Company entered into a credit agreement with LaSalle Bank National Association
("LaSalle Bank") providing the Company with a $7,000,000 term loan and a
revolving line of credit of up to $5,000,000 to provide for working capital
needs (collectively, the "New Credit Facility") secured by substantially all of
the assets of the Company. The obligations of the Company under the New Credit
Facility have been guaranteed by the Kapoor Trust and Arjun Waney. In exchange
for this guaranty, the Company issued additional warrants ("Guarantee Warrants")
to purchase 880,000 and 80,000 shares of common stock to the Kapoor Trust and
Arjun Waney, respectively, and has agreed to issue to each of them, on each
anniversary of the date of the consummation of the Exchange Transaction,
warrants to purchase an additional number of shares of common stock equal to
0.08 multiplied by the principal dollar amount of the Company's indebtedness
then guaranteed by them under the New Credit Facility. The warrants issued in
exchange for these guarantees have an exercise price of $1.10 per share.
 
     The New Credit Facility with LaSalle Bank consists of a $5,500,000 term
loan A, a $1,500,000 term loan B (collectively, the "Term Loans") as well as a
revolving line of credit of up to $5,000,000 (the "Revolver") secured by
substantially all of the assets of the Company. The New Credit Facility matures
on October 7, 2005. The Term Loans bear interest at prime plus 1.75% (5.75% at
December 31, 2003) and require principal payments of $195,000 per month
commencing October 31, 2003, with the payments first to be applied to term loan
B. The Revolver bears interest at prime plus 1.50% (5.50% as of December 31,
2003). Availability under the Revolver is determined by the sum of (i) 80% of
eligible accounts receivable, (ii) 30% of raw material, finished goods and
component inventory excluding packaging items, not to exceed $2.5 million and
(iii) the difference between 90% of the forced liquidation value of machinery
and equipment ($4,092,000) and the sum of $1,750,000 and the outstanding balance
under term loan B. The availability as of December 31, 2003 was $3,500,000. The
New Credit Facility contains certain restrictive covenants including but not
limited to certain financial covenants such as minimum EDITDA levels, Fixed
Charge Coverage Ratios, Senior Debt to EBITDA ratios and Total Debt to EBITDA
ratios. The New Credit Facility also contains subjective covenants providing
that the Company would be in default if, in the judgment of the lenders, there
is a material adverse change in the financial condition of the Company. The
Company has negotiated an amendment to the New Credit Facility effective
December 31, 2003 that will clarify certain covenant computations and waive
certain technical violations. Because the New Credit Facility also requires the
Company to maintain its deposit accounts with LaSalle, the existence of these
subjective covenants, pursuant to EITF Abstract No. 95-22, requires that the
Company classify outstanding borrowings under the Revolver as a current
liability.
 
     On July 12, 2001 the Company entered into a $5,000,000 convertible
subordinated debt transaction with the Kapoor Trust. The transaction is
evidenced by a Convertible Bridge Loan and Warrant Agreement (the
                                        50

<PAGE>
 
NOTE G -- FINANCING ARRANGEMENTS -- (CONTINUED)

"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
convertible 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 convertible 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 convertible subordinated debt. All unexercised warrants expire on
December 20, 2006.
 
     Under the terms of the Trust Agreement, the convertible subordinated debt
bears interest at prime plus 3.0% (7.0% as of December 31, 2003) and is due on
December 20, 2006. As similarly provided under the subordination agreement with
the Northern Trust, interest cannot be paid on the convertible subordinated debt
until the repayment of all amounts under the New Credit Facility. The
convertible feature of the convertible subordinated debt, as amended, allows for
immediate 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
convertible subordinated debt and related warrants as separate securities. The
fair value of the warrants was estimated on the date of issuance 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. Furthermore, in accordance with Emerging Issues Task Force ("EITF")
Abstract No. 00-27, the Company has also computed and recorded a separate amount
related to the "intrinsic" value of the conversion option related to the debt.
This calculation determines the value of the excess value of the common stock
issuable upon conversion over the recorded value of the debt. 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. Additionally, as the
accrued interest on the convertible subordinated debt is also convertible into
common stock, it may also result in separately recordable beneficial conversion
amounts. Such amounts would be recorded if the price of the Company's common
stock is lower than the conversion rate when the interest is accrued. The
beneficial conversion feature amount related to interest was $0 and $114,000 in
2003 and 2002, respectively, and was recorded as an increase to paid in capital
and as additional debt discount amortizable over the remaining term of the
convertible subordinated debt. Related debt discount amortization was $588,000,
$519,000 and $431,000 in 2003, 2002 and 2001, respectively.
 
     In December 2001, the Company entered into a $3,250,000 five-year loan with
NeoPharm, Inc. ("NeoPharm") to fund the Company's efforts to complete its
lyophilization facility located in Decatur, Illinois. Under the terms of the
Promissory Note, dated December 20, 2001, interest accrued at the initial rate
of 3.6% and was reset quarterly based upon NeoPharm's average return on its cash
and readily tradable long and short-term securities during the previous calendar
quarter (2.5% at December 31, 2003). The principal and accrued interest was due
and payable on or before maturity on December 20, 2006. The note provided that
the Company will use the proceeds of the loan solely to validate and complete
the lyophilization facility located in Decatur, Illinois. The Promissory Note is
subordinated to the Company's senior debt 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.
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. In
September 30, 2003, the Company defaulted 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.
 
                                        51

<PAGE>
 
NOTE G -- FINANCING ARRANGEMENTS -- (CONTINUED)

     Contemporaneous with the completion of the NeoPharm 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 to terminate concurrently with the NeoPharm 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. In September 30, 2003, the Company defaulted
under the Trust Agreement as a result of a cross-default to the NeoPharm
Promissory Note.
 
     In connection with the Exchange Transaction, NeoPharm waived all existing
defaults under the NeoPharm Promissory Note and the Company and NeoPharm entered
into an Amended and Restated Promissory Note dated October 7, 2003 (the "Amended
NeoPharm Note"). Interest under the Amended NeoPharm Note accrues at 1.75% above
LaSalle Bank's prime rate (5.75% as of December 31, 2003), but interest payments
are currently prohibited under the terms of a subordination arrangement between
LaSalle and NeoPharm. The Amended NeoPharm Note also requires the Company to
make quarterly payments of $150,000 beginning on the last day of the calendar
quarter during which all indebtedness under the New Credit Facility has been
paid. All remaining amounts owed under the Amended NeoPharm Note are payable at
maturity on December 20, 2006. The NeoPharm subordinated debt is subordinated to
the Company's bank debt under the New Credit Facility and is senior to the
Company's debt to the Kapoor Trust and to the 2003 Subordinated Notes.
 
     In connection with the Exchange Transaction, the Kapoor Trust waived all
existing defaults under the Trust Agreement and the Company and the Kapoor Trust
entered into an amendment to the Trust Agreement. That amendment did not change
the interest rate or the maturity date of the loans made under the Trust
Agreement. The debt owed under the Trust Agreement is subordinated to the
Company's bank debt under the New Credit Facility, the subordinated debt under
the Amended NeoPharm Note and the 2003 Subordinated Notes issued in connection
with the Exchange Transaction. As part of the Exchange Transaction, the Company
issued the 2003 Subordinated Notes to the Kapoor Trust, Arjun Waney and Argent
Fund Management, Ltd. The 2003 Subordinated Notes mature on April 7, 2006 and
bear interest at prime plus 1.75% (5.75% as of December 31, 2003), but interest
payments are currently prohibited under the terms of a subordination arrangement
between LaSalle and the Note Holders. The 2003 Subordinated Notes are
subordinated to the New Credit Facility and the Amended NeoPharm Note but senior
to Trust Agreement with the Kapoor Trust. The Company also issued to the holders
of the 2003 Subordinated Notes warrants to purchase an aggregate of 276,714
shares of common stock with an exercise price of $1.10 per share. All
unexercised subordinated debt warrants expire on October 7, 2006. The Company,
in accordance with APB Opinion No. 14, recorded the initial issuance of the 2003
Subordinated Debt and Subordinated debt warrants as separate securities. The
fair value of the subordinated debt warrants was estimated on the date of
issuance using the modified Black-Scholes option pricing model with the
following assumptions: (i) dividend yield of 0%, (ii) expected volatility of
127.5%, (iii) risk free rate of 2.19%, and (iv) expected life of 3 years. As a
result, the Company assigned a value of $336,000 to subordinated debt warrants
and recorded this amount in shareholders' equity and as a discount, along with
the spread between the face value of the debt and its initial recorded value as
described above, on the 2003 Subordinated Notes. Related debt discount
amortization was $61,000 as of December 31, 2003.
 
     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
$1,623,000 and $1,917,000 at December 31, 2003 and 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.
 
                                        52

<PAGE>
 
NOTE G -- FINANCING ARRANGEMENTS -- (CONTINUED)

     As part of the Exchange Transaction, the Company recorded $1,627,000 as
deferred financing costs, including the value of the Guarantee Warrants. This
amount is being amortized as a component of interest expense over the life of
the related debt. Amortization in 2003 was $345,000.
 
NOTE H -- PREFERRED STOCK
 
     The Preferred Stock accrues dividends at a rate of 6.0% per annum, which
rate is fully cumulative, accrues daily and compounds quarterly, provided that
in the event stockholder approval authorizing sufficient shares of common stock
to be authorized and reserved for conversion of all of the Preferred Stock and
warrants issued in connection with the Exchange Transaction ("Stockholder
Approval") has not been received by October 7, 2004, such rate is to increase to
10.0% until Stockholder Approval has been received and sufficient shares of
common stock are authorized and reserved. While the dividends could be paid in
cash at the Company's option, such dividends are currently being deferred and
added to the Preferred Stock balance. Subject to certain limitations, on October
31, 2011, the Company is required to redeem all shares of Preferred Stock for an
amount equal to $100 per share, as may be adjusted from time to time as set
forth in the Articles of Amendment to the Articles of Incorporation (the
"Articles of Incorporation") of the Company (the "Stated Value"), plus all
accrued but unpaid dividends on such share. Shares of Preferred Stock have
liquidation rights in preference over junior securities, including the common
stock, and have certain antidilution protections. The Preferred Stock and unpaid
dividends are convertible at any time into a number of shares of common stock
equal to the quotient obtained by dividing (x) the Stated Value plus any accrued
but unpaid dividends by (y) $0.75, as such numbers may be adjusted from time to
time pursuant to the terms of the Articles of Incorporation. Provided that
Stockholder Approval has been received and sufficient shares of common stock are
authorized and reserved for conversion, all shares of Preferred Stock shall
convert to shares of common stock on the earlier to occur of (i) October 8, 2006
and (ii) the date on which the closing price per share of common stock for at
least 20 consecutive trading days immediately preceding such date exceeds $4.00
per share.
 
     Holders of Preferred Stock have full voting rights, with each holder
entitled to a number of votes equal to the number of shares of common stock into
which its shares can be converted. Holders of Preferred Stock and common stock
shall vote together as a single class on all matters submitted to a shareholder
vote, except in cases where a separate vote of the holders of Preferred Stock is
required by law or by the Articles of Incorporation. The Articles of
Incorporation provide that the Company cannot take certain actions, including
(i) issuing additional Preferred Stock or securities senior to or on par with
the Preferred Stock, (ii) amending the Company's Articles of Incorporation or
By-laws to alter the rights of the Preferred Stock, (iii) effecting a change of
control or (iv) effecting a reverse split of the Preferred Stock, without the
approval of the holders of 50.1% of the Preferred Stock.
 
     After the Exchange Transaction, the Investors hold approximately 75% of the
aggregate voting rights represented by outstanding shares of common and
Preferred Stock. After the Exchange Transaction and assuming the exercise of all
outstanding conversion rights, warrants and options to acquire common stock, the
Investors would hold approximately 77% of the common stock, on a fully-diluted
basis. Prior to the Exchange Transaction, the Investors held approximately 35%
of the outstanding voting securities and would have held approximately 42% of
the common stock on a fully-diluted basis.
 
     The initially recorded amount of the Preferred Stock, as described in Note
G, was $5,174,000 below its stated value. The Company is accreting this
difference over the time period from issuance to the mandatory redemption date
of October 31, 2011. Accretion in 2003 was $220,000.
 
     Pursuant to FASB No. 150 -- "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity", as amended, the Preferred
Stock is currently reflected as a liability because of its mandatory redemption
feature. As such, accretion as described above and dividends are reflected as
interest expense in the statement of operations for 2003. Should Stockholder
Approval be obtained to effectively allow conversion of the Preferred Stock into
common stock, the then-carrying value of the Preferred Stock will be
reclassified into shareholders' equity and future accretion and dividends will
be reflected as adjustments to
                                        53

<PAGE>
 
NOTE H -- PREFERRED STOCK -- (CONTINUED)

retained earnings and will also impact income (loss) available to common
stockholders. Additionally, upon Shareholder Approval, and in accordance with
EITF Abstract No. 00-27, the Company will also the record the value of the
conversion option imbedded in the Preferred Stock, subject to limitations
described in the EITF. The value of the beneficial conversion feature was
computed as $37,418,000 as of the Exchange Transaction date. That amount,
however, will be limited to the recorded value of the Preferred Stock on the
Exchange Transaction date ($20,874,000). The then resulting carrying value of
the Preferred Stock will then be adjusted to its full aggregated stated value,
plus unpaid dividends, with a charge directly to retained earnings. That charge
will not impact net earnings for the period it is recorded, but will
substantially reduce earnings available to common stockholders for that period.
Management expects to receive Shareholder Approval at the Company's next meeting
of shareholders tentatively scheduled in the 2nd quarter of 2004.
 
NOTE I -- LEASING ARRANGEMENTS
 
     The Company leases real and personal property in the normal course of
business under various operating leases, including non-cancelable and
month-to-month agreements. Payments under these leases were $1,562,000,
$1,838,000, and $1,841,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
 
     The following is a schedule, by year, of future minimum rental payments
required under non-cancelable operating leases (in thousands):
 

<Table>
<S>                                                            <C>
Year ending December, 31
2004........................................................   $1,557
2005........................................................    1,556
2006........................................................    1,550
2007........................................................    1,521
2008 and thereafter.........................................      862
                                                               ------
Total.......................................................   $7,046
                                                               ======
</Table>

 
NOTE J -- STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
 
     Under the 1988 Incentive Compensation Program (the "Incentive Program")
which expired November 2, 2003, any officer or key employee of the Company is
eligible to receive options as designated by the Company's Board of Directors.
As of December 31, 2003, 4,600,000 shares of the Company's Common Stock are
reserved for issuance under the Incentive Program. The exercise price of the
options granted under the Incentive Program may not be less than 50 percent of
the fair market value of the shares subject to the option on the date of grant,
as determined by the Board of Directors. All options granted under the Incentive
Program during the years ended December 31, 2003, 2002 and 2001 have exercise
prices equivalent to the market value of the Company's common stock on the date
of grant. Options granted under the Incentive Program generally vest over a
period of three years and expire within a period of five years. The Company's
Board of Directors have approved a new 2003 Stock Option Plan under which
135,000 options have been granted. These options have been granted subject to
the approval of this plan by the Company's shareholders.
 
     Under the 1991 Stock Option Plan for Directors (the "Directors' Plan"),
which expired in December 7, 2001, persons elected as directors of the Company
were granted nonqualified options at the fair market value of the shares subject
to option on the date of the grant. Options granted under the Directors' Plan
vested immediately and expire five years from the date of grant. The Company's
Board of Directors have approved a new 2003 Stock Option Plan under which 85,000
options have been granted. These options have been granted subject to the
approval of this plan by the Company's shareholders.
 
                                        54

<PAGE>
 
NOTE J -- STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN -- (CONTINUED)

     A summary of the status of the Company's stock options as of December 31,
2003, 2002 and 2001 and changes during the years ended December 31, 2003, 2002
and 2001 is presented below (shares in thousands):
 

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                          ---------------------------------------------------------
                                                2003                2002                2001
                                          -----------------   -----------------   -----------------
                                                   WEIGHTED            WEIGHTED            WEIGHTED
                                                   AVERAGE             AVERAGE             AVERAGE
                                                   EXERCISE            EXERCISE            EXERCISE
                                          SHARES    PRICE     SHARES    PRICE     SHARES    PRICE
                                          ------   --------   ------   --------   ------   --------
<S>                                       <C>      <C>        <C>      <C>        <C>      <C>
Outstanding at beginning of period......  2,997     $2.83      3,226    $3.72     1,827     $4.78
Granted.................................  1,102     $1.09      1,131    $2.23     2,039     $3.05
Exercised...............................    (42)    $0.93        (92)   $2.19      (175)    $2.48
Expired/Canceled........................   (579)    $3.83     (1,268)   $4.82      (465)    $5.40
                                          -----               ------              -----
Outstanding at end of period............  3,478     $2.30      2,997    $2.93     3,226     $3.72
                                          =====               ======              =====
Options exercisable at end of period....  2,076     $2.72      1,940    $3.10     1,735     $3.92
Options available for future grant......  1,077                1,349              1,660
Weighted average fair value of options
  granted during the period.............            $1.16               $1.56               $2.02
</Table>

 
     The fair value of each option granted during the year ended December 31,
2003 is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: (i) dividend yield of 0%, (ii) expected
volatility of 104%, (iii) risk-free interest rate of 4.0% and (iv) expected life
of 5 years.
 
     The fair value of each option granted during the year ended December 31,
2002 is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: (i) dividend yield of 0%, (ii) expected
volatility of 86%, (iii) risk-free interest rate of 4.4% and (iv) expected life
of 5 years.
 
     The fair value of each option granted during the year ended December 31,
2001 is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions: (i) dividend yield of 0%, (ii) expected
volatility of 79%, (iii) risk-free interest rate of 4.4% and (iv) expected life
of 5 years.
 
