AKORN INC, S-1, 1998-07-29

AKORN INC
S-1, 1998-07-29
PHARMACEUTICAL PREPARATIONS

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1998
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AKORN, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
LOUISIANA 2834 72-0717400
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification
Incorporation or Organization) Classification Code Number)
Number)
</TABLE>

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100 TRI-STATE INTERNATIONAL
SUITE 100
LINCOLNSHIRE, ILLINOIS 60069
(847) 236-3800

(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
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JOHN N. KAPOOR, PH.D.
CHIEF EXECUTIVE OFFICER
100 TRI-STATE INTERNATIONAL
SUITE 100
LINCOLNSHIRE, ILLINOIS 60069
(847) 236-3800

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
--------------

COPIES TO:

JOHN L. MACCARTHY J. VAUGHAN CURTIS
Winston & Strawn Alston & Bird LLP
35 West Wacker Drive One Atlantic Center
Chicago, Illinois 60601 1201 West Peachtree Street
(312) 558-5600 Atlanta, Georgia 30309-3424
(404) 881-7000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
<S> <C> <C>
Common Stock, no par value per share...................... $45,000,000 $13,275
</TABLE>

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
JULY 29, 1998

5,540,000 Shares

AKORN, INC.

Common Stock
---------

Of the 5,540,000 shares of common stock, no par value (the "Common Stock")
offered hereby (the "Offering"), 5,000,000 shares are being sold by Akorn, Inc.
("Akorn" or the "Company" ) and 540,000 shares are being sold by certain
stockholders of the Company (the "Selling Stockholders"). See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholders. The Common Stock is traded on the
Nasdaq National Market under the symbol "AKRN." On July 27, 1998, the last
reported sale price of the Common Stock was $6.41 per share.

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(2)................... $ $ $ $
</TABLE>

(1) Before deducting expenses of the Offering estimated at $550,000 payable by
the Company.

(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 831,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively.

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

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the Common Stock will be made at the offices of BT
Alex. Brown Incorporated, Baltimore, Maryland, on or about , 1998.

BT Alex. Brown Warburg Dillon Read LLC

THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
[INSIDE COVER ART WORK]

PICTURE OF CERTAIN STERILE SPECIALTY PHARMACEUTICAL
PRODUCTS MARKETED BY THE COMPANY WITH CAPTION WHICH READS
"PICTURED ABOVE ARE CERTAIN OF THE MORE THAN 90 STERILE SPECIALITY
PHARMACEUTICAL PRODUCTS MARKETED BY AKORN."

PICTURE OF MANUFACTURING FACILITY OF THE COMPANY WITH CAPTION WHICH READS
"PICTURED ABOVE IS ONE OF AKORN'S ASEPTIC FILLING LINES FOR THE MANUFACTURING OF
OPHTHALMIC AND INJECTABLE STERILE SOLUTIONS."

Alftena-TM-, Sufenta-TM-, Pilo-20-TM-, Pilo-40-TM-, Indocyanine Green-TM-,
Fluress-TM-, Fluoracaine-TM-, Gentak-TM-, BAL in Oil-TM-, Aurolate-TM-, Ful-Glo
Strips-TM-, Rose Bengal Strips-TM-, Paremyd-TM-, Inapsine-TM-, Sublimaze-TM- and
Piroxicam-TM- are trademarks of the Company.

THE UNDERWRITERS AND OTHER PERSONS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT
STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON NASDAQ IN ACCORDANCE WITH REGULATION M OR ANY SUCCESSOR RULES
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN TO "AKORN" OR
THE "COMPANY" REFER TO AKORN, INC. AND ITS SUBSIDIARIES.

THE COMPANY

Akorn is a specialty pharmaceutical company that develops, manufactures and
markets ophthalmic and injectable sterile pharmaceutical products in the United
States. The Company sells more than 90 diagnostic and therapeutic pharmaceutical
products focused primarily on ophthalmology, anesthesia, antidotes and
rheumatology. The Company also markets ophthalmic surgical instruments and other
supplies and provides contract manufacturing for third parties. The Company is
one of a limited number of U.S. specialty pharmaceutical companies with sterile
manufacturing capabilities. Akorn believes that its sterile manufacturing
capabilities, combined with its ability to manufacture a variety of dosage forms
(solutions, suspensions and ointments), afford it a competitive advantage. Many
of the Company's ophthalmic pharmaceuticals are marketed under its
well-recognized "Akorn" label. For the twelve months ended June 30, 1998,
Akorn's net sales and net income were approximately $49.3 million and $3.8
million, respectively.

While the $110 billion U.S. pharmaceutical market is dominated by large
multinational pharmaceutical companies that conduct substantial research and
development, significant sales are derived from specialty pharmaceutical
products. The Company believes that pricing and profit pressures are causing
major pharmaceutical companies to focus on developing new pharmaceuticals and
marketing existing proprietary products, while considering divestitures or
licensing of non-core products as a more effective means of realizing value from
such products. The Company defines specialty pharmaceutical products as those
products which share several, but not necessarily all, of the following
characteristics: (i) products which no longer fit the strategic focus of major
pharmaceutical companies; (ii) products with annual sales typically between $1
and $50 million; (iii) products which receive minimal promotion from major
pharmaceutical companies but which compete in promotion-sensitive markets; (iv)
products which have sales levels that are less likely to become targets of
pricing pressure from managed care or other third-party payors, or which have a
clear price advantage over alternative treatments; and (v) products which can
leverage the existing sales force, manufacturing operations and marketing
efforts of specialty pharmaceutical companies.

Sterile pharmaceutical products consist of pharmaceuticals produced using
sterile manufacturing techniques, such as aseptic filling technologies and heat
sterilization. The manufacture of sterile pharmaceutical products, as compared
to the production of non-sterile products such as tablets, requires more
technologically sophisticated processes and personnel with technical expertise.
In 1997, the U.S. ophthalmic and injectable sterile pharmaceutical markets had
total U.S. sales of approximately $2.0 billion and $8.2 billion, respectively,
which represent increases of approximately 10.0% and 12.0%, respectively, from
1996.

To capitalize on the trend of major pharmaceutical companies devoting less
resources to specialty pharmaceutical products, the Company focuses on sterile
specialty pharmaceutical products that generally face limited competition. The
Company's objective is to become a leading sterile specialty pharmaceutical
company. To achieve this objective, the Company seeks to: (i) pursue strategic
acquisitions of branded sterile specialty pharmaceutical products; (ii)
internally develop sterile specialty pharmaceutical products; (iii) leverage its
existing infrastructure and increase operating efficiencies; and (iv) expand its
sterile manufacturing and technical capabilities. As part of this strategy, the
Company is developing the capability to manufacture controlled-release and
lyophilized (freeze-dried) pharmaceuticals in order to expand the dosage forms
of its current products and pursue other markets.

1
<PAGE>
Since January 1, 1996, the Company has acquired or licensed 18 specialty
pharmaceutical products. In acquiring or licensing pharmaceutical products, the
Company targets products which complement its existing product lines and enable
it to leverage its existing manufacturing, marketing and distribution
capabilities. After acquiring or licensing a specialty pharmaceutical product,
the Company generally focuses on increasing the marketing and promotion of the
product and integrating it into the Company's existing product lines.

The Company also develops pharmaceutical products internally. Since January
1, 1996, the Company has received approval for nine ANDAs and one NDA for
internally developed sterile pharmaceutical products. In connection with its
strategy to continue to internally develop sterile pharmaceutical products,
Akorn currently has ten ANDAs submitted to the FDA for new products. In
addition, over the next three years, the Company anticipates filing ANDAs for
more than ten additional sterile pharmaceutical products and NDAs for three
proprietary pharmaceutical products which are in various stages of development.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company............. 5,000,000 shares
Common Stock offered by the Selling
Stockholders.................................. 540,000 shares
Common Stock to be outstanding after the
offering...................................... 22,952,063 shares(1)
Use of proceeds................................. To repay certain indebtedness; for the
acquisition and development of products;
for the expansion of manufacturing
facilities; and for working capital and
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol................... AKRN
</TABLE>

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(1) Excludes 1,929,238 shares of Common Stock issuable upon exercise of options
outstanding as of June 30, 1998, with a weighted average exercise price of
$2.79 per share. See Note K of the Notes to the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.

2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEAR ENDED JUNE 30, SIX MONTHS YEAR ENDED JUNE 30,
-------------------------------------------- ENDED DECEMBER DECEMBER 31, ---------
1993(1) 1994 1995 1996 31, 1996(2) 1997
----------- --------- --------- --------- --------------- --------------- 1997
---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENTS:
Net sales.................... $ 23,612 $ 31,266 $ 37,505 $ 33,925 $ 16,519 $ 42,323 $ 19,044
Cost of goods sold........... 13,913 18,048 23,328 21,972 10,761 23,547 10,700
----------- --------- --------- --------- --------------- --------------- ---------
Gross profit................. 9,699 13,218 15,177 11,953 5,758 18,776 8,344
Selling, general and
administrative expenses.... 7,534 9,643 10,376 8,974 4,819 12,287 5,804
Research and development..... 453 921 891 1,213 809 1,873 729
Relocation costs............. -- -- -- -- -- 1,451 1,451
Acquisition and severance
costs...................... -- -- -- 677 -- -- --
----------- --------- --------- --------- --------------- --------------- ---------
Operating income............. 1,712 2,654 3,910 1,089 130 3,165 360
Interest income.............. 25 84 106 113 33 41 27
Interest expense............. (288) (181) (25) (441) (243) (497) (254)
Gain (loss) on marketable
equity securities.......... -- -- (308) 80 -- -- --
Other income, net............ 69 16 55 136 150 135 128
----------- --------- --------- --------- --------------- --------------- ---------
Pretax income................ 1,518 2,573 3,738 977 70 2,844 261
Income taxes (benefit)....... (263) 158 1,232 189 26 1,052 97
----------- --------- --------- --------- --------------- --------------- ---------
Net income................... $ 1,781 $ 2,415 $ 2,506 $ 788 $ 44 $ 1,792 $ 164
----------- --------- --------- --------- --------------- --------------- ---------
----------- --------- --------- --------- --------------- --------------- ---------
Net income per share:
Basic...................... $ 0.12 $ 0.14 $ 0.15 $ 0.05 $ 0.00 $ 0.11 $ 0.01
Diluted.................... 0.12 0.14 0.15 0.05 0.00 0.11 0.01
Weighted average shares
outstanding:
Basic...................... 14,159 16,185 16,236 16,383 16,580 16,614 16,596
Diluted.................... 14,955 16,711 16,799 16,788 16,763 16,925 16,802

1998
---------

<S> <C>
INCOME STATEMENTS:
Net sales.................... $ 26,038
Cost of goods sold........... 12,775
---------
Gross profit................. 13,263
Selling, general and
administrative expenses.... 7,420
Research and development..... 1,974
Relocation costs............. --
Acquisition and severance
costs...................... --
---------
Operating income............. 3,869
Interest income.............. 1
Interest expense............. (492)
Gain (loss) on marketable
equity securities.......... --
Other income, net............ 1
---------
Pretax income................ 3,379
Income taxes (benefit)....... 1,230
---------
Net income................... $ 2,149
---------
---------
Net income per share:
Basic...................... $ 0.12
Diluted.................... 0.11
Weighted average shares
outstanding:
Basic...................... 17,769
Diluted.................... 18,837
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 594 $ 21,193
Working capital...................................................................... 11,430 32,029
Total assets......................................................................... 48,220 68,819
Total debt........................................................................... 17,735 8,935
Shareholders' equity................................................................. 23,262 52,661
</TABLE>

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(1) Includes the reversal of a provision for a litigation judgment ($0.7
million), the reduction of estimated costs of reorganizing manufacturing
operations ($0.4 million) and income tax benefits ($0.3 million).

(2) In October 1996, the Company changed its fiscal year from the year ending
June 30 to a calendar year.

(3) Adjusted to give effect to the sale by the Company of 5,000,000 shares of
Common Stock offered hereby (based on an assumed public offering price of
$6.41 per share) and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."

3
<PAGE>
FORWARD-LOOKING STATEMENTS

Certain statements in this Prospectus constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. When used in this document, the words "anticipate," "believe,"
"estimate" and "expect" and similar expressions are generally intended to
identify forward-looking statements. Prospective investors are cautioned that
any forward-looking statements, including statements regarding the intent,
belief or expectations of the Company or its management are not guarantees of
future performance and involve risks and uncertainties and that actual results
may differ materially from those in the forward-looking statements as a result
of various factors, including but not limited to: (i) the effects of federal,
state and other governmental regulation of the Company's business; (ii) the
Company's success in acquiring, developing, manufacturing and marketing new
products; (iii) implementation of the Company's growth strategy; (iv) the
effects of competition from generic pharmaceuticals and from other
pharmaceutical companies; and (v) other factors referred to in this Prospectus.
See "Risk Factors." The Company does not intend to update these forward-looking
statements.

UNLESS OTHERWISE INDICATED, ALL SHARE AND FINANCIAL INFORMATION SET FORTH HEREIN
REFLECT NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING."

4
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS.

GOVERNMENT REGULATION

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

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

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

5
<PAGE>
submission for expert review of detailed documentation for sterilization process
validation in drug applications beyond those required for general manufacturing
process validation. Various sterilization process requirements are the subject
of detailed FDA guidelines, including requirements for the maintenance of
microbiological control and quality stability. Pharmaceutical products must be
distributed, sampled and promoted in accordance with FDA requirements. The FDA
also regulates drug labeling and the advertising of prescription drugs. The
Company believes its operating facilities and practices are in compliance with
applicable federal and state law. However, a finding by a governmental agency or
court that the Company is not in compliance could have a material adverse effect
on the Company's business, financial condition and results of operations.

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

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

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

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

DEPENDENCE ON ACQUISITION AND LICENSING OF PHARMACEUTICAL PRODUCTS

Until the Company develops and introduces a sufficient number of its own
pharmaceutical products, it must rely upon the availability for purchase or
licensing of pharmaceutical product lines of other pharmaceutical or
biotechnology companies. Other companies, including those with substantially

6
<PAGE>
greater financial, marketing and other resources, compete with the Company for
the right to acquire or license such products. The Company's success in
executing this strategy depends, in part, on its ability to identify potential
products that meet the Company's criteria, including possessing a recognizable
brand name or being complementary to the Company's existing product lines. See
"Business--Strategy." There can be no assurance that the Company will have
success in identifying potential product acquisitions or licensing opportunities
or that, if identified, it will complete such product acquisitions or obtain
such licenses on acceptable terms or that it will successfully integrate any
acquired or licensed products into its existing product lines. The inability to
complete acquisitions of, or obtain licenses for, pharmaceutical products could
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, there can be no assurance that the
Company, once it has obtained rights to a pharmaceutical product and committed
to payment terms, will be able to generate sales sufficient to create a profit
or otherwise avoid a loss. Any inability to generate such sufficient sales or
any subsequent reduction of sales could have a material adverse effect on the
Company's business, financial condition and result of operations. See
"Business--Strategy" and "--Product Acquisitions."

DEPENDENCE ON DEVELOPMENT OF PHARMACEUTICAL PRODUCTS AND MANUFACTURING
CAPABILITIES

The Company's strategy for growth is dependent upon its ability to develop
products that can be promoted through existing marketing and distribution
channels and, when appropriate, the enhancement of such marketing and
distribution channels. The Company currently has ten ANDAs submitted to the FDA
for new sterile pharmaceutical products. In addition, over the next three years,
the Company currently anticipates filing ANDAs for more than ten additional
pharmaceutical products and NDAs for three proprietary pharmaceutical products
which are in various stages of development. The Company may not meet its
anticipated time schedule for the filing of ANDAs and NDAs or may decide not to
pursue ANDAs or NDAs that it has submitted or anticipates submitting. The
internal development of new pharmaceutical products by the Company is dependent
upon the research and development capabilities of the Company's personnel and
its infrastructure. There can be no assurance that the Company will successfully
develop new pharmaceutical products or, if developed, successfully integrate new
products into its existing product lines. In addition, there can be no assurance
that the Company will receive all necessary approvals from the FDA or that such
approvals will not involve delays which adversely affect the marketing and sale
of the Company's products. The Company's failure to develop new products or
receive FDA approval of new or previously filed ANDAs or NDAs, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Another part of the Company's growth strategy is to
develop the capability to manufacture controlled-release ophthalmic
pharmaceutical products and lyophilized (freeze-dried) pharmaceutical products.
While the Company has devoted resources to developing these capabilities, it may
not be successful in developing these capabilities, or the Company may not
realize the anticipated benefits from developing these capabilities. See
"Business--Strategy."

GENERIC SUBSTITUTION

The Company's branded pharmaceutical products are subject to competition
from generic equivalents and alternative therapies. Generic pharmaceuticals are
the chemical and therapeutic equivalents of brand-name pharmaceuticals and
represent an increasing proportion of pharmaceuticals dispensed in the United
States. There is no proprietary protection for most of the branded
pharmaceutical products sold by the Company and generic and other substitutes
for most of its branded pharmaceutical products are sold by other pharmaceutical
companies. In addition, governmental and cost-containment pressures regarding
the dispensing of generic equivalents will likely result in generic substitution
and competition generally for the Company's branded pharmaceutical products.
Although the Company attempts to mitigate the effect of this substitution
through, among other things, creation of strong brand-name recognition and
product-line extensions for its branded pharmaceutical products, there can be no
assurance that the Company will be successful in these efforts. Increased
competition in

7
<PAGE>
the sale of generic pharmaceutical products could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"--Competition; Uncertainty of Technological Change" and
"Business--Competition." Generic substitution is regulated by the federal and
state governments, as is reimbursement for generic drug dispensing. There can be
no assurance that substitution will be permitted for newly-approved generic
drugs or that such products will be subject to government reimbursement.

DEPENDENCE ON GENERIC AND OFF-PATENT PHARMACEUTICAL PRODUCTS

For the six months ended June 30, 1998, the Company derived 49.8% of its net
sales from the sale of generic pharmaceutical products. The success of the
Company depends, in part, on its ability to anticipate which branded
pharmaceuticals are about to come off patent and thus permit the Company to
develop, manufacture and market equivalent generic pharmaceutical products.
Generic pharmaceuticals must meet the same quality standards as branded
pharmaceuticals, even though these equivalent pharmaceuticals are sold at prices
which are significantly lower than that of branded pharmaceuticals. In addition,
generic products that third parties develop may render the Company's generic
products noncompetitive or obsolete. Although the Company has successfully
brought generic pharmaceutical products to market in a timely manner in the
past, there can be no assurance that the Company will be able to consistently
bring these products to market quickly and efficiently in the future. An
increase in competition in the sale of generic pharmaceutical products or the
Company's failure to bring such products to market before its competitors could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Strategy."

COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE

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

DEPENDENCE ON SUPPLY OF RAW MATERIALS AND COMPONENTS

The Company requires a supply of quality raw materials and components to
manufacture and package pharmaceutical products for itself and for third parties
with which it has contracted. The principal components of the Company's products
are active and inactive pharmaceutical ingredients and certain packaging
materials. Many of these components are available from only a single source and,
in 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

8
<PAGE>
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.

DEPENDENCE ON THIRD-PARTY MANUFACTURERS

For the six months ended June 30, 1998, the Company derived 51.1% of its net
sales from the sale of products manufactured by third parties. There can be no
assurance that the Company's dependence on third parties for the manufacture of
such products will not adversely affect the Company's profit margins or its
ability to develop and deliver its products on a timely and competitive basis.
If for any reason the Company is unable to obtain or retain third-party
manufacturers on commercially acceptable terms, it may not be able to distribute
its products a planned. No assurance can be made that the manufacturers utilized
by the Company will be able to provide the Company with sufficient quantities of
its products or that the products supplied to the Company will meet the
Company's specifications. Any delays or difficulties with third-party
manufacturers could adversely affect the marketing and distribution of certain
of the Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations.

PRODUCT LIABILITY

The Company faces exposure to product liability claims in the event that the
use of its technologies or products or those it licenses from third parties is
alleged to have resulted in adverse effects in users thereof. Receipt of
regulatory approval for commercial sale of such products does not mitigate such
product liability risks. While the Company has taken, and will continue to take,
what it believes are appropriate precautions, there can be no assurance that it
will avoid significant product liability exposure. In addition, future product
labeling may include disclosure of additional adverse effects, precautions and
contraindications, which may adversely impact sales of such products. The
Company currently has product liability insurance in the amount of $10.0 million
for aggregate annual claims with a $25,000 deductible per incident and a
$150,000 aggregate annual deductible. However, there can be no assurance that
its insurance coverage will be sufficient to cover fully potential claims.
Additionally, there can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim would not have a material adverse effect on the Company's
business, financial condition and results of operations.