     The following table summarizes information about stock options outstanding
at December 31, 2003 (shares in thousands):
 

<Table>
<Caption>
                                         OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                          --------------------------------------------------   ---------------------------------
                             NUMBER                                                NUMBER
                          OUTSTANDING    WEIGHTED AVERAGE                      EXERCISABLE AT
                          DECEMBER 31,      REMAINING       WEIGHTED AVERAGE    DECEMBER 31,    WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES      2003       CONTRACTUAL LIFE    EXERCISE PRICE         2003         EXERCISE PRICE
------------------------  ------------   ----------------   ----------------   --------------   ----------------
<S>                       <C>            <C>                <C>                <C>              <C>
$0.50 -- $0.75.........        177          4.3 years            $0.72                43             $0.74
$0.76 -- $1.00.........        646          4.2 years            $0.92               196             $0.94
$1.01 -- $2.00.........        648          4.5 years            $1.34               253             $1.26
$2.01 -- $3.50.........      1,174          4.2 years            $2.31               961             $2.32
$3.51 -- $4.00.........        497          3.8 years            $3.61               326             $3.62
$4.01 -- $5.00.........         98          0.4 years            $4.54                92             $4.54
$5.01 -- $6.00.........        109          2.3 years            $5.37                80             $5.39
$6.01 -- $7.50.........         84          1.7 years            $5.73                80             $5.79
$7.51 -- $10.00........         45          1.4 years            $8.29                45             $8.29
                             -----                                                 -----
                             3,478                                                 2,076
                             =====                                                 =====
</Table>

 
     The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock option plans.
 
                                        55

<PAGE>
 
NOTE J -- STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN -- (CONTINUED)

     The Akorn, Inc. Employee Stock Purchase Plan permits eligible employees to
acquire shares of the Company's common stock through payroll deductions not
exceeding 15% of base wages, at a 15% discount from market price. A maximum of
1,000,000 shares of the Company's common stock may be acquired under the terms
of the Plan. New shares issued under the plan approximated 127,000 in 2003,
99,000 in 2002, and 44,000 in 2001.
 
NOTE K -- INCOME TAXES
 
     The income tax provision (benefit) consisted of the following (in
thousands):
 

<Table>
<Caption>
                                                              CURRENT   DEFERRED    TOTAL
                                                              -------   --------   -------
<S>                                                           <C>       <C>        <C>
Year ended December 31, 2003
  Federal...................................................  $     0   $     0    $     0
  State.....................................................     (171)        0       (171)
                                                              -------   -------    -------
                                                              $  (171)  $     0    $  (171)
                                                              =======   =======    =======
Year ended December 31, 2002
  Federal...................................................  $  (293)  $ 3,585    $ 3,292
  State.....................................................      613     2,334      2,947
                                                              -------   -------    -------
                                                              $   320   $ 5,919    $ 6,239
                                                              =======   =======    =======
Year ended December 31, 2001
  Federal...................................................  $(6,714)  $  (746)   $(7,460)
  State.....................................................     (253)   (2,067)    (2,320)
                                                              -------   -------    -------
                                                              $(6,967)  $(2,813)   $(9,780)
                                                              =======   =======    =======
</Table>

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

<Table>
<Caption>
                                                               YEARS ENDED DECEMBER 31,
                                                              ---------------------------
                                                               2003      2002      2001
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Computed "expected" tax expense (benefit)...................  $(4,191)  $(2,283)  $(8,475)
Change in income taxes resulting from:
  State income taxes, net of federal income tax.............     (765)     (323)   (1,245)
  Valuation allowance change................................    4,816     9,216        --
  Other, net................................................      (31)     (371)      (60)
                                                              -------   -------   -------
Income tax expense (benefit)................................  $  (171)  $ 6,239   $(9,780)
                                                              =======   =======   =======
</Table>

 
                                        56

<PAGE>
 
NOTE K -- INCOME TAXES -- (CONTINUED)

     Net deferred income tax assets at December 31, 2003 and 2002 include (in
thousands):
 

<Table>
<Caption>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  2003           2002
                                                              ------------   ------------
<S>                                                           <C>            <C>
Deferred income tax assets:
  Other accrued expenses....................................    $    378       $   469
  Intangible assets.........................................         448           490
  Net operating loss carry forwards.........................      13,666         9,295
  Other.....................................................       2,144         2,431
                                                                --------       -------
                                                                $ 16,636       $12,685
                                                                --------       -------
  Valuation allowance.......................................     (13,886)       (9,216)
                                                                --------       -------
                                                                $  2,750       $ 3,469
Deferred income tax liabilities:
  Property, plant and equipment, net........................      (2,750)       (2,669)
  Other.....................................................          --          (800)
                                                                --------       -------
                                                                $ (2,750)      $(3,469)
                                                                --------       -------
Net.........................................................    $      0       $     0
                                                                ========       =======
</Table>

 
     The Company records a valuation allowance to reduce the deferred income 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 income tax
asset was necessary, the Company considered both negative and positive evidence.
Based upon this analysis, the negative evidence outweighed the positive evidence
in determining the amount of the net deferred income tax assets that is more
likely than not to be realized. Based upon its analysis, the Company established
a valuation allowance to reduce the net deferred income tax assets to zero. The
Company's net operating loss carry forwards of approximately $30.9 million
expiring from 2021 through 2023.
 
NOTE L -- RETIREMENT PLAN
 
     All employees who have attained the age of 21 are eligible for
participation in the Company's 401(k) Plan. The plan-related expense recognized
for the years ended December 31, 2003, 2002 and 2001 totaled $198,000, $242,000
and $234,000, respectively. The employer's matching contribution is a percentage
of the amount contributed by each employee and is funded on a current basis.
 
NOTE M -- SEGMENT INFORMATION
 
     The Company classifies its operations into three business segments,
Ophthalmic, Injectable and Contract Services. The Ophthalmic segment
manufactures, markets and distributes diagnostic and therapeutic
pharmaceuticals. The Injectable segment manufactures, markets and distributes
injectable pharmaceuticals, primarily in niche markets. The Contract Services
segment manufactures products for third party pharmaceutical and biotechnology
customers based on their specifications. The Company's basis of accounting in
preparing its segment information is consistent with that used in preparing its
consolidated financial statements.
 
                                        57

<PAGE>
 
NOTE M -- SEGMENT INFORMATION -- (CONTINUED)

     Selected financial information by industry segment is presented below (in
thousands):
 

<Table>
<Caption>
                                                                YEARS ENDED DECEMBER 31,
                                                              -----------------------------
                                                                2003      2002       2001
                                                              --------   -------   --------
<S>                                                           <C>        <C>       <C>
Revenues
Ophthalmic..................................................  $ 26,056   $29,579   $ 16,936
Injectable..................................................    12,155    12,977      9,663
Contract Services...........................................     7,280     8,863     14,946
                                                              --------   -------   --------
  Total revenues............................................  $ 45,491   $51,419   $ 41,545
                                                              ========   =======   ========
Gross profit/(Loss)
Ophthalmic..................................................  $  7,967   $13,917   $   (751)
Injectable..................................................     4,309     5,955      2,739
Contract Services...........................................      (128)      665      4,410
                                                              --------   -------   --------
  Total gross profit........................................    12,148    20,537      6,398
Operating expenses..........................................    18,424    24,102     27,472
                                                              --------   -------   --------
  Total operating loss......................................    (6,276)   (3,565)   (21,074)
Interest and other expense, net.............................    (6,220)   (3,148)    (3,852)
                                                              --------   -------   --------
Loss before income taxes....................................  $(12,496)  $(6,713)  $(24,926)
                                                              ========   =======   ========
</Table>

 
     The Company manages its business segments to the gross profit level and
manages its operating and other costs on a company-wide basis. Intersegment
activity at the gross profit level is minimal. The Company does not identify
assets by segment for internal purposes, as certain manufacturing and warehouse
facilities support more than one segment.
 
NOTE N -- COMMITMENTS AND CONTINGENCIES
 
     (i) 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 September 25, 2003, the Company consented to the entry of an
administrative cease and desist order to resolve the issues arising from the
staff's investigation and proposed enforcement action as described above.
Without the Company admitting or denying the findings set forth therein, the
consent order finds that the Company failed to promptly and completely record
and reconcile cash and credit remittances, including those from its top five
customers, to invoices posted in its accounts receivable sub-ledger. According
to the findings in the 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 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
                                        58

<PAGE>
 
NOTE N -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

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 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
consent order does not impose a monetary penalty against the Company or require
any additional restatement of the Company's financial statements. The consent
order 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. On October 27, 2003, the recently appointed special committee
engaged Jefferson Wells, International ("Jefferson Wells") to serve as
consultant in this capacity. On February 6, 2004, Jefferson Wells reported its
findings to the special committee, such findings being that the Company has made
the necessary personnel changes and procedural improvements required to maintain
control over the accounts receivable process and establish the necessary
reserves. Jefferson Wells report was delivered to the SEC on February 13, 2004
 
     (ii) 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. The October, 2000 warning letter addressed several
deviations from regulatory requirements including general documentation and
cleaning validation 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
validation and process control issues. This led to the FDA leaving the warning
letter in place and issuing a Form 483 to document its findings. While no
further correspondence was received from the FDA, the Company responded to the
inspectional findings. This response described the Company's plan for addressing
the issues raised by the FDA and included improved cleaning validation, enhanced
process controls and approximately $2.0 million of capital improvements. In
August 2002, the FDA conducted an inspection of the Decatur facility and
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 from December 10, 2002 to
February 6, 2003. This inspection 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 report to the FDA on April 15, May
15 and June 15, 2003.
 
     The Company is working with FDA to favorably resolve such compliance
matters and has submitted to the FDA and continues to implement a plan for
comprehensive corrective actions at its Decatur, Illinois facility. On February
11, 2004, the FDA began a reinspection of the Decatur facility. This inspection
is still ongoing at the time of this filing.
 
     Upon completion of the reinspection, the FDA may take any of the following
actions: (i) find that the Decatur facility is in substantial compliance; (ii)
require the Company to undertake further corrective actions, which could include
a recall of certain products, and then conduct another inspection to assess the
success of those efforts; (iii) seek to enjoin the Company from further
violations, which may include temporary suspension of some or all operations and
potential monetary penalties; or (iv) take other enforcement action
                                        59

<PAGE>
 
NOTE N -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

which may include seizure of Company products. At this time, it is not possible
to predict the FDA's course of action.
 
     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 for products to be manufactured at its Decatur
facility. This has adversely impacted, and is likely to continue to adversely
impact, the Company's ability to grow sales. However, the Company believes that
unless and until the FDA chooses option (iii) or (iv), the Company will be able
to continue manufacturing and distributing its current product lines.
 
     If the FDA chooses option (iii) or (iv), such action could significantly
impair the Company's ability to continue to manufacture and distribute its
current product line and generate cash from its operations and could result in a
covenant violation under the Company's senior debt, any or all of which would
have a material adverse effect on the Company's liquidity and its ability to
continue as a going concern. Any monetary penalty assessed by the FDA also could
have a material adverse effect on the Company's liquidity.
 
     (iii) On August 9, 2003, Novadaq Technologies Inc. ("Novadaq") notified the
Company that it had requested arbitration with the International Court of
Arbitration ("ICA") related to a dispute between the Company and Novadaq
regarding the issuance of a Right of Reference to Novadaq from Akorn for
Novadaq's NDA and Drug Master File ("DMF") for specified indications for Akorn's
drug IC Green. In its request for arbitration, Novadaq asserts that Akorn is
obligated to provide the Right of Reference as described above pursuant to an
amendment dated September 26, 2002 to the January 4, 2002 Supply Agreement
between the two companies. Akorn does not believe it is obligated to provide the
Right of Reference which, if provided, would likely reduce the required amount
of time for clinical trials and reduce Novadaq's cost of developing a product
for macular degeneration. The Company also is contemplating the possible
development of a separate product for macular degeneration which, if developed,
could face competition from any product developed by Novadaq. Even if the Right
of Reference is provided, the approval process for such a product is expected to
take several years. On October 17, 2003, the ICA notified the Company that it
decided that this matter shall proceed to arbitration. The arbitration has been
scheduled for the week of June 7, 2004. The Company is in the process of
preparing for arbitration on this matter and will defend itself vigorously.
 
     In connection with the request for arbitration described above, on August
22, 2003, Novadaq filed a lawsuit and a Notice of Emergency Motion in the
Circuit Court of Cook County, Illinois, County Department, Chancery Division for
interim relief related to the issuance of the Right of Reference from Akorn to
Novadaq. On September 22, 2003, Akorn and Novadaq entered into an Agreed Order
whereby Akorn would provide the requested Right of Reference to Novadaq. The
Agreed Order terminates upon the settlement of the dispute between the parties
or in the event that the final disposition of the arbitration filed with the ICA
results in a final decision against Novadaq or a failure to hold that Novadaq
has a right to the Right of Reference.
 
     (iv) On October 8, 2003, the Company, pursuant to the terms of the Letter
Agreement dated September 26, 2002 between the Company and AEG Partners LLC, as
amended (the "AEG Letter Agreement"), terminated its consultant AEG Partners LLC
("AEG"). AEG contends that, as a result of the Exchange Transaction, the Company
must pay it a "success fee" consisting of $686,000 and a warrant to purchase
1,250,000 shares of the Company's common stock at $1.00 per share, and adjust
the terms of the warrant, pursuant to certain anti-dilution provisions, to take
into account the impact of the convertible Preferred Stock issued in connection
with the Exchange Transaction. The Company disputes that AEG is owed this
success fee. Pursuant to the AEG Letter Agreement, the Company and AEG are
trying to resolve the dispute. If this fails, the AEG Letter Agreement provides
for mandatory and binding arbitration. On January 9, 2004, AEG filed a demand
for arbitration. A single arbitrator has been chosen, but no arbitration date
has been set. The Company is in the process of preparing for arbitration and
will vigorously defend itself and assert any appropriate counterclaims in
regards to this matter.
 
     (v) On October 14, 2003, Leerink Swann & Co., Inc. ("Leerink") filed a
complaint in the Supreme Court of the State of New York alleging a breach of
contract for the payment of fees by the Company for
 
                                        60

<PAGE>
 
NOTE N -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

investment banking services. Leerink alleged the Company was obligated to pay
$1,765,032 pursuant to a written agreement dated May 8, 2003 between Leerink and
the Company (the "Leerink Agreement"). The Company disputed that Leerink was
owed $1,765,032. On December 5, 2003, Leerink and the Company reached a
settlement where, among other things, the Company paid $750,000 to Leerink, and
the Company and extend the Leerink Agreement for an additional year. As a result
of the settlement, the above mentioned complaint was dismissed on December 8,
2003.
 
     (vi) On February 23, 2004, the Company was sued in the United States
District Court for the District of Arizona for damages resulting from the death
of an Arabian show horse allegedly injected with the drug Sarapin in the summer
of 2003. The complaint alleges that the Company is liable in strict products
liability, in negligence and for injury to property for manufacturing and
selling the Sarapin injected into the horse. The complaint alleges that the
Sarapin was sold at a time when several lots of Sarapin were being recalled due
to a "lack of sterility assurances." The complaint seeks unspecified special,
general and punitive damages against the Company in an amount in excess of
$75,000. The Company tendered the defense of the complaint to its insurer, and
the insurer has indicated that the tender will be accepted subject to a
reservation of rights as to the punitive damage claim.
 
     (vii) The Company was party to a License Agreement with Johns Hopkins
University Applied Physics Lab ("JHU/APL") effective April 26, 2000, and amended
effective July 15, 2001. Pursuant to the License Agreement, the Company licensed
two patents from JHU/APL for the development and commercialization of a
diagnosis and treatment for age-related macular degeneration ("AMD") using
Indocyanine Green ("ICG"). In July 2001, this license agreement was amended such
that the Company relinquished the international rights to the two patents in
exchange for a reduced financial obligation. The Company delivered research and
development equipment in lieu of a $100,000 payment for a recorded gain of
$51,000 upon transfer of the equipment. The Company retained the exclusive
rights in the United States of America. A dispute arose between the Company and
JHU/APL concerning the License Agreement. Specifically, JHU/APL challenged the
Company's performance required by December 31, 2001 under the License Agreement
and alleged that the Company was in breach of the License Agreement. The Company
denied JHU/APL's allegations and contended that it had performed in accordance
with the terms of the License Agreement. As a result of the dispute, on March
29, 2002, the Company commenced a lawsuit in the U.S. District Court for the
Northern District of Illinois, seeking declaratory and other relief against
JHU/APL. On July 3, 2002, the Company reached an agreement with JHU/APL with
regard to the dispute that had risen between the two parties. The Company and
JHU/APL mutually agreed to terminate their license agreement. As a result, the
Company no longer has any rights to the JHU/APL patent rights as defined in the
License Agreement. In exchange for relinquishing its rights to the JHU/APL
patent rights, the Company received an abatement of the $300,000 due to JHU/APL
at March 31, 2002 and a payment of $125,000 to be received by August 3, 2002.
The Company also has the right to receive 15% of all cash payments and 20% of
all equity received by JHU/APL from any license of the JHU/APL patent rights
less any cash or equity returned by JHU/APL to such licensee. The combined total
of all such cash and equity payments are not to exceed $1,025,000. The $125,000
payment is considered an advance towards cash payments due from JHU/APL and will
be credited against any future cash payments due the Company as a result of
JHU/APL's licensing efforts. As a result of the resolved dispute above, the
Company recorded an asset impairment charge of $1,559,500 in the second quarter
of 2002. The impairment amount represents the net value of the asset recorded on
the balance sheet of the Company less the $300,000 payment abated by JHU/APL and
the $125,000 payment from JHU/APL. The $125,000 payment was received on August
3, 2002.
 
     In the fourth quarter of 2002, the Company learned that JHU/APL had
licensed their two patents related to AMD to Novadaq. In connection with the
settlement of a prior dispute with Novadaq in January 2002 (as discussed below),
the Company had previously acquired an equity interest in Novadaq. Pursuant to
the settlement with JHU/APL, the Company is entitled to 20% of all equity
received by JHU/APL from any license of the patent rights. Therefore, the
Company received an additional 132,000 shares of Novadaq, valued at $23,000
which was recorded as a gain in the fourth quarter of 2002.
                                        61

<PAGE>
 
NOTE N -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

     (viii) On March 6, 2002, the Company received a letter from the United
States Attorney's Office, Central District of Illinois, Springfield, Illinois,
advising the Company that the Drug Enforcement Agency ("DEA") had referred a
matter to that office for a possible civil legal action for alleged violations
of the Comprehensive Drug Abuse Prevention Control Act of 1970, 21 U.S.C. & 801,
et. seq. and regulations promulgated under the Act. The alleged violations
relate to record keeping and controls surrounding the storage and distribution
of controlled substances. On November 6, 2002, the Company entered into a Civil
Consent Decree with the DEA. Under terms of the Consent Decree, the Company,
without admitting any of the allegations in the complaint from the DEA, has
agreed to pay a fine of $100,000, upgrade its security system and to remain in
substantial compliance with the Comprehensive Drug Abuse Prevention Control Act
of 1970. If the Company does not remain in substantial compliance during the
two-year period following the entry of the civil consent decree, the Company, in
addition to other possible sanctions, may be held in contempt of court and
ordered to pay an additional $300,000 fine.
 
     The Company is a party in other 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 O -- SUPPLEMENTAL CASH FLOW INFORMATION (IN THOUSANDS)
 

<Table>
<Caption>
                                                               YEAR ENDED DECEMBER 31,
                                                              -------------------------
                                                               2003      2002     2001
                                                              -------   ------   ------
<S>                                                           <C>       <C>      <C>
Interest and taxes paid:
  Interest (net of amounts capitalized).....................  $ 2,289   $3,150   $3,308
  Income taxes..............................................       --      613       38
Noncash investing and financing activities:
  Intangible asset received in exchange for research
     equipment..............................................       --       --      100
  Reduction of liability in exchange for intangible asset...               300       --
  Investment in Novadaq received in exchange for intangible
     asset equipment........................................       --      713       --
Exchange Transaction:
  Warrants in exchange for consulting services..............    1,518       --       --
  Debt extinguished with other securities...................   32,257       --       --
  Preferred stock issued to extinguish debt.................   20,874       --       --
  Subordinated debt issued to extinguish debt...............    2,046       --       --
  Warrants issued to extinguish debt........................    9,337       --       --
</Table>

 
NOTE P -- RECENT ACCOUNTING PRONOUNCEMENTS
 
     In April 2002, the FASB issued SFAS No. 145 "Rescission 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 Extinguishments of Debt", which requires all gains and losses
from extinguishments 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 Opinion No. 30 will now be used to classify those gains and losses. SFAS
No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements",
amended SFAS No. 4, is no longer necessary because SFAS No. 4 has been
rescinded. SFAS No. 145 amends SFAS No. 13 "Accounting for Leases", to require
that certain lease modifications that have economic effects similar to
sale-leaseback transaction be accounted for in the same manner as sale-leaseback
transactions. Certain provisions of SFAS No. 145 are effected for fiscal years
beginning after May 15, 2002, while other provisions are effected for
 
                                        62

<PAGE>
 
NOTE P -- RECENT ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)

transactions occurring after May 15, 2002. The adoption of SFAS No. 145 has not
had a material impact on the Company's financial statements but did have an
impact on the classification of the net gain from extinguishment of debt
resulting from the Exchange Transaction in 2003.
 
     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 in 2003. 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. The Company adopted the revised disclosure requirements in
2003.
 
     In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.
This Interpretation elaborates on the disclosure to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation applicable to guarantees issued or modified
after December 31, 2002 and did not have a material 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 sufficient voting rights to direct decisions of the entity, 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.
 
     On December 17, 2003, the Staff of the SEC issued Staff Accounting Bulletin
No. 104 (SAB 104), Revenue Recognition, which supercedes SAB 101, Revenue
Recognition in Financial Statements. SAB 104's primary purpose is to rescind
accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, superceded as a result of the issuance of EITF 00-21, "Accounting
for Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13,
Revenue Recognition. Selected portions of the FAQ have been incorporated into
SAB 104. The adoption of SAB 104 did not materially affect our revenue
recognition policies, nor our results of operations, financial position or cash
flows.
 
                                        63

<PAGE>
 
NOTE P -- RECENT ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)

     In April 2003, FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities
("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133. SFAS 149 is effective for
contracts and hedging relationships entered into or modified after June 30,
2003. The Company adopted the provisions of SFAS 149 effective June 30, 2003 and
such adoption did not have a material impact on its consolidated financial
statements since the Company has not entered into any derivative or hedging
transactions.
 
     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards for how entities classify and measure in their statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. The provisions of SFAS 150 are effective for financial
statements entered into or modified after May 31, 2003. As a result of SFAS No.
150, the Company has reflected the Preferred Stock issued as part of the
Exchange Transaction as a long-term liability until approval by the Company's
shareholders.
 
NOTE Q -- CUSTOMER AND SUPPLIER CONCENTRATION
 
     AmerSource Health Corporation ("AmeriSource"), Cardinal Health, Inc.
("Cardinal") and McKesson Drug Company ("McKesson") are all distributors of the
Company's products, as well as suppliers of a broad range of health care
products. The percentage impact that these customers had on the Company's
business as of and for the years ended as indicated is as follows:
 

<Table>
<Caption>
                                          2003                 2003       2002                 2002
                                          GROSS    2003     GROSS ACCT.   GROSS    2002     GROSS ACCT.
                                          SALES   REVENUE   RECEIVABLES   SALES   REVENUE   RECEIVABLES
                                          -----   -------   -----------   -----   -------   -----------
<S>                                       <C>     <C>       <C>           <C>     <C>       <C>
AmerisourceBergen Corporation...........   19%      15%         13%        28%      22%         28%
Cardinal Health, Inc....................   19%      14%         22%        18%      12%         27%
McKesson Drug Company...................   16%      15%         17%        11%       8%          6%
</Table>

 
     No other customer accounted for more than 10% of gross sales, net revenues
or gross trade receivables for the indicated dates and periods.
 
     If sales to either AmerisourceBergen, Cardinal or McKesson were to diminish
or cease, the Company believes that the end users of its products would find
little difficulty obtaining the Company's products either directly from the
Company or from another distributor.
 
     No supplier of products accounted for more than 10% of the Company's
purchases in 2003, 2002 or 2001. The Company requires a supply of quality raw
materials and components to manufacture and package pharmaceutical products for
itself and for third parties with which it has contracted. The principal
components of the Company's products are active and inactive pharmaceutical
ingredients and certain packaging materials. Many of these components are
available from only a single source and, in the case of many of the Company's
ANDAs and NDAs, only one supplier of raw materials has been identified. Because
FDA approval of drugs requires manufacturers to specify their proposed suppliers
of active ingredients and certain packaging materials in their applications, FDA
approval of any new supplier would be required if active ingredients or such
packaging materials were no longer available from the specified supplier. The
qualification of a new supplier could delay the Company's development and
marketing efforts. If for any reason the Company is unable to obtain sufficient
quantities of any of the raw materials or components required to produce and
package its products, it may not be able to manufacture its products as planned,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
                                        64

<PAGE>
 
NOTE R -- ASSET IMPAIRMENT CHARGES
 
     In the third quarter of 2002, the Company recorded an impairment charge of
$545,000 in selling, general and administration expenses, to write-off abandoned
construction projects and dispose of certain other fixed assets in its
Ophthalmic segment.
 
     During the third quarter of 2002, the Company recorded an impairment charge
of $257,000 related to the product license intangible assets for the products
Sublimaze, Inapsine, Paradrine and Dry Eye test in its Injectable segment. The
Company determined that projected profitability on the products was not
sufficient to support the carrying value of the intangible asset. The recording
of this charge reduced the carrying value of the intangible assets related to
these product licenses to zero. The charge is reflected in the selling, general
and administrative expense category of the consolidated statement of operations.
 
     In the second quarter of 2002, the Company settled a dispute with JHU/APL
regarding a license agreement and the associated patent (See Note
N -- "Commitments and Contingencies" in the notes to the consolidated financial
statements) with a net carrying value of $1,559,500 which was written-off as an
impaired intangible asset during the second quarter in its Ophthalmic segment in
SG&A.
 
     In May 2001, the Company discontinued one of its products due to
uncertainty of product availability from a third-party manufacturer, rising
manufacturing costs and delays in obtaining FDA approval to manufacture the
product in-house. The Company recorded an asset impairment charge of $1,170,000
related to manufacturing equipment specific to the product and an asset
impairment charge of $140,000 related to the remaining balance of the product
acquisition intangible asset during the first quarter of 2001 in its Ophthalmic
Segment in SG&A.
 
     In November 2001, the Company decided to no longer sell one of its products
due to unavailability of raw material at a competitive price and declining
market share. The Company recorded an asset impairment charge of $725,000
related to the remaining balance of the product acquisition intangible asset
during the fourth quarter of 2001 in its Ophthalmic Segment in SG&A.
 
NOTE S -- RESTRUCTURING CHARGES
 
     During 2001, the Company adopted a restructuring program to properly size
its operations to then current business conditions. These actions were designed
to reduce costs and improve operating efficiencies. The program included, among
other items, severance of employees, plant-closing costs related to the
Company's San Clemente, CA sales office and rent for unused facilities under
lease in San Clemente and Lincolnshire, IL. The restructuring, affecting all
three business segments, reduced the Company's workforce by 50 employees,
primarily sales and manufacturing related, representing 12.5% of the total
workforce. Activities previously executed in San Clemente have been relocated to
the Company's headquarters.
 
     The restructuring program costs are included in selling, general and
administrative expenses in the accompanying consolidated statement of operations
and resulted in a charge to operations of approximately $1,117,000 consisting of
severance costs of $398,000, lease costs of $625,000 and other costs of $94,000.
At December 31, 2003, there is no amount remaining in accruals for
restructuring. Approximately $589,000 of the restructuring accrual was paid by
December 31, 2001 ($181,000 severance, $314,000 lease costs, $94,000 other) and
the remainder was paid by June 30, 2002, except for $176,000 in lease costs that
continued through February 2003.
 

I
TEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     On April 24, 2003, Deloitte & Touche LLP ("Deloitte") notified us that it
would decline to stand for re-election as our independent accountant after
completion of its audit of our consolidated financial statements as of and for
the year ended December 31, 2002. Deloitte completed its audit and delivered its
auditors' report, dated May 9, 2003, on May 20, 2003. Deloitte then advised us
that the client-auditor relationship between us and Deloitte had ceased.
 
                                        65

<PAGE>
 
     Deloitte's reports on our consolidated financial statements for the years
ended December 31, 2002 and 2001 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles, except that Deloitte's report on our 2001
financial statements included an explanatory paragraph relating to the
restatement of such financial statements discussed in Note S thereto, and its
reports on our 2001 and 2002 consolidated financial statements included an
explanatory paragraph relating to the uncertainty with respect to our ability to
continue as a going concern.
 
     During the two fiscal years ended December 31, 2002 and 2001, and the
subsequent interim period through the date of this report, there were no
disagreements between us and Deloitte on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to Deloitte's satisfaction, would have caused
Deloitte to make reference to the subject matter of the disagreement in
connection with its reports on our financial statements.
 
     Except as set forth in the next paragraph, during the two most recent
fiscal years and the subsequent interim period through the date of this report,
there have been no reportable events as that term is defined in Item
304(a)(1)(v) of Regulation S-K.
 
     Deloitte informed us that, in connection with its audit of our consolidated
financial statements for the year ended December 31, 2002, it noted certain
matters involving our internal control that Deloitte considers to be material
weaknesses. A material weakness is a condition in which the design or operation
of one or more of the internal control components does not reduce to a
relatively low level the risk that misstatements caused by error or fraud in
amounts that would be material in relation to the financial statements being
audited may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. Deloitte concluded that
the following matters constitute material weaknesses: (i) failure to analyze
accounts receivable in a sufficient level of customer detail to enable
management to adequately calculate an allowance for doubtful accounts; (ii)
misstatements in fixed assets, including unrecorded disposals, balances for
abandoned construction projects that had not been written off, the use of
incorrect useful lives, failure to prepare and review fixed asset roll forward
schedules and reconciliations on a timely basis and failure to take a physical
inventory of fixed assets in several years; and (iii) when taken together,
incomplete internal control documentation, inadequate communication of
transactions and contract terms affecting financial results, untimely
preparation and inadequate management review of analyses, inadequate
documentation and analysis to support the assumptions used to calculate various
account balances, and inadequate controls over manual journal entries. Deloitte
further advised us that it believes that these material weaknesses constitute a
reportable event as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
Our Audit Committee discussed these matters with Deloitte.
 
     We have reviewed the matters identified by Deloitte and have concluded that
the misstatements identified by Deloitte are the result of errors and not fraud.
Although we do not necessarily agree with Deloitte's judgment that there are
material weaknesses in our internal controls, we decided to promptly conduct a
full review of our internal controls and put in place procedures designed to
address all relevant internal control issues, including those identified by
Deloitte. We also began the process of selecting a new independent accountant.
 
     On October 22, 2003, upon recommendation of the Audit Committee and
approval by our Board of Directors, we engaged BDO Seidman, LLP ("BDO") as our
principal accountants to audit our financial statements for our fiscal year
ending December 31, 2003, and to review our financial statements for the fiscal
quarters ended March 31, June 30 and September 30, 2003.
 
     During the fiscal years ended December 31, 2002 and 2001 and any subsequent
interim period preceding the engagement of BDO, neither us nor anyone on our
behalf has consulted BDO regarding either (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements or (ii) any
matter that was the subject of a disagreement, as defined in Item 304(a)(1)(iv)
of Regulation S-K, or a reportable event, as described in Item 304(a)(1)(v) of
Regulation S-K.
 
                                        66

<PAGE>
 

ITEM 9A.  CONTROLS AND PROCEDURES
 
     We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our 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 our management including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
 
     As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, as of
the end of the period covered by this report, our disclosure controls and
procedures are effective in timely communicating to them the material
information relating to Akorn required to be included in our periodic SEC
filings.
 
     There were no changes to our internal controls over financial reporting
that occurred during our most recently completed fiscal quarter that materially
affected, or is reasonably likely to materially affect our internal control over
financial reporting.
 
                                        67

<PAGE>
 

                                    PART III
 

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The following table sets forth our directors and executive officers as of
March 15, 2004. Each officer serves as such at the pleasure of the Board of
Directors. On November 6, 2003, our Board of Directors held a meeting at our
principal office to discuss, among other items, the composition of the Board of
Directors. At the meeting, the Board of Directors increased the number of
directors of Akorn from five (5) to six (6) members.
 

<Table>
<Caption>
NAME                           AGE                            POSITION WITH AKORN
----                           ---                            -------------------
<S>                            <C>    <C>
John N. Kapoor, Ph.D.......    60     Director, Chairman of the Board
Arthur S. Przybyl..........    47     Director, President and Chief Executive Officer
Bernard J. Pothast.........    42     Sr. Vice President, Chief Financial Officer, Secretary and Treasurer
Arjun C. Waney(2)(3).......    63     Director
Jerry I.
  Treppel(1)(2)(3).........    49     Director
Jerry N. Ellis(1)(2)(3)....    66     Director
Ronald M. Johnson(1)(3)....    57     Director
</Table>

 
---------------
 
(1) -- Member of the Audit Committee
 
(2) -- Member of the Compensation Committee
 
(3) -- Member of the Nominating and Corporate Governance Committee
 
     Mr. Ellis, is the chairman of the Audit Committee and has been determined
by the Board of Directors to be independent and to be an Audit Committee
Financial Expert, Mr. Waney is the chairman of Compensation Committee and Mr.
Treppel is the chairman of the Corporate Governance Committee.
 
     John N. Kapoor, Ph.D. Dr. Kapoor has served as our Chairman of the Board
since May 1995 and from December 1991 to January 1993. Dr. Kapoor served as our
Chief Executive Officer from March 2001 to December 2002. Dr. Kapoor also served
as our acting Chairman of the Board from April 1993 to May 1995 and as our Chief
Executive Officer from May 1996 to November 1998. Dr. Kapoor serves as Chairman
of the Board of Option Care, Inc. (an infusion services and supplies company)
and was Chief Executive Officer of Option Care, Inc. from August 1993 to April
1996. Dr. Kapoor is the president of E.J. Financial Enterprises, Inc. (a health
care consulting and investment company) and has served as Chairman of the Board
of NeoPharm, Inc. (a biopharmaceutical company) since July 1990. Dr. Kapoor is
the Chairman of the board of First Horizon Pharmaceutical Corporation (a
distributor of pharmaceuticals) and of Introgen Therapeutics, Inc. (a gene
therapy company).
 
     Arthur S. Przybyl, Mr. Przybyl has served as our Chief Executive Officer
since February 2003 and as a director of Akorn since his appointment by the
Board of Directors in November of 2003. Previously, Mr. Przybyl served as
President and Chief Operating Officer beginning September 2002. Mr. Przybyl
joined Akorn in August 2002 as senior vice president sales and marketing. Prior
to joining Akorn, Mr. Przybyl served as president and chief executive officer
for Hearing Innovations Inc., an innovative, start-up developer of medical
devices for the profoundly deaf and tinnitus markets. Previous to that, he
served as president and chief operating officer for Bioject, Inc., a NASDAQ
company specializing in needle-free technology. Mr. Przybyl is also a director
of Novadaq Technologies, Inc., a privately held research company.
 
     Bernard J. Pothast. Mr. Pothast has served our as our Senior Vice President
since June 2002 and as our Vice President, Chief Financial Officer, Secretary
and Treasurer since September 2001. From 1998 to 2001, he was Director of
Financial Planning and Analysis of Moore North America (a business form printing
company). From 1995 to 1998, Mr. Pothast was Director of Business Planning and
Corporate Finance of GATX Corporation (a transportation and logistics company).
From 1990 to 1995, he was Manager of Financial Reporting and Analysis for The
Perseco Company (a packaging and logistics company). Mr. Pothast began his
career at the public accounting firm of Ernst & Young.
 
                                        68

<PAGE>
 
     Jerry I. Treppel. Mr. Treppel was appointed by the Board of Directors to
the Board as of November 6, 2003. Mr. Treppel is the Managing Member of Wheaten
Capital Management LLC, a capital management company focusing on investment in
the health care sector. Over the past 15 years, Mr. Treppel was an equity
research analyst focusing on the specialty pharmaceuticals and generic drug
sectors at several investment banking firms including Banc of America
Securities, Warburg Dillon Read LLC (now UBS), and Kidder, Peabody & Co. He
previously served as a healthcare services analyst at various firms, including
Merrill Lynch & Co. He also held administrative positions in the healthcare
services industry early in his career. Mr. Treppel is a current member of the
Board of Directors of Able Laboratories Inc., a generic drug company and of
Cangene, a Canadian biotechnology company. Mr. Treppel holds a BA in Biology
from Rutgers College in New Brunswick, N.J., an MHA in Health Administration
from Washington University in St. Louis, Mo., and an MBA in Finance from New
York University. Mr. Treppel has been a Chartered Financial Analyst (CFA) since
1988.
 