NEED TO ATTRACT AND RETAIN KEY PERSONNEL IN HIGHLY COMPETITIVE MARKETPLACE

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

DEPENDENCE ON KEY EXECUTIVE OFFICERS

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

9
<PAGE>
QUARTERLY FLUCTUATION OF RESULTS; POSSIBLE VOLATILITY OF STOCK PRICE

The Company's results of operations may vary from quarter to quarter due to
a variety of factors including the timing of acquisitions, development and sales
of branded pharmaceutical products, expenditures incurred to acquire and promote
additional pharmaceutical products, changes in the Company's customer base, a
customer's termination of a substantial account, the availability and cost of
raw materials, interruptions in supply by third-party manufacturers, the
introduction of new products or technological innovations by the Company's
competitors, delays in obtaining government approvals, including FDA approval of
NDAs or ANDAs for Company products, loss of key personnel, the mix of products
sold by the Company, changes in sales and marketing expenditures, competitive
pricing pressures and general economic and industry conditions which affect
customer demand. There can be no assurance that the Company will be successful
in maintaining or improving its profitability or avoiding losses in any future
period. Such fluctuations may result in volatility in the price of the Common
Stock. Due to the foregoing factors, it is possible that in future quarters the
Company's operating results will be below the expectations of investors or
securities analysts. Such an event could adversely affect the market price of
the Common Stock. In the past, following periods of volatility in the market
price of their securities, companies have become defendants in securities class
action litigation. Any such litigation initiated against the Company could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Summary of Results of
Operations by Quarter."

PATENTS AND PROPRIETARY RIGHTS

The patent position of competitors in the pharmaceutical industry generally
is highly uncertain, involves complex legal and factual questions, and is the
subject of much litigation. There can be no assurance that any patent
applications relating to the Company's potential products or processes will
result in patents being issued, or that the resulting patents, if any, will
provide protection against competitors who: (i) successfully challenge the
Company's patents; (ii) obtain patents that may have an adverse effect on the
Company's ability to conduct business; or (iii) are able to circumvent the
Company's patent position. It is possible that other parties have conducted or
are conducting research and could make discoveries of pharmaceutical
formulations or processes that would precede any discoveries made by the
Company, which could prevent the Company from obtaining patent protection for
these discoveries or marketing products developed therefrom. Consequently, there
can be no assurance that others will not independently develop pharmaceutical
products similar to or obsoleting those that the Company is planning to develop,
or duplicate any of the Company's products. The inability of the Company to
obtain patents for its products and processes or the ability of competitors to
circumvent or obsolete the Company's patents could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Patents and Proprietary Rights."

RELATIONSHIPS WITH OTHER ENTITIES; CONFLICTS OF INTEREST

Dr. John N. Kapoor, Ph.D., the Company's Chairman of the Board and Chief
Executive Officer, is affiliated with EJ Financial Enterprises, Inc., a health
care investment firm ("EJ Financial"). See "Certain Relationships and Related
Transactions." 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 of which is Dr. Kapoor, is a principal shareholder of each of
these companies. As a result, Dr. Kapoor devotes approximately two days per week
to the business of the Company. Although such companies do not currently compete
directly with the Company, certain companies with which EJ Financial is involved
are in the pharmaceutical business. Discoveries made by one or more of these
companies could render the Company's products

10
<PAGE>
less competitive or obsolete. Potential conflicts of interest could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management."

LITIGATION INVOLVING THE COMPANY'S CHAIRMAN

Dr. Kapoor was previously the Chairman and President of Lyphomed, Inc., a
manufacturer of injectable pharmaceuticals ("Lyphomed"). Fujisawa Pharmaceutical
Co. Ltd. ("Fujisawa") was a major stockholder of Lyphomed from the mid-1980s
until 1990, at which time Fujisawa completed a tender offer for the remaining
shares of Lyphomed, including the shares held by Dr. Kapoor. Prior to and
following the tender offer by Fujisawa, Lyphomed experienced regulatory
difficulties with the FDA relating to the manufacturing and laboratory practices
involving certain generic pharmaceutical products. In 1991, the FDA investigated
and issued a Form 483 citing differences between the Company's generic drug
applications and underlying raw data. Lyphomed also experienced, following the
tender offer, declining results of operations. Fujisawa filed suit in federal
district court in Illinois against Dr. Kapoor alleging securities fraud,
racketeering, and other federal and state law claims relating to the purchase of
Lyphomed. In addition to substantial monetary relief, Fujisawa also sought the
imposition of a constructive trust on the assets of Dr. Kapoor, including the
shares of the Common Stock, representing approximately 23.6% of the Common
Stock, beneficially owned by Dr. Kapoor. The district court dismissed Fujisawa's
federal claims against Dr. Kapoor and Fujisawa appealed. The appellate court
affirmed the district court's dismissal of the securities fraud claim on the
grounds that the statute of limitations had run, but overturned the district
court's dismissal of the racketeering claims and remanded the matter, including
the state law claims, to the trial court. Dr. Kapoor has denied Fujisawa's
allegations and continues to defend the suit. Although the Company is not a
party to these suits, these proceedings against Dr. Kapoor, the imposition of a
constructive trust on the shares of the Common Stock held by Dr. Kapoor or
heightened FDA scrutiny as a result of these proceedings could have a material
adverse effect on the Company.

SHARES ELIGIBLE FOR FUTURE SALE

Immediately after completion of this Offering, the Company will have
22,952,063 shares of Common Stock outstanding. Of these shares, 21,952,063
shares (including the 5,540,000 shares sold pursuant to this Offering) will be
freely tradable without restriction or further registration under the Securities
Act other than those shares held by "affiliates" of the Company. The remaining
1,000,000 shares will become eligible for resale in December 1998, subject to
the limitations set forth under Rule 144 ("Rule 144") under the Securities Act
of 1933, as amended (the "Securities Act"), as applicable. The Company, together
with its executive officers and directors (holding in the aggregate
approximately 5,064,793 shares of Common Stock after completion of this
Offering), will enter into agreements not to, subject to certain exceptions,
register the sale of, sell, offer to sell, contract to sell, grant any option to
purchase or otherwise dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, other than the shares offered hereby, for a period ranging from 90
to 180 days after the date of this Prospectus, without the prior written consent
of BT Alex. Brown Incorporated. However, BT Alex. Brown Incorporated may, in its
discretion, waive the foregoing restrictions in whole or in part, with or
without a public announcement of such action. The sale of a substantial number
of shares of Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock. In addition, any
such sale or such perception could make it more difficult for the Company to
sell equity securities or equity-related securities in the future at a time and
price that the Company deems appropriate. See "Shares Eligible for Future Sale."

11
<PAGE>
RISKS RELATED TO YEAR 2000 ISSUES

The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions
resulting in the year 2000 being recognized as the year 1900 by the computer
program. The Company utilizes commercially available software to store and
process its business information transactions. The Company has already begun to
modify its computer systems to be Year 2000-compliant by upgrading the server
software of its injectable business and completing the installations of Year
2000-compliant financial software in the ophthalmic business. The Company
expects to be fully Year 2000-compliant by the end of 1998. In addition, the
Company has communicated with others with whom it does significant business to
determine their Year 2000-compliance readiness and the extent to which the
Company is vulnerable to any third-party Year 2000 issues. Failure of the
Company or its significant suppliers or customers to address adequately the Year
2000 issue could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Issue."

12
<PAGE>
THE COMPANY

The Company is a Louisiana corporation founded in 1971 in Abita Springs,
Louisiana. In January 1992, the Company acquired Taylor Pharmacal Company, a
manufacturer of specialty injectable pharmaceutical products ("Taylor
Pharmaceuticals"). In June 1996, the Company acquired Pasadena Research
Laboratories, Inc., a distributor and marketer of injectable products ("PRL").
In July 1998, the Company acquired assets of Advanced Remedies, Inc., used in
the manufacture of sterile ophthalmic and injectable pharmaceutical products
("ARI"). In 1997, the Company moved its principal executive offices to 100
Tri-State International, Suite 100, Lincolnshire, Illinois 60069-4404. The
Company's telephone number is (847) 236-3800. The Company anticipates moving its
principal executive offices to 2500 Millbrook Drive, Buffalo Grove, Illinois
60089 in September 1998.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered by the Company, after deducting discounts and commissions
and estimated offering expenses payable by the Company, are estimated to be
$29.4 million ($34.4 million if the Underwriters' over-allotment option is
exercised in full), based upon an assumed offering price of $6.41 per share.

The Company intends to use such net proceeds: (i) to repay approximately
$14.8 million of indebtedness under the Company's revolving credit facility;
(ii) for the acquisition and development of additional ophthalmic and injectable
pharmaceutical products; (iii) for expansion of manufacturing facilities; and
(iv) for working capital and general corporate purposes. The indebtedness under
the Company's revolving credit facility accrues at an annual rate equal to the
Federal Funds Rate plus an applicable margin. The rate on this indebtedness
approximated 7.0% as of June 30, 1998. The revolving credit facility matures on
December 20, 1999.

The Company will not receive any proceeds from the sale of Common Stock by
the Selling Stockholders. See "Principal and Selling Stockholders."

DIVIDEND POLICY

The Company has not paid cash dividends on the Common Stock since 1991 and
does not anticipate paying any cash dividends in the foreseeable future.
Instead, the Company anticipates that it will retain all of its earnings for the
continued operation and expansion of its business for the foreseeable future. In
addition, the terms of the Company's revolving credit facility prohibit it from
paying dividends or making other payments with respect to its Common Stock
without bank consent. Any future payment of dividends will depend upon the
Company's future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and such other factors as
the Board of Directors may deem relevant.

13
<PAGE>
PRICE RANGE OF COMMON STOCK

The Common Stock is quoted on the Nasdaq National Market under the symbol
"AKRN." The following table sets forth for the periods indicated the range of
high and low bid prices for the Common Stock as reported on the Nasdaq National
Market.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
First Quarter................................................................................. $ 3.00 $ 1.75
Second Quarter................................................................................ 2.63 1.94
Third Quarter................................................................................. 3.00 2.03
Fourth Quarter................................................................................ 4.38 2.94

YEAR ENDING DECEMBER 31, 1998
First Quarter................................................................................. 6.88 2.75
Second Quarter................................................................................ 9.06 6.03
Third Quarter (through July 27, 1998)......................................................... 8.00 6.06
</TABLE>

On July 27, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $6.41 per share. At June 30, 1998 the Company had
approximately 700 holders of record of Common Stock.