     Arjun C. Waney. Mr. Waney was appointed by the Board of Directors to the
Board as of November 6, 2003. Mr. Waney is Managing Director and principal
shareholder of Argent Fund Management Ltd., a UK-based fund management firm that
manages First Winchester Investments, an offshore fund specializing in U.S.
equities. Mr. Waney has over thirty years experience in the U.S. capital markets
in connection with various investment funds. In 1965, he founded Import Cargo
Inc. and Cost Less Imports Inc., multi-store retail operations in the U.S. and
Europe, respectively, that were sold in succession to Pier 1 Imports Inc. In
1973, Mr. Waney founded Beeba's Creations Inc., now known as Nitches Inc., a
U.S. apparel importer and wholesaler that went public in 1982. Mr. Waney is a
significant shareholder of Akorn, and may be deemed to beneficially own more
than 10% of the outstanding shares of Akorn's common stock.
 
     Jerry N. Ellis. Mr. Ellis has served as a Director of Akorn since 2001. Mr.
Ellis is an Adjunct Professor in the Department of Accounting at The University
of Iowa. Mr. Ellis was a consultant to Arthur Andersen, LLP from 1994 to 2000
and a Partner at Arthur Andersen in the Dallas, Madrid and Chicago offices from
1973 to 1994. Mr. Ellis is a director of First Horizon Pharmaceutical
Corporation (a distributor of pharmaceuticals).
 
     Ronald M. Johnson. Mr. Johnson was appointed by the Board of Directors to
the Board as of March 22, 2003. Mr. Johnson is currently Executive Vice
President of Quintiles Consulting, a company which provides consulting services
to pharmaceutical, medical device, biologic and biotechnology industries in
their efforts to meet the regulatory requirements of the FDA. Prior to joining
Quintiles in 1997, Mr. Johnson spent thirty years with the FDA holding various
senior level positions primarily in the compliance and enforcement areas.
 
CODE OF ETHICS
 
     We are in the process of finalizing our Code of Ethics (the "Code of
Ethics"). The Code of Ethics will be adopted by the Board of Directors prior to
the date of our 2004 Annual Meeting of Shareholders and will be applicable to
our principal executive officer, principal financial officer, controller and
persons performing similar functions. We will satisfy any disclosure
requirements under Item 10 of Form 8-K regarding an amendment to, or waiver
from, any provision of the Code of Ethics with respect to our principal
executive officer, principal financial officer, controller and persons
performing similar functions by disclosing the nature of such amendment or
waiver on our website or in a report on Form 8-K. Our website address is
http://www.akorn.com.
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     During 2002, (i) Mr. Przybyl and Mr. Pothast, both officers of Akorn,
failed to file timely with the SEC one Form 4 to report changes in beneficial
ownership, and (ii) Mr. Treppel, a director of Akorn, failed to timely file with
the SEC one Form 3 to report initial beneficial ownership as required by Section
16(a) of the Securities Exchange Act of 1934. All such transactions have been
reported on amended statements or annual statements on Form 5.
 
                                        69

<PAGE>
 

ITEM 11.  EXECUTIVE COMPENSATION
 
     The following table summarizes the compensation paid by Akorn for services
rendered during the years ended December 31, 2003, 2002 and 2001 to each person
who, during 2003, served as the chief executive officer of Akorn and to each
other of our executive officers whose total annual salary and bonus for 2003
exceeded $100,000 (each a "Named Executive Officer").
 
                           SUMMARY COMPENSATION TABLE
 

<Table>
<Caption>
                                                                                             LONG-TERM
                                               ANNUAL COMPENSATION                          COMPENSATION
                        -----------------------------------------------------------------   ------------
                                                                                OTHER        SECURITIES
  NAME AND PRINCIPAL                                                            ANNUAL       UNDERLYING    ALL OTHER(1)
       POSITION                 TIME PERIOD             SALARY    BONUS(2)   COMPENSATION   OPTIONS/SARS   COMPENSATION
  ------------------    ----------------------------   --------   --------   ------------   ------------   ------------
<S>                     <C>                            <C>        <C>        <C>            <C>            <C>
John N. Kapoor(3).....  Year ended December 31, 2003   $     --     $--        $    --             --        $    --
  Chairman              Year ended December 31, 2002         --      --             --             --             --
                        Year ended December 31, 2001      2,083      --             --        500,000             --
Arthur S.
  Przybyl(4)..........  Year ended December 31, 2003    259,089      --         10,000         75,000         44,649
  President and
    Interim             Year ended December 31, 2002     93,482      --          3,308        300,000             --
  Chief Executive
    Officer             Year ended December 31, 2001         --      --             --             --             --
Bernard J.
  Pothast(5)..........  Year ended December 31, 2003    170,154      --          4,846         25,000             --
  Sr. Vice President,   Year ended December 31, 2002    148,263      --             --        100,000             --
  Chief Financial
    Officer,            Year ended December 31, 2001     39,094      --             --         75,000             --
  Secretary and
    Treasurer
</Table>

 
---------------
(1) Represents contributions to our Savings and Retirement Plan, except as
    indicated in notes (4)and (5).
 
(2) There were no executive officer bonuses awarded for 2003, 2002 or 2001.
 
(3) Dr. Kapoor currently serves as our Chairman and served as Chief Executive
    Officer from March 2001 to December 2002. In lieu of a salary for 2001, we
    issued Dr. Kapoor options to purchase 500,000 shares of our common stock.
    Dr. Kapoor was not paid a salary or granted options in 2003 or in 2002.
 
(4) Mr. Przybyl became Chief Executive Officer on February 17, 2003. Prior to
    this, Mr. Przybyl was our President and Chief Operating Officer. His "All
    Other Compensation" for 2003 is exclusively related to reimbursement for
    relocation expenses totaling $44,649 and "Other Annual Compensation"
    represents a $10,000 automobile allowance.
 
(5) Mr. Pothast has been our Chief Financial Officer, Secretary and Treasurer
    since September 2001. His "Other Annual Compensation" for 2003 represents an
    automobile allowance.
 
                        OPTION/SAR GRANTS IN LAST FISCAL YEAR
 
     The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers in the fiscal year ended
December 31, 2003, including the potential realizable value over the five-year
term of the options, based on assumed rates of stock appreciation of 5% and 10%
of the market price of the underlying security on the date of grant, compounded
annually. These assumed rates of appreciation comply with the rules of the SEC
and do not represents Akorn's estimate of future stock price.
 
                                        70

<PAGE>
 
Actual gains, if any, on stock option exercises will be dependent on the future
performance of Akorn's common stock.
 

<Table>
<Caption>
                                                                                         POTENTIAL REALIZABLE
                                           INDIVIDUAL GRANTS                               VALUE AT ASSUMED
                                    --------------------------------                    ANNUAL RATES OF STOCK
                                     NUMBER OF      PERCENT OF TOTAL                    PRICE APPRECIATION FOR
                                     SECURITIES       OPTIONS/SARS      EXERCISE             OPTION TERM
                                     UNDERLYING        GRANTED TO       OR BASE     ------------------------------
                                    OPTIONS/SARS      EMPLOYEES IN       PRICE      EXPIRATION
              NAME                  GRANTED (#)       FISCAL YEAR        ($/SH)        DATE       5%($)     10%($)
              ----                  ------------    ----------------    --------    ----------    ------    ------
<S>                                 <C>             <C>                 <C>         <C>           <C>       <C>
Arthur S. Przybyl...............      50,000(1)            10%            0.80       1/20/08      51,051    64,420
                                      25,000(1)             5%            0.90       2/18/08      28,716    39,860
Bernard J. Pothast..............      25,000(1)             5%            0.90       2/18/08      28,716    39,860
</Table>

 
---------------
(1) Issued pursuant to the Amended and Restated 1988 Incentive Compensation
    Program.
 
              AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                          AND FY-END OPTION/SAR VALUES
 

<Table>
<Caption>
                                                                      NUMBER OF               VALUE OF
                                                                SECURITIES UNDERLYING    UNEXERCISED IN-THE-
                                                                UNEXERCISED OPTIONS/    MONEY OPTIONS/SARS AT
                                                                 SARS AT FY-END (#)         FY-END ($)(1)
                                     SHARES                     ---------------------   ---------------------
                                  ACQUIRED ON       VALUE           EXERCISABLE/            EXERCISABLE/
              NAME                EXERCISE (#)   REALIZED ($)       UNEXERCISABLE         UNEXERCISABLE ($)
              ----                ------------   ------------   ---------------------   ---------------------
<S>                               <C>            <C>            <C>                     <C>
John N. Kapoor..................       --             --           385,000/125,000               --  /  --
Arthur S. Przybyl...............       --             --           187,500/187,500         193,750/193,750
Bernard J. Pothast..............       --             --            106,250/93,750           56,250/56,251
</Table>

 
---------------
(1) Value of Unexercised in-the-Money options calculated using the December 31,
    2003 closing price of $2.00.
 
EMPLOYMENT AGREEMENTS
 
     In September 2001, Mr. Pothast received and accepted an employment offer
letter for the position of Vice President Finance and Chief Financial Officer of
Akorn. His letter provides for an annual salary of $135,000 (to be increased to
$150,000 following our first full quarter of positive operating income), a
discretionary bonus of up to 30% of his base salary, a grant of options to
purchase 75,000 shares of our common stock, severance for six months of his base
salary if he is terminated without cause, and other customary benefits for our
employees.
 
     In January 2003, Mr. Przybyl received and accepted an employment offer
letter of the position of our Executive Officer. His letter provides for an
annual salary of $260,000, a discretionary bonus of up to 50% of his base
salary, a grant of options to purchase 50,000 shares of our common stock,
severance for one year at his base salary if he is terminated without cause, and
other customary benefits for our employees. We currently have no other
employment agreements in place. In connection with his serving as our Chief
Executive Officer, we have provided to Mr. Przybyl supplemental indemnity
assurances with respect to any claims associated with his execution, filing and
submission Chief Executive Officer Certifications of SEC reports for periods
preceding his direct supervision of financial and accounting matters.
 
COMPENSATION COMMITTEE INTERLOCKS
 
     Mr. Waney, Mr. Treppel and Mr. Ellis who currently comprise the
Compensation Committee, are each independent, non-employee directors of Akorn.
No executive officer of Akorn served as a director or member of (i) the
compensation committee of another entity in which one of the executive officers
of such entity served on the our Compensation Committee, (ii) the board of
directors of another entity in which one of the executive officers of such
entity served on our Compensation Committee, or (iii) the compensation committee
 
                                        71

<PAGE>
 
of any other entity in which one of the executive officers of such entity served
as a member of our Board of Directors, during the year ended December 31, 2003.
 
COMPENSATION OF DIRECTORS
 
     Each director who is not one of our salaried officers receives a fee for
his services as a director of $2,500 per regular meeting of the Board of
Directors, $500 per telephone meeting and $500 per committee meeting, plus
reimbursement of his expenses related to those services.
 
     All of our directors participate in our new 2003 Stock Option Plan ("2003
Stock Option Plan"), pursuant to which each of our directors is granted an
option to acquire 10,000 shares of our common stock on the day after each annual
meeting of shareholders at which he is elected to serve as a director. Any
director appointed between annual meetings is entitled to receive a pro rata
portion of an option to acquire 10,000 shares. Options granted under the plan
vest immediately and expire five years from the date of grant. Upon joining the
Board in 2001, Mr. Ellis was granted an option under the plan for 20,000
shares,which is part of the option exercise price for all options granted under
the plan is the fair market value of the shares covered by the option at the
time of the grant.
 
COMPENSATION COMMITTEE REPORT
 
     The Compensation Committee of the Board of Directors reviews, analyzes and
makes recommendations related to compensation packages for our executive
officers, evaluates the performance of the Chief Executive Officer and the Chief
Operating Officer and administers the grant of stock options under our 2003
Stock Option Plan.
 
     Our executive compensation policies are designed to (a) provide competitive
levels of compensation to attract and retain qualified executives, (b) reward
achievements in corporate performance, (c) integrate pay with annual and
long-term performance goals and (d) align the interests of executives with the
goals of shareholders.
 
     Compensation paid to Company executives consists of salaries, annual cash
incentive bonuses and long-term incentive opportunities in the form of stock
options.
 
Salary
 
     Mr. Przybyl's salary for 2003 was fixed in his employment offer letter at
an annual rate of $260,000, and is subject to periodic adjustment by the Board
of Directors.
 
Incentive Bonus
 
     Annual incentive compensation for executive officers during 2003, 2002 and
2001 was based on corporate earnings objectives as well as position-specific
performance objectives. There were no performance bonuses granted to executive
officers for 2003, 2002 or 2001.
 
Stock Options
 
     The Committee's practice with respect to stock options has been to grant
options based upon the attainment of our performance goals and to vest options
based on the passage of time. The option grants noted in the compensation tables
include grants upon initial employment and annual grants as well as grants
issued under the Stock Option Plan for Directors to those named executive
officers that are also directors.
 
                                        72

<PAGE>
 
     It is the responsibility of the Committee to address the issues raised by
tax laws under which certain non-performance based compensation in excess of $1
million per year paid to executives of public companies is non-deductible to
Akorn and to determine whether any actions with respect to this limit need to be
taken by us. It is not anticipated that any of our executive officers will
receive any compensation in excess of this limit.
 
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
 
         Arjun C. Waney         Jerry I. Treppel         Jerry N. Ellis
 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS
 
     As of March 15, 2004, the following persons were directors, nominees, Named
Executive Officers (as defined in "Executive Compensation" above), or others
with beneficial ownership of five percent or more of our common stock. The
information set forth below has been determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934 based upon information furnished to us
or to the SEC by the persons listed. Unless otherwise noted the address of each
of the following persons is 2500 Millbrook Drive, Buffalo Grove, Illinois 60089.
 

<Table>
<Caption>
BENEFICIAL OWNER                                             SHARES BENEFICIALLY OWNED    PERCENT OF CLASS
----------------                                             -------------------------    ----------------
<S>                                                          <C>                          <C>
DIRECTORS
John N. Kapoor, Ph.D.....................................           27,995,299(1)              40.51%
Arjun C. Waney...........................................            5,842,167(2)(8)            9.07%
Jerry I. Treppel.........................................              833,334(3)(8)            1.29%
Jerry N. Ellis...........................................               22,000(4)(8)            0.10%
Ronald M. Johnson........................................                   --(8)               0.00%
NAMED EXECUTIVE OFFICERS
Arthur S. Przybyl........................................              369,947(5)               0.54%
Bernard J. Pothast.......................................              106,250(6)               0.48%
Directors and officers as a group (7 persons)............           35,148,997                 50.90%
OTHER BENEFICIAL OWNERS
Pequot Capital Management Inc............................           13,733,334(7)              21.32%
</Table>

 
---------------
 
(1) Of such 27,995,299 shares, (i) 851,800 are owned directly by the John N.
    Kapoor Trust dated September 20, 1989 (the "Trust") of which Dr. Kapoor is
    the sole trustee and beneficiary, (ii) 3,395,000 are owned by EJ
    financial/Akorn Management, L.P. of which Dr. Kapoor is managing general
    partner, (iii) 25,000 are owned directly by Dr. Kapoor, (iv) 63,600 are
    owned by a trust, the trustee of which is Dr. Kapoor's wife and the
    beneficiaries of which are their children, (v) 510,000 are issuable pursuant
    to options granted by us directly to Dr. Kapoor, 385,000 of which are
    exerciseable, (vi) 6,337,047 are issuable upon exercise of warrants issued
    to the John N. Kapoor Trust dated September 20, 1989, (vii) 2,426,900 are
    issuable upon the conversion of a convertible note held by the John N.
    Kapoor Trust dated September 20, 1989 and (vii) 197,619 are issuable upon
    the conversion of interest related to the convertible note held by the John
    N. Kapoor Trust dated September 20, 1989 and (ix) 107,350 shares of Series A
    6% Participating Convertible Preferred Stock convertible into 14,313,333
    shares.
 
(2) Of such 5,842,167 shares represented as beneficial to Mr. Waney, (i) 908,833
    shares are held by Argent Fund Management, Ltd., including 2,672 shares of
    Series A 6% Participating Convertible Preferred Stock currently convertible
    into 356,266 shares at $0.75 per share, 89,067 warrants currently
    exercisable to purchase shares at an exercise price of $1.00 per share and
    5,000 warrants currently exercisable to purchase shares at an exercise price
    of $1.10 per share. Mr. Waney serves as Chairman and Managing Director and
    owns 52% of Argent, (ii) 628,400 shares are held by First Winchester, which
    operates as an equity fund for investors unrelated to Mr. Waney and whose
    investments are directed by Argent,
 
                                        73

<PAGE>
 
    (iii) 506,000 shares are held by Mr. Waney through Individual Retirement
    Accounts maintained in the United States, (iv) 3,798,933 shares are held
    jointly by Mr. Waney and Mrs. Waney, including 20,000 Series A 6%
    Participating Convertible Preferred Stock currently convertible into
    2,666,666 Shares at $0.75 per share, 666,667 warrants currently exercisable
    to purchase shares at an exercise price of $1.00 per share and 140,000
    warrants currently exercisable to purchase shares at an exercise price of
    $1.10 per share. Under the Rules of the SEC, Mr. Waney may be deemed to be
    the beneficial owner of the shares held by First Winchester.
 
(3) Of Mr. Treppel's 833,334 shares, (i) 333,333 representing 2,500 shares of
    Series A 6% Participating Convertible Preferred Stock currently convertible
    at $0.75 per share and (ii) 83,334 warrants currently exercisable to
    purchase shares at an exercise price of $1.00 per share. There is an
    additional (i) 333,333 shares represent 2,500 shares of Series A 6%
    Participating Convertible Preferred Stock currently convertible at $0.75 per
    share and (ii) 83,334 warrants currently exercisable to purchase shares at
    an exercise price of $1.00 per share which are held indirectly through
    Wheaton Capital Management LLC.
 
(4) Mr. Ellis's 2,000 shares, represent direct ownership, 2,000 shares of common
    stock. Mr. Ellis was granted options to purchase 20,000 shares of common
    stock
 
(5) Of Mr. Przybyl's 369,947 shares, (i) 187,500 relate to granted options of
    375,000, of which 187,500 are vested or exercisable, (ii) 7,447 shares of
    common stock, (iii) 140,000 shares of common stock underlying 1,050 shares
    of the Issuer's Series A 6% Participating Convertible Preferred Stock, par
    value $1.00 per and (iv) 35,000 shares of common stock underlying warrants
    for common stock, at a purchase price of $1.00 per share.
 
(6) Mr. Pothast's shares reported include options to purchase 106,250 shares.
    These stock options represent presently exercisable options from three
    separate grants totaling 200,000 shares, each of which vest in four equal
    increments, one quarter on the grant date and one quarter for each of the
    next three successive anniversary dates.
 
(7) Of such shares, Pequot Capital Management beneficially own 13,733,334 shares
    as follows: (i) 400,000 shares of common stock; (ii) 10,666,667 shares of
    common stock underlying 80,000 shares of the Issuer's Series A 6%
    Participating Convertible Preferred Stock, par value $1.00 per share; and
    (iii) 2,666,667 shares of common stock underlying warrants for common stock,
    at a purchase price of $1.00 per share.
 
(8) Options to purchase stock of 35,000, 30,000, 10,000 and 10,000 granted to
    Mr. Ellis, Mr. Johnson, Mr. Treppel and Mr. Waney, respectively are not
    included in the calculation of beneficial ownership. Such grants were made
    under the proposed 2003 Stock Option Plan and are subject to the approval of
    our shareholders.
 
EQUITY COMPENSATION PLANS
 
 Equity Compensation Plans Approved by Stockholders.
 
     The stockholders approved the Akorn, Inc. 1988 Incentive Compensation Plan
("1988 Plan"), under which any of our officers or key employees was eligible to
receive stock options as designated by our Board of Directors, and the Akorn,
Inc. 1991 Stock Option (the "1991 Directors' Plan"), under which options were
issuable to our directors. The aforementioned 1988 Plan expired on November 2,
2003 and the 1991 Directors Plan expired December 7, 2001.
 
 Equity Compensation Plans Not Approved by Stockholders.
 
     The 2003 Stock Option Plan was approved by the Board of Directors on
November 6, 2003 and is subject to the approval of our shareholders. Under the
2003 Stock Option Plan we may issue up to an aggregate total of 5,000,000
incentive or non-qualified options to purchase Akorn common stock. 220,000
options have been granted under the 2003 Stock Option Plan. These options have
been granted subject to the approval of this plan by our shareholders.
 
     On November 21, 2002, we entered into a success fee arrangement with its
restructuring consultants AEG Partners which provides that we will issue
1,250,000 warrants to purchase common stock at an exercise price of $1.00 per
warrant share upon the date on which each of the following conditions have been
met or
                                        74

<PAGE>
 
waived by us: (i) the Forbearance Agreement shall have been terminated, (ii) the
consultants engagement pursuant to its consulting agreement shall have been
terminated and (iii) we 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.
 
     Summary Table. The following table sets forth certain information as of
December 31, 2003, with respect to compensation plans under which shares of
Akorn common stock were issuable as of that date.
 

<Table>
<Caption>
                                                                                          NUMBER OF SECURITIES
                                                                                     REMAINING AVAILABLE FOR FUTURE
                                 NUMBER OF SECURITIES TO                                  ISSUANCE UNDER EQUITY
                                 BE ISSUED UPON EXERCISE   WEIGHTED-AVERAGE PRICE          COMPENSATION PLANS
                                 OF OUTSTANDING OPTIONS,   OF OUTSTANDING OPTIONS,   (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY                      WARRANTS AND RIGHT.       WARRANT AND RIGHTS           IN THE FIRST COLUMN)
-------------                    -----------------------   -----------------------   -------------------------------
<S>                              <C>                       <C>                       <C>
Equity Compensation plans
approved by security
holders:.......................         3,258,175                  $2.3233                      2,933,340
Equity Compensation plans not
approved by security
holders:.......................         1,470,000                  $1.1363                             --
                                        ---------                  -------                      ---------
TOTAL..........................         4,728,175                       --                      2,953,340
                                        =========                  =======                      =========
</Table>

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Mr. John N. Kapoor, Ph.D., our current Chairman of the Board and Chief
Executive Officer from March 2001 to December 2002, and a principal shareholder,
is affiliated with EJ Financial Enterprises, Inc., a health care consulting
investment company ("EJ Financial"). EJ Financial is involved in the management
of health care companies in various fields, and Dr. Kapoor is involved in
various capacities with the management and operation of these companies. The
John N. Kapoor Trust, the beneficiary and sole trustee of which is Dr. Kapoor,
is a principal shareholder of each of these companies. As a result, Dr. Kapoor
does not devote his full time to our business. Although such companies do not
currently compete directly with us, certain companies with which EJ Financial is
involved are in the pharmaceutical business. Discoveries made by one or more of
these companies could render our products less competitive or obsolete. In
addition, one of these companies, NeoPharm, Inc. of which Dr. Kapoor is Chairman
and a major stockholder, recently entered into a loan agreement with us. We also
owe EJ Financial $18,000 in consulting fees for each of 2002 and 2001, as well
as expense reimbursements of $1,987.30 and $182,369.84 for 2002 and 2001,
respectively. Further, The John N. Kapoor Trust has loaned us $5,000,000
resulting in Dr. Kapoor becoming one of our major creditors as well as a major
shareholder.
 
     On March 21, 2001, in consideration of Dr. Kapoor assuming the positions of
Akorn President and interim CEO, the Compensation Committee of the Board of
Directors agreed to issue Dr. Kapoor 500,000 options under the Amended and
Restated Akorn, Inc. 1988 Incentive Compensation Program in lieu of cash
compensation.
 
     On July 12, 2001, we entered into a $5,000,000 subordinated debt
transaction with the John N. Kapoor Trust dtd. 9/20/89 (the "Trust"), the sole
trustee and sole beneficiary of which is Dr. John N. Kapoor, our Chairman of the
Board of Directors. The transaction is evidenced by a Convertible Bridge Loan
and Warrant Agreement (the "Trust Agreement") in which the Trust agreed to
provide two separate tranches of funding in the amounts of $3,000,000 ("Tranche
A" which was received on July 13, 2001) and $2,000,000 ("Tranche B" which was
received on August 16, 2001). As part of the consideration provided to the Trust
for the subordinated debt, we issued the Trust two warrants which allow the
Trust to purchase 1,000,000 shares of common stock at a price of $2.85 per share
and another 667,000 shares of common stock at a price of $2.25 per share. The
exercise price for each warrant represented a 25% premium over the share price
at the time of the Trust's commitment to provide the subordinated debt. All
unexercised warrants 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 we pay on its senior debt.
Interest cannot be paid to the Trust until the repayment of the senior
 
                                        75

<PAGE>
 
debt pursuant to the terms of a subordination agreement, which was entered into
between the Trust and our senior lenders. Should the subordination agreement be
terminated, interest may be paid sooner. The convertible feature of the Trust
Agreement, as amended, allows for conversion of the subordinated debt plus
interest into our common stock 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, we entered into a $3,250,000 five-year loan with
NeoPharm, Inc. ("NeoPharm") to fund Akorn's efforts to complete its
lyophilization facility located in Decatur, Illinois. Under the terms of the
promissory note, dated December 20, 2001, evidencing the loan (the Promissory
Note") interest will accrue at the initial rate of 3.6% and will be reset
quarterly based upon NeoPharm's average return on its cash and readily tradable
long and short-term securities during the previous calendar quarter. The
principal and accrued interest is due and payable on or before maturity on
December 20, 2006. The note provides that Akorn will use the proceeds of the
loan solely to validate and complete the lyophilization facility located in
Decatur, Illinois. In consideration for the loan, under a separate manufacturing
agreement between us and NeoPharm, we, upon completion of the lyophilization
facility, agree to provide NeoPharm with access to at least 15% of the capacity
of Akorn's lyophilization facility each year. The Promissory Note is
subordinated to Akorn's senior debt owed to Northern Trust but is senior to
Akorn's subordinated debt owed to the Trust. Dr. John N. Kapoor, our chairman,
is also chairman of NeoPharm and holds a substantial stock position in that
company as well as in us.
 
     Commensurate with the completion of the Promissory Note between us and
NeoPharm, we entered into an agreement with the Trust, which amended the Trust
Agreement. The amendment extended the Trust Agreement to terminate concurrently
with the Promissory Note on December 20, 2006. The amendment also made it
possible for the Trust to convert the interest accrued on the $3,000,000 tranche
into common stock of Akorn. Previously, the Trust could only convert the
interest accrued on the $2,000,000 tranche. The change related to the
convertibility of the interest accrued on the $3,000,000 tranche requires that
shareholder approval be received by August 31, 2002, which date has been
extended to June 30, 2003.
 
     As part of the Exchange Transaction, we issued the 2003 Subordinated Notes
to the Kapoor Trust, Arjun Waney and Argent Fund Management, Ltd. The 2003
Subordinated Notes mature on April 7, 2006 and bear interest at prime plus
1.75%, but interest payments are currently prohibited under the terms of the
subordination arrangements described below. The 2003 Subordinated Notes are
subordinated to the New Credit Facility and the Amended NeoPharm Note but senior
to Trust Loan Agreement with the Kapoor Trust. We also issued to the holders of
the 2003 Subordinated Notes warrants to purchase an aggregate of 276,714 shares
of common stock with an exercise price of $1.10 per share.
 
     In 2003,we paid approximately $115,000 for consulting fees to Quintiles,
Inc., a firm at which Mr. Johnson, one of our directors, is employed.
 
     We have an equity ownership interest in Novadaq Technologies, Inc.
("Novadaq") of 4,132,000 common shares, representing approximately 16.9% of the
outstanding stock of Novadaq. Previously, we had entered into a marketing
agreement with Novadaq, which was terminated in early 2002. We received, as part
of the termination settlement, the aforementioned shares and entered into an
agreement with Novadaq to be the exclusive future supplier of Indocyanine Green
for use in Novadaq's diagnostic procedures. We also have the right to appoint
one individual to the Board of Directors of Novadaq. Arthur S. Przybyl, our
Chief Executive Officer, currently serves in this capacity.
 

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
 
AUDIT FEES
 
     Aggregate fees, including out-of-pocket expenses, for professional services
rendered by BDO Seidman, LLP, ("BDO Seidman") in connection with (i) the audit
of our consolidated financial statements as of and for the year ended December
31, 2003 and (ii) the reviews of the our unaudited condensed consolidated
interim financial statements as of September 30, 2003, June 30, 2003, and March
31, 2003 were $233,500.
 
                                        76

<PAGE>
 
     Aggregate fees for these services as provided by Deloitte & Touche LLP
("Deloitte & Touche") for the year ended December 31, 2002 were $326,000.
 
AUDIT-RELATED FEES
 
     Aggregate fees, including out-of-pocket expenses, for professional services
rendered by BDO Seidman for audit-related services for the year ended December
31, 2003 were $10,200. Audit-related services included an audit of our employee
benefit plan audits.
 
     Aggregate fees for these services as provided by Deloitte & Touche for the
year ended December 31, 2002 were $75,000.
 
TAX FEES
 
     Aggregate fees, including out-of-pocket expenses, for professional services
rendered by Deloitte and Touche in connection with tax compliance and advice and
preparation of employee expatriate tax returns for the year ended December 31,
2002 were $32,200.
 
     Aggregate fees for these services as provided by Deloitte & Touche for the
year ended December 31, 2003 were $82,000.
 
ALL OTHER FEES
 
     There were no additional fees to those described above during the years
ended December 31, 2003. In December 31, 2002, fees for miscellaneous
professional services as provided by Deloitte & Touche amounted to $50,000.
These services included (i) review of our accounting software for potential
validation issues, (ii) identification of application security requirements and
(iii) consultation on implantation of sales and use software.
 
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
 
     At their regularly scheduled and special meetings the Audit Committee of
the Board of Directors considers and pre-approves any audit and non-audit
services to be performed for us by our independent accountants.
 
     For 2003, those pre-approved audit, audit-related, tax and all other
services represented 72%, 3%, 25% and 0% respectively of all services that year.
 
AUDIT COMMITTEE CHARTER
 
     We are in the process of finalizing a new Audit Committee Charter (the
"Audit Committee Charter"). The Audit Committee Charter will be adopted by the
Board of Directors prior to the date of our 2004 Annual Meeting of Stockholders.
 
                                        77

<PAGE>
 

                                    PART IV
 

ITEM 15.  EXHIBITS AND REPORTS ON FORM 8-K
 
     (a).3. Exhibits
 
     Those exhibits marked with an asterisk (*) refer to exhibits filed
herewith. The other exhibits are incorporated herein by reference, as indicated
in the following list.
 

<Table>
<C>         <S>
 (2.0)      Agreement and Plan of Merger among Akorn, Inc., Taylor, and
            Pasadena Research Laboratories, Inc. dated May 7, 1996,
            incorporated by reference to the Company's report on Form
            10-K for the fiscal year ended June 30, 1996.
 (3.1)      Restated Articles of Incorporation of the Company dated
            September 6, 1991, incorporated by reference to Exhibit 3.1
            to the Company's report on Form 10-K for the fiscal year
            ended June 30, 1991.
 (3.2)      Articles of Amendment to Articles of Incorporation of the
            company dated February 28, 1997, incorporated by reference
            to Exhibit 3.2 to the Company's report on Form 10-K for the
            transition period from July 1, 1996 to December 31, 1996.
 (3.3)      Composite Articles of Incorporation of the Company,
            incorporated by reference to Exhibit 3.1 to the Company's
            report on Form 8-K filed on October 24, 2003.
 (3.4)      Articles of Amendment to Articles of Incorporation of the
            Company, incorporated by reference to Exhibit 3.1.1 to the
            Company's report on Form 8-K filed on October 24, 2003.
 (3.5)      Amended and Restated By-laws of the Company, incorporated by
            reference to Exhibit 3.2 to the Company's report on Form 8-K
            filed on October 24, 2003.
 (4.1)      Specimen Common Stock Certificate, incorporated by reference
            to Exhibit 4.1 to the Company's report on Form 10-K for the
            fiscal year ended June 30, 1988.
 (4.2)      First Amendment dated October 7, 2003 to Registration Rights
            Agreement dated July 12, 2001 between the Company and The
            John N. Kapoor Trust dtd 9/20/89, incorporated by reference
            to Exhibit 4.1 to the Company's report on Form 8-K filed on
            October 24, 2003.
 (4.3)      Form of Warrant Certificate, incorporated by reference to
            Exhibit 4.2 to the Company's report on Form 8-K filed on
            October 24, 2003.
 (4.4)      Form of Warrant Agreement dated October 7, 2003 between the
            Company and each of the Investors, incorporated by reference
            to Exhibit 4.3 to the Company's report on Form 8-K filed on
            October 24, 2003.
 (4.5)      Warrant Agreement dated October 7, 2003 between the Company
            and the Kapoor Trust issued with respect to New Credit
            Facility guaranty, incorporated by reference to Exhibit 4.4
            to the Company's report on Form 8-K filed on October 24,
            2003.
 (4.6)      Warrant Agreement dated October 7, 2003 between the Company
            and Arjun Waney issued with respect to New Credit Facility
            guaranty, incorporated by reference to Exhibit 4.5 to the
            Company's report on Form 8-K filed on October 24, 2003.
 (4.7)      Warrant Agreement dated October 7, 2003 between the Company
            and the Kapoor Trust issued with respect to the Notes,
            incorporated by reference to Exhibit 4.6 to the Company's
            report on Form 8-K filed on October 24, 2003.
 (4.8)      Warrant Agreement dated October 7, 2003 between the Company
            and Arjun Waney issued with respect to the Notes,
            incorporated by reference to Exhibit 4.7 to the Company's
            report on Form 8-K filed on October 24, 2003.
 (4.9)      Warrant Agreement dated October 7, 2003 between the Company
            and Argent Fund Management Ltd. issued with respect to the
            Notes, incorporated by reference to Exhibit 4.8 to the
            Company's report on Form 8-K filed on October 24, 2003.
 (4.10)     Registration Rights Agreement dated October 7, 2003 among
            the Company and each of the Investors, incorporated by
            reference to Exhibit 4.9 to the Company's report on Form 8-K
            filed on October 24, 2003.
</Table>