14
<PAGE>
CAPITALIZATION

The following table sets forth as of June 30, 1998: (i) the capitalization
of the Company; and (ii) the capitalization of the Company as adjusted to
reflect the Offering (based on an assumed offering price of $6.41 per share) and
the application of the estimated net proceeds therefrom, all as if they occurred
on June 30, 1998:

<TABLE>
<CAPTION>
JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 594 $ 21,193
----------- ------------
----------- ------------
Long-term obligations(1):
Long-term debt....................................................................... $ 13,638 $ 4,838
Capital lease obligations............................................................ 125 125
----------- ------------
Total long-term obligations........................................................ 13,763 4,963
----------- ------------
Shareholders' equity:
Preferred stock, $1.00 par value; 5,000,000 shares authorized;
no shares issued outstanding....................................................... -- --
Common stock, no par value; 40,000,000 shares authorized; 17,952,063 shares issued
and outstanding, 22,952,063 shares issued and outstanding as adjusted(2)........... 17,569 46,968
Retained earnings.................................................................... 6,158 6,158
Treasury stock-at cost............................................................... (465) (465)
----------- ------------
Total shareholders' equity......................................................... 23,262 52,661
----------- ------------
Total capitalization........................................................... $ 37,025 $ 57,624
----------- ------------
----------- ------------
</TABLE>

- ------------------------
(1) Excludes current maturities.
(2) Excludes 1,929,238 shares of Common Stock issuable upon the exercise of
options outstanding as of June 30, 1998 issued under the Company's 1988
Incentive Compensation Program and 1991 Stock Option Plan for Directors,
with a weighted average exercise price of $2.79 per share. See
"Management--1988 Incentive Compensation Program," "--1991 Stock Option Plan
for Directors" and Note K of the Notes to the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.

15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data as of and for the year
ended December 31, 1997, as of and for the six months ended December 31, 1996
and as of and for the two fiscal years ended June 30, 1996 and 1995 have been
derived from the Consolidated Financial Statements of the Company which have
been audited by Deloitte & Touche LLP, independent auditors whose report appears
elsewhere in this Prospectus. The following selected consolidated financial data
as of and for the two fiscal years ended June 30, 1994 and 1993 are derived from
the audited consolidated financial statements not included herein. The selected
consolidated financial data for the six months ended June 30, 1997 and 1998 have
been derived from the Company's unaudited consolidated financial statements. The
unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments of a normally recurring nature necessary for a fair
presentation of financial position and results of operations. The results for
the six months ended June 30, 1998 are not necessarily indicative of the results
to be expected for the entire year. The selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, SIX MONTHS YEAR ENDED ENDED JUNE 30,
-------------------------------------------- ENDED DECEMBER DECEMBER 31, --------------------
1993(1) 1994 1995 1996 31, 1996(2) 1997 1997 1998
----------- --------- --------- --------- --------------- --------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENTS:
Net sales.................. $ 23,612 $ 31,266 $ 37,505 $ 33,925 $ 16,519 $ 42,323 $ 19,044 $ 26,038
Cost of goods sold......... 13,913 18,048 22,328 21,972 10,761 23,547 10,700 12,775
----------- --------- --------- --------- --------------- --------------- --------- ---------
Gross profit............... 9,699 13,218 15,177 11,953 5,758 18,776 8,344 13,263
Selling, general and
administrative
expenses................. 7,534 9,643 10,376 8,974 4,819 12,287 5,804 7,420
Research and development... 453 921 891 1,213 809 1,873 729 1,974
Relocation costs........... -- -- -- -- -- 1,451 1,451 --
Acquisition and severance
costs.................... -- -- -- 677 -- -- -- --
----------- --------- --------- --------- --------------- --------------- --------- ---------
Operating income........... 1,712 2,654 3,910 1,089 130 3,165 360 3,869
Interest income............ 25 84 106 113 33 41 27 1
Interest expense........... (288) (181) (25) (441) (243) (497) (254) (492)
Gain (loss) on marketable
equity securities........ -- -- (308) 80 -- -- -- --
Other income, net.......... 69 16 55 136 150 135 128 1
----------- --------- --------- --------- --------------- --------------- --------- ---------
Pretax income.............. 1,518 2,573 3,738 977 70 2,844 261 3,379
Income taxes (benefit)..... (263) 158 1,232 189 26 1,052 97 1,230
----------- --------- --------- --------- --------------- --------------- --------- ---------
Net income................. $ 1,781 $ 2,415 $ 2,506 $ 788 $ 44 $ 1,792 $ 164 $ 2,149
----------- --------- --------- --------- --------------- --------------- --------- ---------
----------- --------- --------- --------- --------------- --------------- --------- ---------
Net income per share:
Basic.................... $ 0.12 $ 0.14 $ 0.15 $ 0.05 $ 0.00 $ 0.11 $ 0.01 $ 0.12
Diluted.................. 0.12 0.14 0.15 0.05 0.00 0.11 0.01 0.11
Weighted average shares
outstanding:
Basic.................... 14,159 16,185 16,236 16,383 16,580 16,614 16,596 17,769
Diluted.................. 14,955 16,711 16,799 16,788 16,763 16,925 16,802 18,837

JUNE 30, DECEMBER 31, JUNE 30,
-------------------------------------------- -------------------------------- --------------------
1993 1994 1995 1996 1996 1997 1997 1998
----------- --------- --------- --------- --------------- --------------- --------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents.............. $ 1,114 $ 1,894 $ 775 $ 891 $ 1,380 $ 2,413 $ 737 $ 594
Working capital............ 5,445 7,938 8,458 7,650 8,204 11,021 4,963 11,430
Total assets............... 15,008 22,190 27,491 29,817 28,013 38,715 36,297 48,220
Total debt................. 3,193 1,150 4,883 5,696 5,831 10,902 7,164 17,735
Shareholders' equity....... 6,916 12,704 15,585 16,301 16,374 20,251 16,552 23,262
</TABLE>

- ------------------------------
(1) Includes the reversal of a provision for a litigation judgment ($0.7
million), the reduction of estimated costs of reorganizing manufacturing
operations ($0.4 million) and income tax benefits ($0.3 million).
(2) In October 1996, the Company changed its fiscal year from the year ending
June 30 to a calendar year.

16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
SEE "RISK FACTORS" FOR TRENDS AND UNCERTAINTIES KNOWN TO THE COMPANY THAT COULD
CAUSE REPORTED FINANCIAL INFORMATION TO DIFFER MATERIALLY FROM FUTURE RESULTS.

OVERVIEW

Akorn is a speciality pharmaceutical company that develops, manufactures and
markets ophthalmic and injectable sterile pharmaceutical products in the United
States. The Company sells more than 90 diagnostic and therapeutic pharmaceutical
products focused primarily on ophthalmology, anesthesia, antidotes and
rheumatology. The Company sells branded and generic pharmaceuticals, as well as
ophthalmic surgical instruments and other supplies, to hospitals, clinics, group
purchasing organizations, ophthalmalogists, optometrists and other specialty
physicians. The Company also provides contract manufacturing of injectable
pharmaceuticals for pharmaceutical and biotechnology companies.

For the six-month period ended June 30, 1998, 53.1% of the Company's net
sales were derived from the sale of ophthalmic products and 46.9% were from the
sale of injectable products, including contract manufacturing for third parties.
For the six-month period ended June 30, 1998, 49.8% of the Company's net sales
were from the sale of generic pharmaceuticals, 30.9% were from the sale of
branded pharmaceuticals, 14.4% were from its contract manufacturing operations
and 4.9% were from the sale of ophthalmic surgical instruments and other
supplies. In the pharmaceutical industry, prices and margins for branded
pharmaceuticals are generally significantly higher than those for generic
pharmaceuticals. However, most of the branded pharmaceuticals sold by the
Company face competition from generic and other substitutes so these differences
are not as great for pharmaceutical products sold by the Company. For the
six-month period ended June 30, 1998, no single pharmaceutical product accounted
for more than 10.0% of the Company's net sales and only two of these products
accounted for more than 5.0% of the Company's net sales. Effective July 1, 1996,
the Company changed its fiscal year from June 30 to December 31.

CHARGEBACKS

Most of the Company's products sold to group-purchasing organization members
are distributed through wholesalers. The Company bills the wholesaler at the
Company's list price and reserves the estimated difference between list and
contract price. This reserve is carried as a reduction of accounts receivable.
The Company regularly evaluates the reserve balance against actual chargebacks
processed by wholesalers.

CORPORATE ACQUISITIONS

In January 1992, the Company acquired Taylor Pharmaceuticals in a
pooling-of-interests transaction valued at approximately $4.0 million. Taylor
Pharmaceuticals was a privately-held contract manufacturer of sterile
pharmaceuticals. The acquisition enabled the Company to increase its margins and
limit supply disruptions by internally manufacturing many of the ophthalmic
pharmaceuticals which it previously obtained from third-party manufacturers. The
acquisition also allowed the Company to diversify its revenues by contract
manufacturing injectable pharmaceuticals for third parties.

In June 1996, the Company acquired PRL in a pooling-of-interests transaction
valued at approximately $3.8 million. PRL was a privately-held marketer of
sterile injectable pharmaceuticals primarily focused on antidotes and
rheumatology. The acquisition of PRL enabled the Company to expand the customer
base for its injectable pharmaceutical products.

17
<PAGE>
In July 1998, the Company acquired the assets, including four approved ANDAs
and five submitted ANDAs, of ARI from Sidmak, Inc. for approximately $4.0
million. The acquisition was paid for in cash and financed by the Company's
existing $25.0 million revolving credit facility. The ARI acquisition provides
the Company with capability to manufacture ophthalmic ointments and suspensions
and will allow the Company to reduce further its dependence on third-party
manufacturers.

PRODUCT ACQUISITIONS, LICENSING AND DEVELOPMENT

Since January 1, 1996, the Company has acquired or licensed 18 specialty
pharmaceutical products. The Company generally seeks to acquire or license
specialty pharmaceutical products which complement its existing product lines
and allow it to leverage existing manufacturing and marketing capabilities.
Since January 1, 1996, the Company has received FDA approval for nine ANDAs and
one NDA. As of June 30, 1998, the Company had ten ANDAs submitted to the FDA for
new products and had three NDAs and more than ten ANDAs in various stages of
development. See "Risk Factors Dependence on Development of Pharmaceutical
Products and Manufacturing Capabilities" and "--Dependence on Acquisition and
Licensing of Pharmaceutical Products."