 
                                        78

<PAGE>

<Table>
<C>         <S>
(10.1)      Consulting Agreement dated November 15, 1990 by and between
            E. J. Financial Enterprises, Inc., a Delaware corporation,
            and the Company, incorporated by reference to Exhibit 10.24
            to the Company's report on Form 10-K for the fiscal year
            ended June 30, 1991.
(10.2)      Amendment No. 1 to the Amended and Restated Akorn, Inc. 1988
            Incentive Compensation Program, incorporated by reference to
            Exhibit 10.33 to the Company's report on Form 10-K for the
            fiscal year ended June 30, 1992.
(10.3)      1991 Akorn, Inc. Stock Option Plan for Directors,
            incorporated by reference to Exhibit 4.3 to the Company's
            registration statement on Form S-8, registration number
            33-44785.
(10.4)      Common Stock Purchase Warrant dated September 3, 1992,
            issued by the Company to the John N. Kapoor Trust dated
            September 20, 1989, incorporated by reference to Exhibit No.
            7 to Amendment No. 3 to Schedule 13D, dated September 10,
            1992, filed by John N. Kapoor and the John N. Kapoor Trust
            dated September 20, 1989.
(10.5)      Promissory Note among the Company, Akorn (New Jersey), Inc.
            and The Northern Trust Company dated April 16, 2001,
            incorporated by reference to Exhibit 10.3 to the Company's
            report on Form 8-K filed on April 17, 2001.
(10.6)      Letter of Commitment to the Company from John. N. Kapoor,
            incorporated by reference to Exhibit 10.3 to the Company's
            report on Form 8-K filed on April 17, 2001.
(10.7)      Convertible Bridge Loan and Warrant Agreement dated as of
            July 12, 2001, by and between Akorn, Inc. and the John N.
            Kapoor Trust dtd. 9/20/89, incorporated by reference to
            Exhibit 10.1 to the Company's report on Form 8-K filed on
            July 26, 2001.
(10.8)      The Tranche A Common Stock Purchase Warrant, dated July 12,
            2001, incorporated by reference to Exhibit 10.2 to the
            Company's report on Form 8-K filed on July 26, 2001.
(10.9)      The Tranche B Common Stock Purchase Warrant, dated July 12,
            2001, incorporated by reference to Exhibit 10.3 to the
            Company's report on Form 8-K filed on July 26, 2001.
(10.10)     Registration Rights Agreement dated July 12, 2001, by and
            between Akorn, Inc. and the John N. Kapoor Trust dtd.
            9/20/89, incorporated by reference to Exhibit 10.4 to the
            Company's report on Form 8-K filed on July 26, 2001.
(10.11)     Offer Letter dated September 4, 2001 from the Company to Mr.
            Pothast, incorporated by reference to Exhibit 10.161 to the
            Company's report on Form 10-K for the fiscal year ended
            December 31, 2002.
(10.12)     Promissory Note among the Company, Akorn (New Jersey), Inc.
            and NeoPharm, Inc. dated December 20, 2001, incorporated by
            reference to Exhibit 10.17 to the Company's report on Form
            10-K for fiscal year ended December 31, 2001.
(10.13)     Processing Agreement dated December 20, 2001, by and between
            Akorn, Inc. and NeoPharm, Inc., incorporated by reference to
            Exhibit 10.18 to the Company's report on Form 10-K for
            fiscal year ended December 31, 2001.
(10.14)     Subordination and Intercreditor Agreement dated December 20,
            2001, by and between NeoPharm, Inc. and the John N. Kapoor
            trust dtd. 9/20/89, incorporated by reference to Exhibit
            10.20 to the Company's report on Form 10-K for fiscal year
            ended December 31, 2001.
(10.15)     Supply Agreement dated January 4, 2002, by and between
            Akorn, Inc. and Novadaq Technologies, Inc., incorporated by
            reference to Exhibit 10.22 to the Company's report on Form
            10-K for fiscal year ended December 31, 2001.
(10.16)     Mutual Termination and Settlement Agreements by and between
            Akorn, Inc. and Johns Hopkins University/Applied Physics
            Laboratory dtd. July 3, 2002, incorporated by reference to
            Exhibit 10.23 to the Company's report on Form 10-K for
            fiscal year ended December 31, 2001.
(10.17)     Engagement Letter by and among the Company and AEG Partners
            LLC dated as of September 26, 2002, incorporated by
            reference to Exhibit 10.39 to the Company's Report on Form
            10-Q for the period ended September 30, 2002.
</Table>

 
                                        79

<PAGE>

<Table>
<C>         <S>
(10.18)     Amendment to Engagement Letter by and among the Company and
            AEG Partners LLC dated as of November 21, 2002 incorporated
            by reference to Exhibit 10.40 to the Company's report on
            Form 10-K for the fiscal year ended December 31, 2002.
(10.19)     Offer Letter dated January 22, 2003 from the Company to
            Arthur S. Przybyl, incorporated by reference to Exhibit
            10.41 to the Company's report on Form 10-K for the fiscal
            year ended December 31, 2000.
(10.20)     Indemnification Agreement dated May 15, 2003 by and between
            the Company and Arthur S. Przybyl, incorporated by reference
            to Exhibit 10.42 to the Company's report on Form 10-K for
            the fiscal year ended December 31, 2002.
(10.21)     Subordinated Promissory Note dated October 7, 2003 issued to
            the Kapoor Trust, incorporated by reference to Exhibit 10.2
            to the Company's report on Form 8-K filed on October 24,
            2003.
(10.22)     Subordinated Promissory Note dated October 7, 2003 issued to
            Arjun Waney, incorporated by reference to Exhibit 10.3 to
            the Company's report on Form 8-K filed on October 24, 2003.
(10.23)     Subordinated Promissory Note dated October 7, 2003 issued to
            Argent Fund Management Ltd., incorporated by reference to
            Exhibit 10.4 to the Company's report on Form 8-K filed on
            October 24, 2003.
(10.24)     Credit Agreement dated October 7, 2003 among the Company,
            Akorn (New Jersey), Inc., the lenders party thereto and
            LaSalle Bank National Association, as Administrative Agent,
            incorporated by reference to Exhibit 10.1 to the Company's
            report on Form 8-K filed on October 24, 2003.
(10.25)     Form of Indemnity Agreement dated October 7, 2003 between
            the Company and each of the Directors as incorporated by
            reference to Exhibit 10.1 to the Company's report on Form
            10-Q/A for quarter ended September 30, 2003
(10.26)     Form of Amended and Restated Promissory Note dated October
            7, 2003 issued to NeoPharm, incorporated by reference to
            Exhibit 10.2 to the Company's report on Form 10-Q/A for
            quarter ended September 30, 2003.
(10.27)     Form of Reaffirmation of Subordination and Intercreditor
            Agreement from the Kapoor Trust to NeoPharm, incorporated by
            reference to Exhibit 10.3 to the Company's report on Form
            10-Q/A for quarter ended September 30, 2003.
(10.28)     Form of Subordination and Intercreditor Agreement dated
            October 7, 2003 among the Company, Akorn (New Jersey), Inc.,
            LaSalle Bank and NeoPharm, incorporated by reference to
            Exhibit 10.4 to the Company's report on Form 10-Q/A for
            quarter ended September 30, 2003.
(10.29)     Form of Fourth Amendment to Convertible Bridge Loan and
            Warrant Agreement dated October 7, 2003 between the Company
            and the Kapoor Trust, incorporated by reference to Exhibit
            10.5 to the Company's report on Form 10-Q/A for quarter
            ended September 30, 2003.
(10.30)     Form of Acknowledgment of Subordination dated October 7,
            2003 between the Company and the Kapoor Trust, incorporated
            by reference to Exhibit 10.6 to the Company's report on Form
            10-Q/A for quarter ended September 30, 2003.
(10.31)     Form of Subordination and Intercreditor Agreement dated
            October 7, 2003 among the Company, Akorn (New Jersey), Inc.,
            LaSalle Bank and the Kapoor Trust, incorporated by reference
            to Exhibit 10.7 to the Company's report on Form 10-Q/A for
            quarter ended September 30, 2003.
(10.32)     Form of Subordination and Intercreditor Agreement dated
            October 7, 2003 among the Company, Akorn (New Jersey), Inc.,
            LaSalle Bank and the Kapoor Trust, incorporated by reference
            to Exhibit 10.8 to the Company's report on Form 10-Q/A for
            quarter ended September 30, 2003.
(10.33)     Form of Subordination and Intercreditor Agreement dated
            October 7, 2003 among the Company, Akorn (New Jersey), Inc.,
            LaSalle Bank and Arjun Waney, incorporated by reference to
            Exhibit 10.9 to the Company's report on Form 10-Q/A for
            quarter ended September 30, 2003.
</Table>

 
                                        80

<PAGE>

<Table>
<C>         <S>
(10.34)     Form of Subordination and Intercreditor Agreement dated
            October 7, 2003 among the Company, Akorn (New Jersey), Inc.,
            LaSalle Bank and Argent Fund Management Ltd, incorporated by
            reference to Exhibit 10.10 to the Company's report on Form
            10-Q/A for quarter ended September 30, 2003.
(10.35)     Akorn, Inc. 2003 Stock Option Plan.
(10.36)     Form of Akorn, Inc. Non-Qualified Stock Option Agreement.
(10.37)     Form of Akorn, Inc. Incentive Stock Option Agreement.
(21.1)      Subsidiaries of Registrant.
(31.1)      Certification of the Chief Executive Officer pursuant to
            Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)      Certification of the Chief Financial Officer pursuant to
            Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)      Certification of the Chief Executive Officer pursuant to 18
            USC Section 1350, as adopted pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002.
(32.2)      Certification of the Chief Financial Officer pursuant to 18
            USC Section 1350, as adopted pursuant to Section 906 of the
            Sarbanes-Oxley Act of 2002.
</Table>

 
     (b) Reports on Form 8-K:
 
     Form 8-K filed on October 10, 2003 to announce the closing of the Exchange
Transaction.
 
     Form 8-K filed on October, 24, 2003 to provide further details of the
Exchange Transaction.
 
     Form 8-K filed on October 29, 2003 in connection with the engagement of BDO
Seidman, LLP as the Company's principal accountants.
 
     Form 8-K filed on November 20, 2003 to announce the election of Arthur S.
Przybyl, Jerry Treppel and Arjun C. Waney to the Company's Board of Directors.
 
                                        81

<PAGE>
 

                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          AKORN, INC.
 
                                          By:     /s/ ARTHUR S. PRZYBYL
                                            ------------------------------------
                                                     Arthur S. Przybyl
                                                  Chief Executive Officer
Date: March 30, 2004
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the dates indicated.
 

<Table>
<Caption>
SIGNATURE                                                    TITLE                          DATE
---------                                                    -----                          ----
<C>                                         <S>                                        <C>
          /s/ ARTHUR S. PRZYBYL             Chief Executive Officer                    March 30, 2004
------------------------------------------  (Principal Executive Officer)
            Arthur S. Przybyl
 
          /s/ BERNARD J. POTHAST            Chief Financial Officer                    March 30, 2004
------------------------------------------  (Principal Financial Officer and
            Bernard J. Pothast              Principal Accounting Officer)
 
             /s/ JOHN KAPOOR                Director, Board Chairman                   March 30, 2004
------------------------------------------
             Dr. John Kapoor
 
            /s/ JERRY N. ELLIS              Director                                   March 30, 2004
------------------------------------------
              Jerry N. Ellis
 
            /s/ ARJUN C. WANEY              Director                                   March 30, 2004
------------------------------------------
              Arjun C. Waney
 
            /s/ JERRY TREPPEL               Director                                   March 30, 2004
------------------------------------------
              Jerry Treppel
 
          /s/ RONALD M. JOHNSON             Director                                   March 30, 2004
------------------------------------------
            Ronald M. Johnson
</Table>

 
                                        82




<PAGE>

                                                                   EXHIBIT 10.35

                                   AKORN, INC.
                             2003 STOCK OPTION PLAN


         1. PURPOSE. This Stock Option Plan (the "Plan") is intended to serve as
an incentive to, and to encourage stock ownership by, certain eligible
participants rendering services to Akorn, Inc., a Louisiana corporation, and
certain affiliates as set forth below (the "Corporation"), so that they may
acquire or increase their proprietary interest in the Corporation and to
encourage them to remain in the service of the Corporation.

         2. ADMINISTRATION.

                  2.1 Committee. The Plan shall be administered by the Board of
Directors of the Corporation (the "Board of Directors"), or a committee of two
or more members appointed by the Board of Directors (the "Committee") who are
independent directors under Nasdaq Marketplace Rules and an outside director as
defined in Treasury Regulation Section 1.162-27(e)(3). The Committee shall
select one of its members as Chairman and shall appoint a Secretary, who need
not be a member of the Committee. The Committee shall hold meetings at such
times and places as it may determine and minutes of such meetings shall be
recorded. Acts by a majority of the Committee in a meeting at which a quorum is
present and acts approved in writing by a majority of the members
 of the
Committee shall be valid acts of the Committee.

                  2.2 Term. If the Board of Directors selects a Committee, the
members of the Committee shall serve on the Committee for the period of time
determined by the Board of Directors and shall be subject to removal by the
Board of Directors at any time. The Board of Directors may terminate the
function of the Committee at any time and resume all powers and authority
previously delegated to the Committee.

                  2.3 Authority. The Committee shall have sole discretion and
authority to grant options under the Plan to eligible participants rendering
services to the Corporation or any "parent" or "subsidiary" of the Corporation
("Parent or Subsidiary"), as defined in Section 424 of the Internal Revenue Code
of 1986, as amended (the "Code"), at such times, under such terms and in such
amounts as it may decide. For purposes of this Plan and any Stock Option
Agreement (as defined below), the term "Corporation" shall include any Parent or
Subsidiary, if applicable. Subject to the express provisions of the Plan, the
Committee shall have complete authority to interpret the Plan, to prescribe,
amend and rescind the rules and regulations relating to the Plan, to determine
the details and provisions of any Stock Option Agreement, to accelerate any
options granted under the Plan and to make all other determinations necessary or
advisable for the administration of the Plan.

                  2.4 Type of Option. The Committee shall have full authority
and discretion to determine, and shall specify, whether the eligible individual
will be granted options intended to qualify as incentive options under Section
422 of the Code ("Incentive Options") or options which are not intended to
qualify under Section 422 of the Code ("Non-Qualified Options"); provided,
however, that Incentive Options shall only be granted to employees of the
Corporation, or a Parent or Subsidiary thereof, and shall be subject to the
special limitations set forth herein attributable to Incentive Options.


                                       1


<PAGE>




                  2.5 Interpretation. The interpretation and construction by the
Committee of any provisions of the Plan or of any option granted under the Plan
shall be final and binding on all parties having an interest in this Plan or any
option granted hereunder. No member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
option granted under the Plan.

         3. ELIGIBILITY.


                  3.1 General. All directors, officers, employees of and
consultants to the Corporation, or any Parent or Subsidiary relative to the
Corporation's, or any Parent's or Subsidiary's management, operation or
development shall be eligible to receive options under the Plan. The selection
of recipients of options shall be within the sole and absolute discretion of the
Committee. No person shall be granted an Incentive Option under this Plan unless
such person is an employee of the Corporation, or a Parent or Subsidiary on the
date of grant. No person shall be granted an option under this Plan unless such
person has executed, if requested by the Committee, the grant representation
letter set forth on Exhibit "A," as such Exhibit may be amended by the Committee
from time to time. No person shall be granted more than 500,000 options in any
one year period.

                  3.2 Termination of Eligibility. 

                           3.2.1 If an optionee ceases to be employed by the
Corporation, or its Parent or Subsidiary, is no longer an officer or member of
the Board of Directors of the Corporation, or no longer performs services for
the Corporation, or its Parent or Subsidiary, for any reason (other than for
"cause," as hereinafter defined, or such optionee's death), any option granted
hereunder to such optionee shall expire three (3) months after the occurrence
giving rise to such termination of eligibility (or one (1) year in the event an
optionee is "disabled," as defined in Section 22(e)(3) of the Code) or upon the
date it expires by its terms, whichever is earlier. Any option that has not
vested in the optionee as of the date of such termination shall immediately
expire and shall be null and void. The Committee shall, in its sole and absolute
discretion, decide, utilizing the provisions set forth in Treasury Regulations
Section 1.421-7(h), whether an authorized leave of absence or absence for
military or governmental service, or absence for any other reason, shall
constitute termination of eligibility for purposes of this Section.

                           3.2.2 If an optionee ceases to be employed by the
Corporation, or its Parent or Subsidiary, is no longer an officer or member of
the Board of Directors of the Corporation, or no longer performs services for
the Corporation, or its Parent or Subsidiary, and such termination is as a
result of "cause," as hereinafter defined, then all options granted hereunder to
such optionee shall expire on the date of the occurrence giving rise to such
termination of eligibility or upon the date it expires by its terms, whichever
is earlier, and such optionee shall have no rights with respect to any
unexercised options. For purposes of this Plan, "cause" shall mean an optionee's
personal dishonesty, misconduct, breach of fiduciary duty, incompetence,
intentional failure to perform stated obligations, willful violation of any law,
rule, regulation or final cease and desist order, or any material breach of any
provision of this Plan, any Stock Option Agreement or any employment agreement.


                                       2


<PAGE>




                  3.3 Death of Optionee and Transfer of Option. In the event an
optionee shall die, a vested option may be exercised (subject to the condition
that no option shall be exercisable after its expiration and only to the extent
that the optionee's right to exercise such option had accrued at the time of the
optionee's death) at any time within six months after the optionee's death by
the executors or administrators of the optionee or by any person or persons who
shall have acquired the option directly from the optionee by bequest or
inheritance. Any option that has not vested in the optionee as of the date of
death or termination of employment, whichever is earlier, shall immediately
expire and shall be null and void. No option shall be transferable by the
optionee other than by will or the laws of intestate succession.

                  3.4 Limitation on Incentive Options. No person shall be
granted any Incentive Option to the extent that the aggregate fair market value
of the Stock (as defined below) to which such options are exercisable for the
first time by the optionee during any calendar year (under all plans of the
Corporation as determined under Section 422(d) of the Code) exceeds $100,000.

         4. IDENTIFICATION OF STOCK. The Stock, as defined herein, subject to
the options shall be shares of the Corporation's authorized but unissued or
acquired or reacquired common stock (the "Stock"). The aggregate number of
shares subject to outstanding options shall not exceed 5,000,000 shares of Stock
(subject to adjustment as provided in Section 6). If any option granted
hereunder shall expire or terminate for any reason without having been exercised
in full, the unpurchased shares subject thereto shall again be available for
purposes of this Plan.

         5. TERMS AND CONDITIONS OF OPTIONS. Any option granted pursuant to the
Plan shall be evidenced by an agreement ("Stock Option Agreement") in such form
as the Committee shall from time to time determine, which agreement shall comply
with and be subject to the following terms and conditions:

                  5.1 Number of Shares. Each option shall state the number of
shares of Stock to which it pertains.
  

                  5.2 Option Exercise Price. Each option shall state the option
exercise price, which shall be determined by the Committee; provided, however,
that (i) the exercise price of any Incentive Option shall not be less than the
fair market value of the Stock, as determined by the Committee, on the date of
grant of such option, (ii) the exercise price of any option granted to any
person who owns more than 10% of the total combined voting power of all classes
of the Corporation's stock, as determined for purposes of Section 422 of the
Code, shall not be less than 110% of the fair market value of the Stock, as
determined by the Committee, on the date of grant of such option, and (iii) the
exercise price of any Non-Qualified Option shall not be less than 85% of the
fair market value of the Stock, as determined by the Committee, on the date of
grant of such option. In the event that the fair market value of the price of
the common stock declines below the price at which the option is granted, the
Committee shall have the discretion and authority to cancel, reduce, or
otherwise modify the price of any unexercised option, including, but not limited
to, a regrant of the option at a new price more commensurate with the fair
market value of the stock. The Committee must receive the approval of the Board
of Directors before any action is taken in accordance with this provision.