SEASONALITY

While there is seasonal demand for some of the Company's pharmaceutical
products, seasonal fluctuations in demand have not historically had a material
effect on the Company's consolidated quarterly revenues.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected
statements of income data as a percentage of net sales:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
-------------------- -------------------- DECEMBER 31, --------------------
1995 1996 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Ophthalmic......................... 63.4% 61.4% 65.6% 62.2% 58.8% 61.0% 53.1%
Injectable......................... 36.6 38.6 34.4 37.8 41.2 39.0 46.9
--------- --------- --------- --------- ----- --------- ---------
100.0 100.0 100.0 100.0 100.0 100.0 100.0
Gross profit......................... 40.5 35.2 38.2 34.9 44.4 43.8 50.9
Selling, general and administrative
expenses........................... 27.7 26.5 27.7 29.2 29.0 30.5 28.5
Research and development............. 2.4 3.6 2.8 4.9 4.4 3.8 7.6
Operating income..................... 10.4 3.2 7.7 0.8 7.5 1.9 14.9
Interest expense..................... (0.1) (1.3) (1.2) (1.5) (1.2) (1.3) (1.9)
Other income, net.................... 0.2 0.4 0.0 0.9 0.3 0.7 0.0
Net income........................... 6.7 2.3 4.7 0.3 4.2 0.9 8.3
</TABLE>

SIX MONTHS ENDED JUNE 30, 1998 AND 1997

NET SALES. Consolidated net sales increased 36.7% in the six-month period
ended June 30, 1998 compared to the same period in 1997. Ophthalmic-related
sales increased 18.8%, reflecting new product introductions and acquisitions as
well as growth in the base business. Injectable-related sales increased 64.8%
compared to the same period in 1997 due primarily to product acquisitions and
increased contract manufacturing activity.

GROSS PROFIT. Consolidated gross profit increased 59.0% during the period,
with gross margins increasing from 43.8% to 50.9%, reflecting product
acquistions.

18
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 27.8% during the six-month period ended June
30, 1998 as compared to the same period in 1997, reflecting increased marketing
and promotional activities in the ophthalmic business as well as increased
amortization of intangibles related to product acquisitions. The percentage of
selling, general and administrative expenses to net sales decreased from 30.5%
to 28.5%.

RESEARCH AND DEVELOPMENT. Research and development expenses increased
170.8% in the period, to $2.0 million from $0.7 million in the same period in
1997. The increase reflects an increased number of products under development,
including TP-1000. Improved gross profits have enabled the Company to devote
substantial resources to developing patented products as part of its long-term
growth strategy.

RELOCATION EXPENSES. During the six-month period ended June 30, 1997, the
Company recorded $1.5 million in charges related to the relocation of the
ophthalmic business and executive offices from Abita Springs, Louisiana to the
Chicago area. The charges primarily relate to severance and retention bonus
payments as well as a write-down of the Abita Springs facility and equipment to
estimated net realizable value.

INTEREST EXPENSE. Interest expense for the six months ended June 30, 1998
was $0.5 million which represented an increase of 93.7% as compared to the same
period in 1997 due to higher outstanding debt balances.

NET INCOME. The Company reported net income of $2.1 million or $0.11 per
diluted share for the six months ended June 30, 1998. The net income for the
comparable prior-year period was $0.2 million or $0.01 per diluted share.

YEARS ENDED DECEMBER 31, 1997 AND JUNE 30, 1996

NET SALES. Net sales increased 24.8% for the year ended December 31, 1997
compared to the year ended June 30, 1996. Ophthalmic-related sales increased
19.5%, primarily due to strong performance in the diagnostic and therapeutic
product lines. The acquisition of Indocyanine Green from Becton, Dickinson & Co.
in April 1997 and the introduction of the Company's generic version of Timolol
Maleate also contributed to the sales increase. Injectable-related sales
increased 33.1%, primarily due to penetration into the hospital market and
strong performance in rheumatology and antidote products, including BAL in Oil,
acquired from Becton, Dickinson & Co. in April 1997. Injectable-related sales
also benefited from a continuing shortage of certain blood-derivative
pharmaceuticals distributed by the Company.

GROSS PROFIT. Consolidated gross profit increased 57.0% for the year, with
gross margins increasing from 35.2% to 44.4%. The increase in gross margins was
caused by product acquisitions, a shift in ophthalmic sales mix to higher-margin
products and the injectable business' re-engineering of production processes to
reduce costs of manufacturing. Margins on the Company's generic version of
Timolol Maleate have declined at a faster than anticipated rate, due to the
large number of competitors offering the product.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 36.9%, reflecting increased marketing and
promotional activities in the ophthalmic business, provisions for employee
performance bonuses and expenses associated with the new corporate office
facility.

RESEARCH AND DEVELOPMENT. Research and development expenses increased
54.4%, reflecting a greater number of products under development. Actual
spending on research and development for the year included approximately $0.7
million pre-funded by Pfizer, Inc. for clinical development of Piroxicam. The
pre-funded development reserve was exhausted during 1997. Additional spending
for data analysis and development of the NDA filing will be reflected in 1998
research and development expenses.

19
<PAGE>
RELOCATION EXPENSES. During 1997, the Company recorded $1.5 million in
charges related to the relocation of the ophthalmic business and executive
offices from Abita Springs, Louisiana to the Chicago area. The charges primarily
relate to severance and retention bonus payments as well as a write-down of the
Abita Springs facility and equipment to estimated net realizable value.

INTEREST EXPENSE. Interest expense increased 12.7%, reflecting higher
average outstanding debt balances. Interest income declined 63.7% due to the
liquidation of investments of Piroxicam development funds to finance clinical
trials.

NET INCOME. Net income for 1997 was $1.8 million or $0.11 per diluted share
compared to $0.8 million or $0.05 per diluted share for the year ended June 30,
1996. The increase in earnings resulted from the above-mentioned items.

SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995

NET SALES. Net sales declined 2.5% for the six months ended December 31,
1996 as compared to the same period in 1995. Ophthalmic-related sales declined
7.6%, primarily due to the Company's decision to discontinue its practice of
granting wholesaler discounts at the end of each quarter. Injectable-related
sales increased 7.2%, primarily due to the acquisition of two anesthesia
products from Janssen Pharmaceutica, Inc. in July 1996.

GROSS PROFIT. Consolidated gross profit declined 11.1% compared to the
prior year period, with gross margins declining from 38.2% to 34.9%. The decline
can be attributed to under-absorption of plant overhead expenses caused by
decreased unit sales volume in contract manufacturing services.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 2.5% over the prior year period, primarily due
to increased marketing and promotional activities in the ophthalmic business.

RESEARCH AND DEVELOPMENT. Research and development expenses increased
69.2%, reflecting an increased number of products in development.

INTEREST EXPENSE. Interest and other income (expense) increased due to
increased interest expense on higher average outstanding debt balances.

NET INCOME. Net income for the period was $44,000 or $0.00 per diluted
share compared with $0.8 million or $0.05 per diluted share in the prior year
period. The decline is primarily due to the under-absorption of manufacturing
overhead expenses and the increase in research and development expenditures.

YEARS ENDED JUNE 30, 1996 AND 1995

NET SALES. Consolidated net sales declined 9.5% for the year ended June 30,
1996 compared to the previous year. Ophthalmic-related sales declined 12.4%,
primarily due to the loss of sales of the segment's best-selling allergy
product, which was converted to over-the-counter status in October 1994, and to
the Company's decision to discontinue its practice of granting wholesaler
discounts at the end of each quarter. Injectable-related sales declined 4.5%,
primarily due to loss of contract manufacturing customers which resulted in a
reduction in manufacturing unit volume.

GROSS PROFIT. Consolidated gross profit declined 21.2% compared to the
prior year period, with gross margins declining from 40.5% to 35.2%. The decline
can be attributed to price pressure on generic pharmaceuticals and
under-absorption of manufacturing overhead due to low unit sales volume.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses declined 13.5% over the prior year period, primarily due
to cost-cutting activities in the ophthalmic business in response to sales
declines.

20
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses increased
36.1%, reflecting an increased number of ophthalmic generic products in
development.

ACQUISITION AND SEVERANCE COSTS. The Company incurred legal, accounting and
severance costs of $0.7 million in 1996 associated with the acquisition of PRL.

INTEREST EXPENSE. Interest expense increased $0.4 million due to borrowings
for the construction projects at the Company's facilities in Decatur, Illinois.
In 1995, other expense included a $0.3 million charge for decline in market
value of an equity investment.

NET INCOME. The Company's net income for the period was $0.8 million or
$0.05 per diluted share compared with $2.5 million or $0.15 per diluted share in
the prior year period. The decline is primarily due to the decline in sales,
under-absorption of manufacturing overhead expenses, increased research and
development expenditures and costs related to the acquisition of PRL.

SUMMARY OF RESULTS OF OPERATIONS BY QUARTER

The following table sets forth certain quarterly operating information for
each of the eight quarters ending June 30, 1998. These data have been prepared
on the same basis as the audited financial statements contained elsewhere in
this Prospectus and include all normally recurring adjustments necessary for the
fair presentation of the information for the periods presented, when read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto. Results for any previous fiscal quarter are not necessarily
indicative of results for the full year or for any future quarter. See "Risk
Factors--Quarterly Fluctuation of Results; Possible Volatility of Stock Price."

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1997 1997 1997 1997 1998 1998
----------- ----------- ----------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $ 8,101 $ 8,416 $ 8,869 $ 10,176 $ 11,058 $ 12,220 $ 12,051 $ 13,987
Gross profit............... 2,969 2,789 3,428 4,916 4,745 5,687 6,242 7,021
Selling, general and
administrative
expenses................. 2,433 2,386 2,558 3,246 2,993 3,489 3,745 3,675
Research and development... 515 294 361 368 342 803 728 1,246
Operating income........... 21 109 (942) 1,302 1,410 1,395 1,769 2,100
Interest expense........... (128) (115) (116) (138) (115) (129) (190) (301)
Other income, net.......... 150 -- 128 -- -- -- -- --
Net income (loss).......... $ 35 $ 9 $ (577) $ 742 $ 825 $ 802 $ 1,048 $ 1,101
----------- ----------- ----------- --------- --------- --------- --------- ---------
----------- ----------- ----------- --------- --------- --------- --------- ---------
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 1998, the Company had cash and cash equivalents of $0.6
million. Working capital at that date was $11.4 million versus $5.0 million at
June 30, 1997. At June 30, 1998, the Company had $10.3 million of financing
available under its $25.0 million revolving credit facility.

During the year ended December 31, 1997, the Company generated sufficient
cash from operations to finance its working capital requirements, primarily an
increase in accounts receivable and inventories related to increased sales
volume. Management anticipates additional investment in working capital to
finance continued sales growth. Investing activities, which include purchases of
property, plant and equipment as well as the purchase of product-related
intangible assets, required $6.3 million in cash. Investing activities were
funded through issuance of long-term debt of $4.0 million short-term borrowings
of $1.8 million and proceeds from the sale of stock of $2.1 million. In 1997,
the Company entered into a $15.0 million revolving credit facility, subject to
certain financial covenants. In June 1998,

21
<PAGE>
the aggregate borrowing commitment under such revolving credit facility was
increased to $25.0 million. Management believes that cash flow from operations,
in conjunction with borrowing availability under its revolving credit facility,
will be sufficient to meet the cash needs of the business for the next twelve
months.