                                       3


<PAGE>





                  5.3 Term of Option. The term of an option granted hereunder
shall be determined by the Committee at the time of grant, but shall not exceed
ten years from the date of the grant. The term of any Incentive Option granted
to an employee who owns more than 10% of the total combined voting power of all
classes of the Corporation's stock, as determined for purposes of Section 422 of
the Code, shall in no event exceed five years from the date of grant. All
options shall be subject to early termination as set forth in this Plan. In no
event shall any option be exercisable after the expiration of its term.

                  5.4 Method of Exercise. An option shall be exercised by
written notice to the Corporation by the optionee (or successor in the event of
death) and execution by the optionee of an exercise representation letter in the
form set forth on Exhibit "B," as such Exhibit may be amended by the Committee
from time to time. Such written notice shall state the number of shares with
respect to which the option is being exercised and designate a time, during
normal business hours of the Corporation, for the delivery thereof ("Exercise
Date"), which time shall be at least 30 days after the giving of such notice
unless an earlier date shall have been mutually agreed upon. At the time
specified in the written notice, the Corporation shall deliver to the optionee
at the principal office of the Corporation, or such other appropriate place as
may be determined by the Committee, a certificate or certificates for such
shares. Notwithstanding the foregoing, the Corporation may postpone delivery of
any certificate or certificates after notice of exercise for such reasonable
period as may be required to comply with any applicable listing requirements of
any securities exchange. In the event an option shall be exercisable by any
person other than the optionee, the required notice under this Section shall be
accompanied by appropriate proof of the right of such person to exercise the
option.

                  5.5 Medium and Time of Payment. The option exercise price
shall be payable in full on or before the option Exercise Date in any one of the
following alternative forms:

                           5.5.1 Full payment in cash or certified bank or
cashier's check;

                           5.5.2 Subject to Section 5.5.7 hereof, a Promissory
Note (as defined below);

                           5.5.3 Full payment in shares of Stock having a fair
market value on the Exercise Date in the amount equal to the option exercise
price;

                           5.5.4 Subject to Section 5.5.7 hereof, through a
special sale and remittance procedure pursuant to which the optionee shall
concurrently provide irrevocable written instruction to (a) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date pursuant to an irrevocable assignment by the
optionee, sufficient funds to cover the aggregate exercise price payable for the
purchased shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Corporation by reason of such
exercise and (b) the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale.

                           5.5.5 A combination of the consideration set forth in
Sections 5.5.1, through 5.5.4 equal to the option exercise price; or

                  
                                       4


<PAGE>





                           5.5.6 Any other method of payment complying with the
provisions of Section 422 of the Code with respect to Incentive Options,
provided the terms of payment are established by the Committee at the time of
grant and any other method of payment established by the Committee with respect
to Non-Qualified Options.

                           5.5.7 Notwithstanding the foregoing, the methods of
payment described in Section 5.5.2 and Section 5.5.4 shall not be available to
any optionee classified as "a director or executive officer (or equivalent
thereof)" within the meaning of Section 402 of the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley") at the time of the exercise, unless such optionee provides to
the Corporation a written opinion of counsel satisfactory to the Corporation
that the proposed medium of payment is not prohibited by Sarbanes-Oxley.

                  5.6 Fair Market Value. The fair market value of a share of
Stock on any relevant date shall be determined in accordance with the following
provisions:

                           5.6.1 If the Stock at the time is neither listed nor
admitted to trading on any stock exchange nor traded in the over-the-counter
market, then the fair market value shall be determined by the Committee after
taking into account such factors as the Committee shall deem appropriate.

                           5.6.2 If the Stock is not at the time listed or
admitted to trading on any stock exchange but is traded in the over-the-counter
market, the fair market value shall be the mean between the highest bid and
lowest asked prices (or, if such information is available, the closing selling
price) of one share of Stock on the date in question in the over-the-counter
market, as such prices are reported by the National Association of Securities
Dealers through its NASDAQ system or any successor system. If there are no
reported bid and asked prices (or closing selling price) for the Stock on the
date in question, then the mean between the highest bid and lowest asked prices
(or the closing selling price) on the last preceding date for which such
quotations exist shall be determinative of fair market value.

                           5.6.3 If the Stock is at the time listed or admitted
to trading on any stock exchange, then the fair market value shall be the
closing selling price of one share of Stock on the date in question on the stock
exchange determined by the Committee to be the primary market for the Stock, as
such price is officially quoted in the composite tape of transactions on such
exchange. If there is no sale of Stock on such exchange on the date in question,
then the fair market value shall be the closing selling price on the exchange on
the last preceding date for which such quotation exists.

                  5.7 Promissory Note. Subject to the requirements of applicable
state or Federal law or margin requirements, payment of all or part of the
purchase price of the Stock may be made by delivery of a full recourse
promissory note ("Promissory Note"). The Promissory Note shall be executed by
the optionee, made payable to the Corporation and bear interest at such rate as
the Committee shall determine, but in no case less than the minimum rate which
will not cause under the Code (i) interest to be imputed, (ii) original issue
discount to exist, or (iii) any other similar results to occur. Unless otherwise
determined by the Committee, interest on the Note shall be payable in quarterly
installments on March 31, June 30, September 30 and December 31 of each year. A
Promissory Note shall contain such other terms


                                        5


<PAGE>





and conditions as may be determined by the Committee; provided, however, that
the full principal amount of the Promissory Note and all unpaid interest accrued
thereon shall be due not later than five years from the date of exercise. The
Corporation may obtain from the optionee a security interest in all shares of
Stock issued to the optionee under the Plan for the purpose of securing payment
under the Promissory Note and may retain possession of the stock certificates
representing such shares in order to perfect its security interest.

                  5.8 Rights as a Shareholder. An optionee or successor shall
have no rights as a shareholder with respect to any Stock underlying any option
until the date of the issuance to such optionee of a certificate for such Stock.
No adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such Stock certificate is issued, except as
provided in Section 6.

                  5.9 Modification, Extension and Renewal of Options. Subject to
the terms and conditions of the Plan, the Committee may modify, extend or renew
outstanding options granted under the Plan, or accept the surrender of
outstanding options (to the extent not exercised) and authorize the granting of
new options in substitution therefor.

                  5.10 Vesting and Restrictions. The Committee shall have
complete authority and discretion to set the terms, conditions, restrictions,
vesting schedules and other provisions of any option in the applicable Stock
Option Agreement and shall have complete authority to require conditions and
restrictions on any Stock issued pursuant to this Plan; provided, however, that
except with respect to options granted to officers or directors of the
Corporation, options granted pursuant to this Plan shall be exercisable or
"vest" at the rate of at least 20% per year over the 5-year period beginning on
the date the option is granted. Options granted to officers and directors shall
become exercisable or "vest," subject to subject to the condition of continued
employment and/or continued service on the Board of Directors, as appropriate.
The maximum vesting period for options granted to officers or directors will be
ten years from the date of grant.

                  5.11 Other Provisions. The Stock Option Agreements shall
contain such other provisions, including without limitation, restrictions or
conditions upon the exercise of options, as the Committee shall deem advisable.

         6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.

                  6.1 Subdivision or Consolidation. Subject to any required
action by shareholders of the Corporation, the number of shares of Stock covered
by each outstanding option, and the exercise price thereof, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Stock of the Corporation resulting from a subdivision or consolidation
of shares, including, but not limited to, a stock split, reverse stock split,
recapitalization, continuation or reclassification, or the payment of a stock
dividend (but only on the Stock) or any other increase or decrease in the number
of such shares effected without receipt of consideration by the Corporation. Any
fraction of a share subject to option that would otherwise result from an
adjustment pursuant to this Section shall be rounded downward to the next full
number of shares without other compensation or consideration to the holder of
such option.


                                        6


<PAGE>





                  6.2 Capital Transactions. Upon a sale or exchange of all or
substantially all of the assets of the Corporation, a merger or consolidation in
which the Corporation is not the surviving corporation, a merger, reorganization
or consolidation in which the Corporation is the surviving corporation and
shareholders of the Corporation exchange their stock for securities or property,
a liquidation of the Corporation, or similar transaction as determined by the
Committee ("Capital Transaction"), this Plan and each option issued under this
Plan, whether vested or unvested, shall terminate, unless such options are
assumed by a successor corporation in a merger or consolidation, immediately
prior to such Capital Transaction; provided, however, that unless the
outstanding options are assumed by a successor corporation in a merger or
consolidation, subject to terms approved by the Committee, all optionees will
have the right, during the 15 days prior to such Capital Transaction, to
exercise all vested options. The Corporation shall, subject to any nondisclosure
provisions, attempt to provide optionees at least 15 days notice of the option
termination date. The Committee may (but shall not be obligated to) (i)
accelerate the vesting of any option or (ii) apply the foregoing provisions,
including but not limited to termination of this Plan and options granted
pursuant to the Plan, in the event there is a sale of 51% or more of the stock
of the Corporation in any two year period or a transaction similar to a Capital
Transaction.

                  6.3 Adjustments. To the extent that the foregoing adjustments
relate to stock or securities of the Corporation, such adjustments shall be made
by the Committee, whose determination in that respect shall be final, binding
and conclusive.

                  6.4 Ability to Adjust. The grant of an option pursuant to the
Plan shall not affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, dissolve, liquidate, sell or
transfer all or any part of its business or assets.

                  6.5 Notice of Adjustment. Whenever the Corporation shall take
any action resulting in any adjustment provided for in this Section, the
Corporation shall forthwith deliver notice of such action to each optionee,
which notice shall set forth the number of shares subject to the option and the
exercise price thereof resulting from such adjustment.

                  6.6 Limitation on Adjustments. Any adjustment, assumption or
substitution of an Incentive Option shall comply with Section 425 of the Code,
if applicable.

         7. NONASSIGNABILITY. Options granted under this Plan may not be sold,
pledged, assigned or transferred in any manner other than by will or by the laws
of intestate succession, and may be exercised during the lifetime of an optionee
only by such optionee. Any transfer in violation of this Section shall void such
option, and any Stock Option Agreement entered into by the optionee and the
Corporation regarding such transferred option shall be void and have no further
force or effect. No option shall be pledged or hypothecated in any way, nor
shall any option be subject to execution, attachment or similar process.

         8. NO RIGHT OF EMPLOYMENT. Neither the grant nor exercise of any option
nor anything in this Plan shall impose upon the Corporation or any other
corporation any obligation to employ or continue to employ any optionee. The
right of the Corporation and any


                                        7


<PAGE>





other corporation to terminate any employee shall not be diminished or affected
because an option has been granted to such employee.

         9. TERM OF PLAN. This Plan is effective on the date the Plan is adopted
by the Board of Directors and options may be granted pursuant to the Plan from
time to time within a period of ten (10) years from such date, or the date of
any required shareholder approval required under the Plan, if earlier.
Termination of the Plan shall not affect any option theretofore granted.

         10. AMENDMENT OF THE PLAN. The Board of Directors of the Corporation
may, subject to any required shareholder approval, suspend, discontinue or
terminate the Plan, or revise or amend it in any respect whatsoever with respect
to any shares of Stock at that time not subject to options.

         11. APPLICATION OF FUNDS. The proceeds received by the Corporation from
the sale of Stock pursuant to options may be used for general corporate
purposes.

         12. RESERVATION OF SHARES. The Corporation, during the term of this
Plan, shall at all times reserve and keep available such number of shares of
Stock as shall be sufficient to satisfy the requirements of the Plan.

         13. NO OBLIGATION TO EXERCISE OPTION. The granting of an option shall
not impose any obligation upon the optionee to exercise such option.

         14. APPROVAL OF BOARD OF DIRECTORS AND SHAREHOLDERS. The Plan shall not
take effect until approved by the Board of Directors of the Corporation. This
Plan shall be approved by a vote of the shareholders within 12 months from the
date of approval by the Board of Directors. In the event such shareholder vote
is not obtained, all options granted hereunder, whether vested or unvested,
shall be null and void. Further, any stock acquired pursuant to the exercise of
any options under this Agreement may not count for purposes of determining
whether shareholder approval has been obtained.

         15. WITHHOLDING TAXES. Notwithstanding anything else to the contrary in
this Plan or any Stock Option Agreement, the exercise of any option shall be
conditioned upon payment by such optionee in cash, or other provisions
satisfactory to the Committee, of all local, state, federal or other withholding
taxes applicable, in the Committee's judgment, to the exercise or to later
disposition of shares acquired upon exercise of an option.

         16. PARACHUTE PAYMENTS. Any outstanding option under the Plan may not
be accelerated to the extent any such acceleration of such option would, when
added to the present value of other payments in the nature of compensation which
becomes due and payable to the optionee would result in the payment to such
optionee of an excess parachute payment under Section 280G of the Code. The
existence of any such excess parachute payment shall be determined in the sole
and absolute discretion of the Committee.

         17. SECURITIES LAWS COMPLIANCE. Notwithstanding anything contained
herein, the Corporation shall not be obligated to grant any option under this
Plan or to sell, issue or effect any transfer of any Stock unless such grant,
sale, issuance or transfer is at such time effectively (i) registered or exempt
from registration under the Securities Act of 1933, as


                                        8


<PAGE>





amended (the "Act"), and (ii) qualified or exempt from qualification under the
California Corporate Securities Law of 1968 and any other applicable state
securities laws. As a condition to exercise of any option, each optionee shall
make such representations as may be deemed appropriate by counsel to the
Corporation for the Corporation to use any available exemption from registration
under the Act or qualification under any applicable state securities law.

         18. RESTRICTIVE LEGENDS. The certificates representing the Stock issued
upon exercise of options granted pursuant to this Plan will bear any legends
required by applicable securities laws as determined by the Committee.

         19. NOTICES. Any notice to be given under the terms of the Plan shall
be addressed to the Corporation in care of its Secretary at its principal
office, and any notice to be given to an optionee shall be addressed to such
optionee at the address maintained by the Corporation for such person or at such
other address as the optionee may specify in writing to the Corporation.

         As adopted by the Board of Directors on November 6, 2003.
























                                        9





<PAGE>




                        AKORN INC 2003 STOCK OPTION PLAN
                                    EXHIBIT A
                           GRANT REPRESENTATION LETTER




Neill E. Shanahan, Vice President,
Human Resources
Akorn, Inc.
2500 Millbrook Drive
Buffalo Grove, IL 60089-4694

         Re:  2003 Stock Option Plan

Dear Mr. Shanahan:

This letter is delivered to Akorn, Inc., a Louisiana corporation (the
"Corporation"), in connection with the grant to _______________________ (the
"Optionee") of an option (the "Option") to purchase _____________ shares of
common stock of the Corporation (the "Stock") pursuant to the Akorn, Inc. 2003
Stock Option Plan originally dated _________________, 2003 (the "Plan"). The
Optionee understands that the Corporation's receipt of this letter executed by
the Optionee is a condition to the Corporation's willingness to grant the Option
to the Optionee.

The Optionee acknowledges that the grant of the Option by the Corporation is in
lieu of any and all other promises of the Corporation to the Optionee, whether
written or oral, express or implied, regarding the grant of options or other
rights to acquire Stock. Accordingly, in anticipation of the grant of the
Option, the Optionee hereby relinquishes all rights to such other rights, if
any, to acquire stock of the Corporation.

In addition, the Optionee makes the following representations and warranties
with the understanding that the Corporation will rely upon them.

         1. The Optionee acknowledges receipt of a copy of the Plan and
Agreement. The Optionee has carefully reviewed the Plan and Agreement.

         2. The Optionee acknowledges receipt of a prospectus regarding the
Plan, if requested, which includes the information required by Section (a)(1) of
Rule 428 under the Securities Act of 1933.

         3. The Optionee understands and acknowledges that the Option and the
Stock are subject to the terms and conditions of the Plan.

         4. The Optionee understands and agrees that, at the time of exercise of
any part of the Option for Stock, the Optionee may be required to provide the
Corporation with additional representations, warranties and/or covenants similar
to those contained in this letter.




<PAGE>




         5. The Optionee is a resident of the State of _______________________.

         6. The Optionee will notify the Corporation immediately of any change
in the above information which occurs before the Option is exercised in full by
the Optionee.



SIGNED


________________________________________________________________________________

Optionee


________________________________________________________________________________

Print Name


________________________________________________________________________________

Date








<PAGE>




                        AKORN INC. 2003 STOCK OPTION PLAN
                                    EXHIBIT B
                          NOTICE OF INTENT TO EXERCISE

Steven Koulogeorge, Controller
Akorn, Inc.
2500 Millbrook Drive
Buffalo Grove, IL 60089-4694

Dear Mr. Koulogeorge,

Please be advised that I seek to exercise options to purchase _________ shares
of Akorn Inc. stock, pursuant to the Options Grant number________
dated__________________ at the price of _____ per share. This notice is
delivered to Akorn, Inc., a Louisiana corporation, pursuant to the Akorn, Inc.
2003 Stock Option Plan, originally dated November 6, 2003.

I understand that employees of the Company responsible for authorizing and
processing this transaction will do so at their earliest convenience, but that
there may be delays following receipt of this letter due to normal business
activities and that the Company cannot guarantee immediate authorization and
processing. I hereby freely waive any and all claims for damages of any kind
that may result from any delay in processing this transaction.

Furthermore, I represent and agree as follows:

         1. I acknowledge receipt of a copy of the Plan and Agreement and have
            carefully reviewed the Plan and Agreement.

         2. I am a resident of the State of __________________________.

         3. If I am an "affiliate" (as defined in Rule 144 under the Securities
            Act of 1933) of the Corporation at the time I desire to sell any
            Akorn stock, I will be subject to certain restrictions under, and
            will comply with all of the requirements of, applicable federal and
            state securities laws. 

SIGNED

________________________________________________________________________________
Name                                                                   Date


________________________________________________________________________________

Print Name


________________________________________________________________________________
Address                                                                Phone




<PAGE>



                                                                   EXHIBIT 10.36

                                                                      Grant ____

   THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES ISSUED
PURSUANT TO THE AKORN INC 2003 STOCK OPTIONS PLAN WHICH WILL BE REGISTERED WITH
    UNDER THE SECURITIES ACT OF 1933 UPON SHAREHOLDER APPROVAL OF THE PLAN.

                 AKORN INC. NON-QUALIFIED STOCK OPTION AGREEMENT


Name
Address

                  RE:      Options to purchase ______ shares of common stock of 
                           Akorn, Inc. at $_____ per share granted on the ___ 
                           (day of the month, year) ___ ("Grant Date") 

         THIS NON-QUALIFIED STOCK OPTION AGREEMENT ("Agreement") is made by and
between Akorn, Inc., a Louisiana corporation ("Corporation"), and ________
("Optionee").

         NOW, THEREFORE, in consideration of the mutual benefit to be derived
herefrom, the Corporation and Optionee agree as follows:

         1. Grant of Option. The Corporation hereby grants to Optionee, subject
to all the terms and provisions of the Akorn, Inc. 2003 Stock Option Plan dated
November 6, 2003, as such Plan may be hereinafter amended, a copy of which is
attached hereto and incorporated herein by this reference ("Plan"), the right,
privilege and option ("Option") to purchase ___(written number)____(number)____
shares of its common stock ("Stock") at $_____ per share, in the manner and
subject to the conditions provided hereinafter and in the Plan and any
amendments thereto and any
 rules and regulations thereunder.

         2. Time of Exercise of Option. Options are immediately exercisable with
respect to one-fourth (1/4) of the shares covered thereby and become exercisable
with respect to an additional one-fourth (1/4) of the shares covered thereby on
each of the first (1st), second (2nd) and third (3rd) anniversary dates of the
date of grant. Any exercise may be with respect to any part or all of the shares
then exercisable pursuant to such Option, provided that the minimum number of
shares exercisable at any time shall not be less than one hundred (100) shares
or the balance of shares for which the Option is then exercisable. Options will
expire and may not be exercised after five (5) years from the date of the grant.

         3. Method of Exercise. The Option shall be exercised by Optionee as set
forth in Sections 5.4 and 5.5 of the Plan.

         4. Restrictions on Exercise and Delivery. The exercise of each Option
shall be subject to the condition that, if at any time the Committee shall
determine, in its sole and absolute discretion,


                                        1


<PAGE>




                  (a) the satisfaction of any withholding tax or other
                      withholding liabilities, is necessary or desirable as a
                      condition of, or in connection with, such exercise or the
                      delivery or purchase of Stock pursuant thereto,

                  (b) the listing, registration, or qualification of any shares
                      deliverable upon such exercise is desirable or necessary,
                      under any state or federal law, as a condition of, or in
                      connection with, such exercise or the delivery or purchase
                      of shares pursuant thereto, or

                  (c) the consent or approval of any regulatory body is
                      necessary or desirable as a condition of, or in connection
                      with, such exercise or the delivery or purchase of shares
                      pursuant thereto,

Then, in any such event, such exercise shall not be effective unless such
withholding, listing, registration, qualification, consent or approval shall
have been effected or obtained free of any conditions not acceptable to the
Committee. Optionee shall execute such documents and take such other actions as
are required by the Committee to enable it to effect or obtain such withholding,
listing, registration, qualification, consent or approval. Neither the
Corporation nor any officer or director, or member of the Committee, shall have
any liability with respect to the non-issuance or failure to sell shares as the
result of any suspensions of exercisability imposed pursuant to this Section.

         5. Termination of Option. Except as otherwise provided in this
Agreement or the Plan, to the extent not previously exercised, the Option shall
terminate upon the first to occur of any of the following events:

                  (a) the dissolution or liquidation of the Corporation;

                  (b) the expiration of five (5) years from the date of the
                      grant of the Option hereunder;

                      the breach by Optionee of any provision of this Agreement;

                  (c) as more fully set forth in Section 3.3 of the Plan, 6
                      months after an Optionee's death; or

                  (d) as more fully set forth in Section 6.2 of the Plan, in the
                      event of a Capital Transaction.

         6. Nonassignability. Options may not be sold, pledged, assigned or
transferred in any manner other than by will or by the laws of descent and
distribution, and may be exercised during the lifetime of Optionee only by
Optionee. Any transfer by Optionee of any Option granted under the Plan or this
Agreement shall void such Option and the Corporation shall have no further
obligation with respect to such Option. No Option shall be pledged or
hypothecated in any way, nor shall any Option be subject to execution,
attachment or similar process.


                                        2



<PAGE>





         7. Restrictions on Transfer of Shares Acquired. Optionee represents and
warrants to the Corporation that he will not transfer the Stock in violation of
the provisions of any applicable securities statute or regulation.

         8. Representation Letter. Upon execution of this Agreement, the
Optionee will deliver to the Corporation the grant representation letter set
forth on Exhibit "A" of the Plan, as such Exhibit may be amended by the
Committee from time to time. Upon any exercise of the Option, the Optionee will
deliver to the Corporation the exercise representation letter set forth on
Exhibit "B" of the Plan, as such Exhibit may be amended by the Committee from
time to time. The Optionee also agrees to make such other representations as are
deemed necessary or appropriate by the Corporation and its counsel.

         9. Rights as Shareholder. Neither Optionee nor his/her executor,
administrator, heirs or legatees, shall be, or have any rights or privileges of,
a shareholder of the Corporation in respect of the Stock, unless and until
certificates representing such shares shall have been issued in Optionee's name.

         10. No Right of Employment. Neither the grant nor exercise of any
Option nor anything in the Plan or this Agreement shall impose upon the
Corporation or any other corporation any obligation to employ or continue to
employ any Optionee. The right of the Corporation and any other corporation to
terminate any employee shall not be diminished or affected because an Option has
been granted to such employee.

         11. Mandatory Arbitration. In the event of any dispute between the
Corporation and Optionee regarding this Agreement or the Plan, the dispute and
any issue as to the arbitrability of such dispute, shall be settled to the
exclusion of a court of law, by arbitration in Chicago, Illinois, by a panel of
three arbitrators (each party shall choose one arbitrator and the third shall be
chosen by the two arbitrators so selected) in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect. The
decision of a majority of the arbitrators shall be final and binding upon the
parties. All costs of the arbitration and the fees of the arbitrators shall be
allocated between the parties as determined by a majority of the arbitrators, it
being the intention of the parties that the prevailing party in such a
proceeding be made whole with respect to its expenses.

         12. Definitions. Capitalized terms shall have the meaning set forth in
the Plan unless otherwise defined herein.

         13. Notices. Any notice to be given under the terms of this Agreement
shall be addressed to the Corporation in care of its Secretary at its principal
office, and any notice to be given to an Optionee shall be addressed to such
Optionee at the address maintained by the Corporation for such person or at such
other address as the Optionee may specify in writing to the Corporation.

         14. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Optionee, his heirs and successors, and of the Corporation, its
successors and assigns.

         15. Governing Law. This Agreement shall be governed by the laws of the
State of Louisiana.


                                        3


<PAGE>





         16. Descriptive Headings. Titles to Sections are solely for information
purposes.

         17. Application of Plan. The Corporation has delivered and the Optionee
hereby acknowledges receipt of a copy of the Plan. The parties agree and
acknowledge that the Option granted hereunder is granted pursuant to the Plan
and subject to the terms and provisions thereof, and the rights of the Optionee
are subject to modifications and termination in certain events as provided in
the Plan.

         IN WITNESS WHEREOF, this Agreement is effective as of, and the date of
grant shall be, ________(Grant Date)____.


                                       AKORN, INC., a Louisiana corporation



                                       By:______________________________________
                                       Neill E. Shanahan, Vice-President,
                                       Human Resources


                                       OPTIONEE


                                       _________________________________________
                                        

                                        4



<PAGE>


                                                                   EXHIBIT 10.37


                                                                      Grant ____

   THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES ISSUED
   PURSUANT TO THE AKORN INC 2003 STOCK OPTIONS PLAN, WHICH WILL BE REGISTERED
     UNDER THE SECURITIES ACT OF 1933 UPON SHAREHOLDER APPROVAL OF THE PLAN



                   AKORN INC. INCENTIVE STOCK OPTION AGREEMENT

Name
Address

                       RE: Options to purchase ______ shares of common stock of 
                       Akorn, Inc. at $____ per share granted on the ____ day of
                       __(month)__, (year). ("Grant Date")  
                       

         THIS INCENTIVE STOCK OPTION AGREEMENT ("Agreement") is made by and
between Akorn, Inc., a Louisiana corporation, ("Corporation"), and ____________
("Optionee").

         NOW, THEREFORE, in consideration of the mutual benefit to be derived
herefrom, the Corporation and Optionee agree as follows:

         1. Grant of Option. The Corporation hereby grants to Optionee, subject

to all the terms and provisions of the Akorn, Inc. 2003 Stock Option Plan dated
November 6, 2003, as such Plan may be hereinafter amended, a copy of which is
attached hereto and incorporated herein by this reference (the "Plan"), the
right, privilege and option ("Option") to purchase __(written number)
____(number)_____shares of its common stock ("Stock") at $_____ per
share, in the manner and subject to the conditions provided hereinafter and in
the Plan and any amendments thereto and any rules and regulations
 thereunder.

         2. Time of Exercise of Option. Options are immediately exercisable with
respect to one-fourth (1/4th) of the shares covered thereby and become
exercisable with respect to an additional one-fourth (1/4th) of the shares
covered thereby on each of the first (1st), second (2nd) and third (3rd)
anniversary dates of the date of the grant. Any exercise may be with respect to
any part or all of the shares then exercisable pursuant to such Option, provided
that the minimum number of shares exercisable at any time shall not be less than
one hundred (100) shares or the balance of shares for which the Option is then
exercisable. Options will expire and may not be exercised after five (5) years
from the date of the grant except as set forth in Section 3 of the Plan, three
(3) months after Optionee's termination of employment without cause with either
the Corporation, or a Parent or Subsidiary thereof or immediately upon
termination for cause. However, such rights may be extended as more fully set
forth in Sections 3.1 and 3.2 of the Plan in the case of Optionee's disability,
leave or death. In no event shall the Corporation be required to transfer
fractional shares to Optionee or those entitled to Optionee's rights herein.

         3. Method of Exercise. The Option shall be exercised by Optionee as set
forth in Sections 5.4 and 5.5 of the Plan.



                                        1


<PAGE>





         4. Restrictions on Exercise and Delivery. The exercise of each Option
shall be subject to the condition that, if at any time the Committee shall
determine, in its sole and absolute discretion,

                  (a) the satisfaction of any withholding tax or other
                      withholding liabilities, is necessary or desirable as a
                      condition of, or in connection with, such exercise or the
                      delivery or purchase of Stock pursuant thereto,

                  (b) the listing, registration, or qualification of any shares
                      deliverable upon such exercise is desirable or necessary,
                      under any state or federal law, as a condition of, or in
                      connection with, such exercise or the delivery or purchase
                      of shares pursuant thereto, or

                  (c) the consent or approval of any regulatory body is
                      necessary or desirable as a condition of, or in connection
                      with, such exercise or the delivery or purchase of shares
                      pursuant thereto.

In any such event, such exercise shall not be effective unless such withholding,
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Committee.
Optionee shall execute such documents and take such other actions as are
required by the Committee to enable it to effect or obtain such withholding,
listing, registration, qualification, consent or approval. Neither the
Corporation nor any officer or director, or member of the Committee, shall have
any liability with respect to the non-issuance or failure to sell shares as the
result of any suspensions of exercisability imposed pursuant to this Section.

         5. Termination of Option. Except as otherwise provided in this
Agreement or the Plan, to the extent not previously exercised, the Option shall
terminate upon the first to occur of any of the following events:

                  (a) the dissolution or liquidation of the Corporation;

                  (b) The expiration of 5 year from the date of the grant of the
                      Option hereunder;

                  (c) the breach by Optionee of any provision of this Agreement;

                  (d) as more fully set forth in Section 3.2.1 of the Plan, 3
                      months after the occurrence of an event giving rise to
                      termination of employment other than for "cause";

                  (e) as more fully set forth in Section 3.2.2 of the Plan, upon
                      or as of the occurrence of an event giving rise to
                      termination of employment for "cause";

                  (f) as more fully set forth in Section 3.3 of the Plan, 6
                      months after an optionee's death; or


                                        2


<PAGE>




                  (g) as more fully set forth in Section 6.2 of the Plan, in the
                      event of a Capital Transaction.

         6. Nonassignability. Options may not be sold, pledged, assigned or
transferred in any manner other than by will or by the laws of descent and
distribution, and may be exercised during the lifetime of Optionee only by
Optionee. Any transfer by Optionee of any Option granted under the Plan or this
Agreement shall void such Option and the Corporation shall have no further
obligation with respect to such Option. No Option shall be pledged or
hypothecated in any way, nor shall any Option be subject to execution,
attachment or similar process.

         7. Restrictions on Transfer of Shares Acquired. Optionee represents and
warrants to the Corporation that he will not transfer the Stock in violation of
the provisions of any applicable securities statute or regulation.

         8. Representation Letter. Upon execution of this Agreement, the
Optionee will deliver to the Corporation the grant representation letter set
forth on Exhibit "A" of the Plan, as such Exhibit may be amended by the
Committee from time to time. Upon exercise of the Option, the Optionee will
deliver to the Corporation the exercise representation letter set forth on
Exhibit "B" of the Plan, as such Exhibit may be amended by the Committee from
time to time. Optionee also agrees to make such other representations as are
deemed necessary or appropriate by the Corporation and its counsel.

         9. Rights as Shareholder. Neither Optionee nor his executor,
administrator, heirs or legatees, shall be, or have any rights or privileges of
a shareholder of the Corporation in respect of the Stock unless and until
certificates representing such Stock shall have been issued in Optionee's name.

         10. No Right of Employment. Neither the grant nor exercise of any
Option nor anything in the Plan or this Agreement shall impose upon the
Corporation or any other corporation any obligation to employ or continue to
employ any Optionee. The right of the Corporation and any other corporation to
terminate any employee shall not be diminished or affected because an Option has
been granted to such employee.

         11. Mandatory Arbitration. In the event of any dispute between the
Corporation and Optionee regarding this Agreement or the Plan, the dispute and
any issue as to the arbitrability of such dispute, shall be settled to the
exclusion of a court of law, by arbitration in Chicago, Illinois, by a panel of
three arbitrators (each party shall choose one arbitrator and the third shall be
chosen by the two arbitrators so selected) in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect. The
decision of a majority of the arbitrators shall be final and binding upon the
parties. All costs of the arbitration and the fees of the arbitrators shall be
allocated between the parties as determined by a majority of the arbitrators, it
being the intention of the parties that the prevailing party in such a
proceeding be made whole with respect to its expenses.

         12. Definitions. Capitalized terms shall have the meaning set forth in
the Plan unless otherwise defined herein.


                                        3



<PAGE>




         13. Notices. Any notice to be given under the terms of this Agreement
shall be addressed to the Corporation in care of its Secretary at its principal
office, and any notice to be given to Optionee shall be addressed to such
Optionee at the address maintained by the Corporation for such person or at such
other address as the Optionee may specify in writing to the Corporation.

         14. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Optionee, his heirs and successors, and of the Corporation, its
successors and assigns.

         15. Governing Law. This Agreement shall be governed by the laws of the
State of Louisiana.

         16. Descriptive Headings. Titles to Sections are solely for information
purposes.

         17. Application of Plan. The Corporation has delivered and the Optionee
hereby acknowledges receipt of a copy of the Plan. The parties agree and
acknowledge that the Option granted hereunder is granted pursuant to the Plan
and subject to the terms and provisions thereof, and the rights of the Optionee
are subject to modifications and termination in certain events as provided in
the Plan.

         IN WITNESS WHEREOF, this Agreement is effective as of, and the date of
grant shall be, _____(Grant Date)___.


                            AKORN, INC., a Louisiana corporation



                            By:_________________________________________________
                               Neill E. Shanahan, Vice-President Human Resources


                            OPTIONEE


                            ____________________________________________________
                               

                                        4



<PAGE>

                                                                    EXHIBIT 21.1

                         SUBSIDIARIES OF THE REGISTRANT

The following is a list of the names and states of incorporation of the
subsidiaries of the Company.

                       Name                    State of Incorporation

             Akorn (New Jersey), Inc.                 New Jersey





<PAGE>
 
                                                                    EXHIBIT 31.1
 
                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
I, Arthur S. Przybyl, certify that:
 
     1. I have reviewed this annual report on Form 10-K of Akorn, Inc.;
 
     2. Based on my knowledge, this annual 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 annual
report;
 
     3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 could adversely
affect the registrant's ability to record, process, summarize and report
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.
 
                                          /s/ ARTHUR S. PRZYBYL
                                          --------------------------------------
                                          Name: Arthur S. Przybyl
                                          Title:  Chief Executive Officer
 
Date: March 30, 2004


<PAGE>
 
                                                                    EXHIBIT 31.2
 
                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
 
I, Bernard J. Pothast, certify that:
 
     1. I have reviewed this annual report on Form 10-K of Akorn, Inc.;
 
     2. Based on my knowledge, this annual 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 annual
report;
 
     3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 could adversely
affect the registrant's ability to record, process, summarize and report
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.
 
                                          /s/ BERNARD J. POTHAST
                                          --------------------------------------
                                          Name: Bernard J. Pothast
                                          Title:  Chief Financial Officer
 
Date: March 30, 2004


<PAGE>
 
                                                                    EXHIBIT 32.1
 

                           CERTIFICATION PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the annual report of Akorn, Inc. (the "Company") on Form 10-K
for the period ended December 31, 2003, as filed with the Securities and
Exchange Commission and to which this Certification is an exhibit (the
"Report"), the undersigned officer of Akorn, Inc. does hereby certify, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
     (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
 
     (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
 
                                                 /s/ ARTHUR S. PRZYBYL
                                          --------------------------------------
                                                    Arthur S. Przybyl
                                                 Chief Executive Officer
 
Date: March 30, 2004





<PAGE>
 
                                                                    EXHIBIT 32.2
 

                           CERTIFICATION PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the annual report of Akorn, Inc. (the "Company") on Form 10-K
for the period ended December 31, 2003, as filed with the Securities and
Exchange Commission and to which this Certification is an exhibit (the
"Report"), the undersigned officer of Akorn, Inc. does hereby certify, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
     (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
 
     (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
 
                                                /s/ BERNARD J. POTHAST
                                          --------------------------------------
                                                    Bernard J. Pothast
                                                 Chief Financial Officer
 
Date: March 30, 2004