For the six-month period ended December 31, 1996, the Company generated cash
from operations in excess of working capital requirements. For the period, net
cash provided by operating activities was $2.5 million. The increase in cash
provided by operating activities was primarily related to the increase in
accruals for wholesaler chargebacks. Net cash utilized for investing activities
during the period was approximately $2.0 million which included purchases of
property, plant and equipment as well as the purchase of certain product lines.
These investing activities were partially funded through net sales of
investments and short-term borrowings of $1.5 million.

For the twelve-month period ended June 30, 1996, the Company generated cash
from operations in excess of working capital requirements. For the period, net
cash provided by operating activities was $10,000 as compared to $0.7 million
for the same period in 1995. The decline in cash provided by operating
activities was primarily related to the increase in inventory associated with
new product acquisitions and other factors. Net cash utilized for investing
activities during the period was approximately $0.9 million which included
purchases of property, plant and equipment and product licensing costs. These
investing activities were partially funded through net sales of investments.

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which requires all items of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Other comprehensive income may include foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. The accumulated
balance of other comprehensive income must be displayed separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. The Company has adopted this accounting standard effective
as of January 1, 1998. Because the Company had no other items of comprehensive
income, reclassification of financial statements for earlier periods was not
required.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a Company's operating segments. The Company will adopt this
accounting standard as of December 31, 1998, as required. The Company expects to
continue reporting on ophthalmic and injectable segments.

YEAR 2000 ISSUE

The Company utilizes commercially available software to store and process
its business information and transactions. The Company's plans to become Year
2000-compliant involve upgrading the server software of its injectable business
and completing the installation of Year 2000-compliant financial software in the
ophthalmic business. The Company expects to be fully compliant by the end of
1998. The cost of this software upgrade and conversion is estimated at less than
$0.5 million, of which approximately $0.3 million was incurred in 1997. In
addition, the Company has communicated with companies with whom it does
significant business to determine their Year 2000-compliance readiness and the
extent to which the Company is vulnerable to any third-party Year 2000 issues.
Based on these communications, the Company does not believe that such companies'
Year 2000-compliance readiness will have a material adverse effect on the
Company. See "Risk Factors--Risks Related to Year 2000 Issues."

22
<PAGE>
BUSINESS

OVERVIEW

Since January 1, 1996, the Company has acquired or licensed 18 specialty
pharmaceutical products. In acquiring or licensing pharmaceutical products, the
Company targets products which complement its existing product lines and enable
it to leverage its existing manufacturing, marketing and distribution
capabilities. After acquiring or licensing a specialty pharmaceutical product,
the Company generally focuses on increasing the marketing and promotion of the
product and integrating it into the Company's existing product lines.

INDUSTRY OVERVIEW

UNITED STATES PHARMACEUTICAL MARKET. In 1997, sales of pharmaceuticals in
the U.S. were approximately $110 billion. While the market is dominated by large
multinational pharmaceutical companies which conduct substantial research and
development on new pharmaceuticals, significant sales are derived from specialty
pharmaceutical products. Industry consolidation and pricing pressures from
cost-containment initiatives have raised the threshold level of sales necessary
for an individual product to justify significant research and development
expenditures and active marketing and promotion from a major pharmaceutical
company. As a result, major pharmaceutical companies have generally elected to
focus on existing proprietary product lines and develop new branded
pharmaceutical products rather than compete in specialty pharmaceutical product
lines. Further, the Company believes that pricing and profit pressures are
leading major pharmaceutical companies to consider divestitures or licensing of
non-core products as a more effective means of realizing value from such
products. Major pharmaceutical companies may choose not to market specialty
pharmaceutical products because: (i) the market size for an individual product
may be too small; (ii) most of such products are no longer subject to patent
protection; (iii) continuing to manufacture such products may no longer be
cost-effective; and (iv) raw materials may be difficult to obtain.

The result of the foregoing factors has been the emergence of pharmaceutical
companies that acquire, license or develop specialty pharmaceutical products.
The Company defines specialty pharmaceutical products as those products which
share several, but not necessarily all, of the following characteristics: (i)
products which no longer fit the strategic focus of major pharmaceutical
companies; (ii) products with annual sales typically in the range of $1 to $50
million; (iii) products which receive

23
<PAGE>
minimal promotion from major pharmaceutical companies but compete in
promotion-sensitive markets; (iv) products which have sales levels that are less
likely to become targets of pricing pressure from managed care or third-party
payors, or which have a clear price advantage over alternative treatments; and
(v) products which can leverage the existing sales force, manufacturing
operations and marketing efforts of specialty pharmaceutical companies.

STERILE PHARMACEUTICAL PRODUCTS. Sterile pharmaceutical products consist of
pharmaceuticals produced using sterile manufacturing techniques, such as aseptic
filling technologies and heat sterilization. Sterile pharmaceutical products are
typically administered in non-solid dosage forms through the injection of
solutions or the application of ointments or suspensions. Several factors limit
the number of specialty pharmaceutical companies that manufacture sterile
pharmaceutical products. The manufacture of sterile pharmaceutical products, as
compared to the production of non-sterile pharmaceutical products such as
tablets, requires more technologically sophisticated processes and personnel
with technical expertise. In addition, substantial capital expenditures are
required to develop and maintain the capability to manufacture sterile products.
Furthermore, the manufacturing and marketing of sterile pharmaceutical products
is subject to extensive governmental regulation. See "--Government Regulation."

All ophthalmic and injectable pharmaceutical products are required to be
manufactured in a sterile process because of the way they are administered to
patients (I.E., through application to the eye or injection). In 1997, the U.S.
ophthalmic and injectable sterile pharmaceutical markets had total sales of
approximately $2.0 billion and $8.2 billion, respectively, which represent
increases of approximately 10.0% and 12.0%, respectively, from 1996. The Company
believes that U.S. sales of ophthalmic and injectable sterile pharmaceutical
products will continue to grow due to a significant number of products coming
off patent and increasing demand due to the aging of the U.S. population.

STRATEGY

PURSUE STRATEGIC ACQUISITIONS OF BRANDED STERILE SPECIALTY PHARMACEUTICAL
PRODUCTS. In order to expand or complement its ophthalmic and injectable
product lines, the Company intends to continue to pursue strategic acquisitions
of branded sterile specialty pharmaceutical products. The Company focuses on the
acquisition of products that it believes are capable of achieving a substantial
market presence. Since January 1, 1996, the Company has acquired or licensed 14
branded specialty pharmaceutical products. Such products include: (i) Alfenta
and Sufenta, anesthesia-related pharmaceutical products acquired from Janssen
Pharmaceutica, Inc.; (ii) Pilo-20 and Pilo-40, therapeutic glaucoma products
acquired from ALZA Corporation; and (iii) Indocyanine Green, a diagnostic
retinal product acquired from Becton, Dickinson & Co. In addition, the Company
enters into licensing arrangements with respect to third-party products such as
Biolon-TM-, a product used in ophthalmic surgery to which the Company obtained
marketing and distribution rights from Bio-Technology General Ltd. The Company
has dedicated personnel who identify and evaluate potential product acquisitions
and licensing opportunities. After acquiring or licensing a branded specialty
pharmaceutical product, the Company generally focuses on increasing the
marketing and promotion of such product and integrating it into its existing
product lines.

INTERNALLY DEVELOP STERILE SPECIALTY PHARMACEUTICAL PRODUCTS. The Company
intends to capitalize on its existing research and development expertise to
continue to internally develop sterile specialty pharmaceutical products. Since
January 1, 1996, the Company has received FDA approval for nine ANDAs

24
<PAGE>
and one NDA for internally developed pharmaceutical products. The Company
currently has ten ANDAs submitted to the FDA for new products. In addition, over
the next three years, the Company anticipates filing ANDAs for more than ten
additional pharmaceutical products and NDAs for three proprietary pharmaceutical
products which are in various stages of development. The Company's NDA filings
are typically for new indications or uses for existing pharmaceutical products.
These NDAs provide the Company the potential to enter new markets at a lower
cost than by developing new proprietary pharmaceutical compounds. See "Risk
Factors--Dependence on Development of Pharmaceutical Products and Manufacturing
Capabilities." In developing pharmaceutical products, the Company targets
pharmaceuticals which complement its existing products and enable it to leverage
its existing manufacturing and marketing capabilities. The Company also develops
pharmaceutical products in order to eliminate the need to purchase
pharmaceuticals from third-party manufacturers.

LEVERAGE EXISTING INFRASTRUCTURE AND INCREASE OPERATING EFFICIENCIES. The
Company intends to improve its profitability by leveraging its existing
infrastructure and increasing operating efficiencies. The Company believes that
its research and development, manufacturing and marketing capabilities provide
it with the ability to profitably offer a broad range of specialty sterile
pharmaceutical products. The Company believes that it can use its existing
marketing capabilities to increase sales of specialty pharmaceutical products
with limited additional expenditures on infrastructure. The Company's existing
research and development resources support both ophthalmic and injectable
products. The Company's manufacturing and research and development resources,
including those recently acquired from ARI, provide it with the opportunity to
enhance profitability by internally manufacturing and developing substantially
more of its products. Finally, the Company intends to continue to increase
operating efficiencies by upgrading capital equipment and reengineering
manufacturing processes.

EXPAND STERILE MANUFACTURING AND TECHNICAL CAPABILITIES. The Company
intends to expand its sterile manufacturing and technical capabilities to
address additional specialty markets and dosage forms. The Company is one of a
limited number of specialty pharmaceutical companies with sterile product
manufacturing capabilities. Through the recent acquisition of ARI, the Company
added the capability to manufacture additional sterile dosage forms (suspensions
and ointments). The Company is also developing the capability to manufacture
controlled-release ophthalmic pharmaceutical products and lyophilized
(freeze-dried) pharmaceutical products. By developing these additional
manufacturing capabilities, the Company intends to expand dosage forms within
existing markets and pursue other markets. See "Risk Factors--Dependence on
Development of Pharmaceutical Products and Manufacturing Capabilities."

OPHTHALMIC PRODUCTS

The Company markets therapeutic and diagnostic ophthalmic pharmaceutical
products as well as ophthalmic surgical instruments and supplies. The ophthalmic
business generated net sales of approximately $24.9 million in 1997, which
represented 58.9% of the Company's total net sales for that year. The Company
believes a significant factor in the success of its ophthalmic products has been
its ability to capitalize on its extensive ophthalmic product line and
well-recognized "Akorn" label. The Company attributes its name recognition
primarily to the success of its comprehensive product catalog which is
distributed periodically to approximately 60,000 potential customers, including
ophthalmologists, optometrists, hospitals, pharmacies and clinics. The Company
has an active base of over 15,000 ophthalmic customers who have made at least
one purchase in the last 12 months.

The Company believes it is a leading provider of diagnostic ophthalmic
pharmaceutical products. The Company's diagnostic ophthalmic pharmaceutical
products are primarily for use in physicians' offices and include a complete
line of ophthalmic dilating and constricting solutions, anesthetics and topical
stains. The Company's therapeutic ophthalmic pharmaceutical product line
includes antibiotics, anti-inflammatories, antibiotic/anti-inflammatory
combinations, glaucoma medications, steroids and decongestants/antihistamines.
Currently, substantially all of the Company's diagnostic ophthalmic

25
<PAGE>
pharmaceutical products consist of branded products, whereas most of the
Company's therapeutic ophthalmic pharmaceutical products are generic versions of
products which have come off patent. In response to the typical decline in the
price of generic pharmaceutical products over time, the Company has focused
additional resources on developing selected pharmaceutical products for sale
under its "Akorn" label and acquiring or licensing branded ophthalmic
pharmaceutical products. As of June 30, 1998, the Company manufactured
approximately 44.0% of the ophthalmic pharmaceutical products that it sold, and
it obtained the remainder, as well as the ophthalmic surgical instruments and
supplies that it sold, from outside suppliers. As a result of the Company's
acquisition of ARI in July 1998, which provides it with the ability to
manufacture sterile ointments and suspensions, the Company will manufacture a
greater percentage of the ophthalmic pharmaceutical products that it sells.
Ophthalmic surgical instruments and supplies available from the Company include
surgical knives and other surgical instruments, balanced salt solution,
post-operative kits, surgical tapes, eye shields and anti-ultraviolet goggles.

The following are summary descriptions of certain of the Company's
significant ophthalmic products:

FLURESS and FLUORACAINE. Fluress and Fluoracaine are diagnostic ophthalmic
solutions combining fluorescein dye with alternative anesthetics. Fluress and
Fluoracaine are used for procedures such as tonometry (pressure testing),
removal of corneal foreign bodies and other short corneal or conjunctival
procedures. Fluress and Fluoracaine are branded ophthalmic products manufactured
by the Company. A number of fluorescein products with significantly lower market
share compete with Fluress and Fluoracaine in the United States.

INDOCYANINE GREEN ("ICG"). ICG is a diagnostic, water-soluble dye used by
ophthalmologists to study circulation in the back of the retina. ICG is a
branded product subject to an NDA owned by the Company and is manufactured for
it by a third-party contractor. There are no generic equivalents of ICG marketed
in the United States.

GENTAK. Gentak is a broad-spectrum topical antibiotic used to treat a
variety of ophthalmic bacterial infections. It is supplied in 5ml and 15ml
bottles of solution and a 3.5 gram ointment tube. Gentak is a branded generic
equivalent of Gentamycin Sulfate and is currently manufactured for the Company
by a third-party contractor. There are a number of products competing with the
Company in this market.

OPHTHALMIC PRODUCTS BY CATEGORY. The table below sets forth information
concerning certain ophthalmic sterile pharmaceutical products marketed by the
Company:

<TABLE>
<CAPTION>
NUMBER OF
PRODUCTS SOLD BY U.S.
PRODUCT CATEGORY THE COMPANY MARKET SIZE(1)
- ------------------------------------------------------------------------------ --------------------- -----------------
<S> <C> <C>
(IN MILLIONS)
Antibiotic.................................................................... 14 $ 122
Antibiotic/Anti-Inflammatory.................................................. 10 130
Anti-Inflammatory............................................................. 7 94
Diagnostic.................................................................... 15 33(2)
Glaucoma...................................................................... 7 715
Other Therapeutic............................................................. 25 272
</TABLE>

- ------------------------
(1) Based on 1997 sales as reported by IMS America (other than as set forth in
footnote (2)).
(2) Based on internal Company estimates.

26
<PAGE>
INJECTABLE PRODUCTS

The Company manufactures and markets a line of specialty injectable
pharmaceutical products. The Company's injectable business generated net sales
of $17.4 million in 1997, which represented 41.1% of the Company's total net
sales for that year.

The Company utilizes its research and development, sterile manufacturing and
marketing capabilities to offer a variety of specialty injectable pharmaceutical
products. Pharmaceutical products manufactured and marketed by the Company
include anesthetics, antidotes and pharmaceuticals used to treat rheumatoid
arthritis. Currently, most of the injectable pharmaceutical products
manufactured and marketed by the Company are generic products. To support its
efforts to sell injectable pharmaceutical products, the Company also supplies
customers with difficult-to-obtain pharmaceutical products, such as
blood-derivative pharmaceuticals, from outside sources. As part of its
injectable business, the Company also manufactures injectable pharmaceutical
products for third parties. See "--Manufacturing."

The following are summary descriptions of certain of the Company's
significant injectable products:

ALFENTA and SUFENTA. Alfenta and Sufenta are therapeutic injectable opioid
analgesics used in inducing and maintaining general anesthesia. Each product is
a branded pharmaceutical manufactured and marketed by the Company. Alfenta and
Sufenta are each subject to an NDA owned by the Company and are primarily sold
to hospitals and outpatient surgery centers. Alfenta is on patent until June
1999 while Sufenta is no longer protected by patent. While a number of
competitors market a generic version of Sufenta, there are no generic
equivalents of Alfenta marketed in the United States.

BAL IN OIL. BAL in Oil is a therapeutic dimercaprol injection used to treat
arsenic, gold and mercury poisoning. BAL in Oil is a branded pharmaceutical
manufactured and marketed by the Company. It is subject to an NDA owned by the
Company and is primarily sold to hospitals and military health care facilities.
There are no generic equivalents of BAL in Oil marketed in the United States.

CYANIDE ANTIDOTE PACKAGES. Cyanide antidote packages are therapeutic kits
that contain the necessary pharmaceuticals to treat cyanide poisoning. The
Company manufactures and markets the pharmaceuticals used in these kits. These
kits compete in the antidote segment of the injectable pharmaceutical product
market and are primarily sold to hospitals and industrial companies. While there
are other products used to treat cyanide poisoning that compete with these
cyanide antidote packages, there are no other kits which compete with these
packages in the U.S. market.

AUROLATE (GOLD SODIUM THIOMALATE INJECTION). Aurolate is a therapeutic
aqueous solution used to treat selected cases of active rheumatoid arthritis in
both adults and juveniles. The product is currently manufactured and marketed by
the Company and is primarily sold to rheumatology clinics and hospitals. There
are no generic equivalents of Aurolate marketed in the United States.

INJECTABLE PRODUCTS BY CATEGORY. The table below sets forth information
concerning certain injectable sterile pharmaceutical products marketed by the
Company:

<TABLE>
<CAPTION>
NUMBER OF
PRODUCTS SOLD BY U.S.
PRODUCT CATEGORY THE COMPANY MARKET SIZE(1)
- ------------------------------------------------------------------------------ ----------------------- -----------------
<S> <C> <C>
(IN MILLIONS)
Anesthesia.................................................................... 4 $ 98
Antidote...................................................................... 5 46
Rheumatology.................................................................. 1 26
Other......................................................................... 5 56(2)
</TABLE>

- ------------------------
(1) Based on 1997 sales as reported by IMS America (other than with respect to
footnote (2)).
(2) Based on internal Company estimates.

27
<PAGE>
PRODUCT ACQUISITIONS

The Company generally seeks to acquire or license specialty pharmaceutical
products which: (i) complement the Company's existing products and allow the
Company to leverage its existing manufacturing and marketing capabilities; (ii)
increase profitability; or (iii) establish or enhance strategic relationships
with major pharmaceutical companies. The table below sets forth information
concerning certain branded products acquired or licensed by the Company since
January 1, 1996:

<TABLE>
<CAPTION>
PHARMACEUTICAL
DATE PRODUCT PRODUCT CATEGORY SELLER
- -------------------------------------- --------------------- ---------------- --------------------------------
<S> <C> <C> <C>
July 1998............................. Fluress Diagnostic Allergan, Inc.
Ful-Glo Strips Diagnostic Allergan, Inc.
Rose Bengal Strips Diagnostic Allergan, Inc.

March 1998............................ BioLon-TM-(1) Other BioTechnology General Ltd.

February 1998......................... Pilo-20 Glaucoma ALZA Corporation
Pilo-40 Glaucoma ALZA Corporation

January 1998.......................... Alfenta Anesthesia Janssen Pharmaceutica, Inc.
Sufenta Anesthesia Janssen Pharmaceutica, Inc.

December 1997......................... Paremyd Diagnostic Allergan, Inc.

April 1997............................ BAL In Oil Antidote Becton, Dickinson & Co.
ICG Diagnostic Becton, Dickinson & Co.

July 1996............................. Inapsine Anesthesia Janssen Pharmaceutica, Inc.
Sublimaze Anesthesia Janssen Pharmaceutica, Inc.
</TABLE>

- ------------------------
(1) Indicates a branded pharmaceutical product that was licensed not acquired.

Since January 1, 1996, the Company has also acquired five generic
pharmaceutical products.

RESEARCH AND DEVELOPMENT

In developing new sterile pharmaceutical products, the Company considers a
variety of factors including: (i) existing or potential marketing opportunities
for such products; (ii) the capability of the Company to manufacture such
products; (iii) whether such products complement existing products of the
Company; (iv) the opportunities to leverage such products with the development
of additional products; and (v) the ability to develop co-marketing
relationships with other pharmaceutical companies. The Company currently has 36
full-time employees that are involved in research and development. The Company's
research and development expenditures for 1995, 1996, 1997 and the first six
months of 1998 were $0.9 million, $1.2 million, $1.9 million and $2.0 million,
respectively.

Since January 1, 1996, the Company has received FDA approval for nine ANDAs
and one NDA for internally developed sterile pharmaceutical products. The
Company currently has ten ANDAs submitted to the FDA for new sterile
pharmaceutical products. In addition, over the next three years, the Company
currently anticipates filing ANDAs for more than ten additional sterile
pharmaceutical products and NDAs for three proprietary pharmaceutical products
which are in various stages of development. See "Risk Factors--Dependence on
Development of Pharmaceutical Products and Manufacturing Capabilities."

28
<PAGE>
Set forth below is a brief description by product category of currently
submitted or contemplated ANDAs for new products and NDAs for new indications of
existing products:

<TABLE>
<CAPTION>
UNDER DEVELOPMENT
SUBMITTED ---------------------- U.S. MARKET
ANDAS ANDAS NDAS SIZE(1)
------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
(IN MILLIONS)
OPHTHALMIC:
Antibotic.......................................................... 2 3 -- $ 122
Antibiotic/Anti-Inflammatory....................................... -- 2 -- 130
Anti-Inflammatory.................................................. -- -- 1 94
Diagnostic......................................................... 2 -- -- 33(2)
Glaucoma........................................................... 2 1 -- 715
Other Therapeutic.................................................. -- 2 1 272

INJECTABLE:
Anesthesia......................................................... 4 3 -- $ 98
Antidote........................................................... -- -- -- 46
Rheumatology....................................................... -- -- -- 26
Other.............................................................. -- 4 1 56(2)
----- ----- ---------
TOTAL................................................................ 10 15 3
----- ----- ---------
----- ----- ---------
</TABLE>

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

(1) Based on 1997 sales as reported by IMS America (other than with respect to
footnote (2)).

(2) Based on internal Company estimates.

Set forth below is a brief description of certain proprietary products
currently under development by the Company which have been publicly announced:

PIROXICAM OPHTHALMIC SOLUTION ("PIROXICAM"). Piroxicam is a non-steroidal
anti-inflammatory drug to be used during cataract surgery. The Company has
acquired the ophthalmic indication for this compound from Pfizer, Inc. The
Company currently anticipates filing an NDA for this product in 1999. According
to industry sources, U.S. sales in the non-steroidal, anti-inflammatory market
were approximately $60.0 million in 1997.

COMBINATION MIOTIC LYOPHILIZED POWDER AND DILUENT ("MLPD"). MLPD is a
therapeutic product to be used to reduce and control post-operative intraocular
pressure increases during and following cataract surgery. The Company has
licensed the world-wide rights to MLPD and currently anticipates filing an NDA
for this product in 2000. According to industry sources, U.S. sales in this
market were approximately $15.0 million in 1997.

TP-1000. TP-1000 is a therapeutic injectable product to be used in the
treatment of migraine headaches. The Company has filed an Investigational New
Drug application for this product and has completed initial dose ranging
studies. The Company currently anticipates filing an NDA for this product in
1999. According to industry sources, U.S. sales in the injectable migraine
treatment market were approximately $50.0 million in 1997.

SALES AND MARKETING

The Company maintains a multi-channel sales and marketing structure for its
ophthalmic products. This structure includes 21 field sales representatives who,
together with two district managers, make personal calls on customers, such as
physicians and group practices. In addition, the Company maintains an 11-person
telemarketing team that sells primarily to ophthalmologists, optometrists and
clinics. The Company's eight-person customer service group is responsible for
processing orders, including those originating from the Company's product
catalog. This catalog features over 2,000 ophthalmic products

29
<PAGE>
and is distributed to over 60,000 potential customers including
ophthalmologists, optometrists, hospitals, chain-pharmacies and clinics. The
catalog is widely-recognized in the ophthalmic industry and has an active base
of over 15,000 customers who have made at least one purchase in the last 12
months. The Company believes that the catalog's presence with ophthalmologists,
optometrists, hospitals, chain-pharmacies and other customers provides it with
valuable recognition of the "Akorn" name. The Company attempts to leverage this
name recognition in its sales and marketing efforts. The ophthalmic business
also employs a national accounts group consisting of four persons who sell
primarily to full-service wholesalers, retail chains and other group purchasing
organizations.

The Company's sales and marketing efforts for its injectable pharmaceutical
products include employing nine telemarketing and customer service
representatives who sell through telemarketing and direct-mail activities. In
addition, the Company has entered into a significant number of contracts with
national and regional group purchasing organizations to distribute its
injectable products and increase its sales volume. The Company also intends to
build a key-account sales force for the injectable business over the next
several years as new products are introduced. The Company's customers for
injectable pharmaceutical products consist primarily of individual hospitals and
clinics, specialty physicians and group purchasing organizations.

MANUFACTURING

The Company's manufacturing facilities, located in Decatur, Illinois and
Somerset, New Jersey, have approximately 131,000 square feet and 30,000 square
feet, respectively. Each facility includes manufacturing, packaging, laboratory,
office and warehouse space. The Company manufactures products in accordance with
cGMP requirements and is licensed by the DEA to procure and produce controlled
substances.

The Company has the ability to manufacture a diverse group of sterile
pharmaceutical products which it believes provides it with a competitive
advantage in the specialty pharmaceutical industry. With the acquisition of the
ARI business in July 1998, the Company added two additional product dosage forms
(ointments and suspensions) for which it did not previously have manufacturing
capabilities. In addition, the Company anticipates adding freeze-dried
(lyophilized) and control-release manufacturing capabilities. This increased
manufacturing capability will allow the Company to further reduce its dependence
on third-party manufacturers and give the Company the opportunity to increase
margins.

As of June 30, 1998, aggregate capacity utilization at the Company's
manufacturing facilities was approximately 50.0%. In general, the Company
transfers production of newly acquired pharmaceutical products and their product
line extensions for which it has production capabilities to its manufacturing
facilities as soon as practicable after regulatory requirements and contractual
obligations are satisfied. See "Risk Factors--Government Regulation." The
Company also maintains integrated manufacturing support systems including
quality assurance, quality control, regulatory compliance, inventory control and
packaging.

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. 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 deliver its products as
planned, which could have a material adverse effect on the Company's business,
financial condition and results of operations.

CONTRACT MANUFACTURING AND RELATED CAPABILITIES. The Company manufactures
injectable pharmaceutical products for third parties which allows it to use
excess capacity at its manufacturing facilities. The Company's third-party
manufacturing and related capabilities include product development, process and
product validation, manufacturing and the filing of ANDAs for its customers.
These capabilities allow the Company to market its services to specialty
pharmaceutical companies,

30
<PAGE>
development-stage biotechnology companies and contract research organizations
which do not have these capabilities. The Company also manufactures injectable
pharmaceuticals for major pharmaceutical companies which the Company believes
allows it to establish or enhance its relationships with these companies so that
when one of them decides to divest or license a specialty pharmaceutical
product, it is more likely to give the Company an opportunity to acquire or
license the product. For example, the Company manufactures sterile
pharmaceuticals for Janssen Pharmaceutica, Inc. and Pfizer, Inc., from each of
which it has acquired or licensed specialty pharmaceutical products.

The Company has historically limited its sales and marketing efforts in the
contract manufacturing business to personal contacts with major pharmaceutical
companies and limited trade journal advertisements. In 1997, the Company
implemented an expanded marketing program emphasizing the full-service
capabilities of the injectable business' third-party contract manufacturing
operations. Components of this marketing program include increased print
advertising, attendance at trade shows by Company personnel and contributions to
industry journals and publications, as well as a continued emphasis on personal
contacts and relationships with major pharmaceutical companies.

PATENTS AND PROPRIETARY RIGHTS

The Company considers the protection of discoveries in connection with its
development activities important to its business. The Company intends to seek
patent protection in the United States and selected foreign countries where
deemed appropriate. To date, the Company has received one U.S. patent for its
ophthalmic and injectable pharmaceutical products and has two additional patent
applications pending. There can be no assurance that the Company will obtain
U.S. or foreign patents or, if obtained, that they will provide substantial
protection or be of commercial benefit.

The Company also relies upon trade secrets, unpatented proprietary know-how
and continuing technological innovation to develop its competitive position. The
Company enters into confidentiality agreements with certain of its employees
pursuant to which such employees agree to assign to the Company any inventions
relating to the Company's business made by them while in the Company's employ.
However, there can be no assurance that others may not acquire or independently
develop similar technology or, if patents are not issued with respect to
products arising from research, that the Company will be able to maintain
information pertinent to such research as proprietary technology or trade
secrets.

COMPETITION

The ophthalmic and injectable pharmaceutical industries are highly
competitive, with many established manufacturers, suppliers and distributors
actively engaged in all phases of the business. Most of the Company's
competitors have substantially greater financial and other resources, including
a larger volume of sales, more sales personnel and larger facilities than the
Company. The Company's competitors in the ophthalmic pharmaceutical industry
include: Alcon Laboratories, Inc., owned by Nestle, S.A.; Allergan, Inc.; CIBA
Vision, a division of Novartis, AG; and Bausch & Lomb Incorporated. The
Company's competitors in the injectable pharmaceutical industry include Abbott
Laboratories; Gensia Sicor Inc.; and Steris Laboratories, a division of Schein
Pharmaceutical, Inc. The Company believes that competition in the sale of its
products is based primarily on price, service, availability and product
efficacy. See "Risk Factors--Competition; Uncertainty of Technological Change."

GOVERNMENT REGULATION

Virtually all aspects of the Company's business are regulated by federal and
state statutes and government agencies. The developing, testing, manufacturing,
processing, quality, safety, efficacy, formulation, packaging, labeling,
record-keeping, distribution, storage and advertising of the Company's products,
and disposal of waste products arising from such activities, are subject to
regulation by one or

31
<PAGE>
more federal agencies, including the FDA. These activities are also regulated by
various agencies of the states and localities in which the Company's products
are sold.

All pharmaceutical manufacturers, including the Company, 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. The initiation of any of these enforcement activities, including
the restriction or prohibition on sales of products marketed by the Company or
the halting of manufacturing operations of the Company, could materially
adversely affect the Company's business, financial condition and results of
operations.

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

The Company and its third-party manufacturers are subject to periodic
inspection by the FDA to assure such compliance. The FDA imposes additional
stringent requirements on the manufacture of sterile pharmaceutical products to
ensure the sterilization processes and related control procedures consistently
produce a sterile product. Additional sterile manufacturing requirements include
the submission for expert review of detailed documentation for sterilization
process validation in drug applications beyond those required for general
manufacturing process validation. Various sterilization process requirements are
the subject of detailed FDA guidelines, including requirements for the
maintenance of microbiological control and quality stability. Pharmaceutical
products must be distributed, sampled and promoted in accordance with FDA
requirements. The FDA also regulates drug labeling and the advertising of
prescription drugs.

While the Company believes that all of its current pharmaceuticals are
lawfully marketed in the United States under current FDA enforcement policies or
have received the requisite agency approvals for manufacture and sale, such
marketing authority is subject to withdrawal by the FDA. In addition,
modifications or enhancements of approved products are in many circumstances
subject to additional FDA approvals which may or may not be granted and which
may be subject to a lengthy application process. The Company's and its
third-party manufacturers' manufacturing facilities are continually subject to
inspection by such governmental agencies and manufacturing operations could be
interrupted or halted in any such facilities if such inspections prove
unsatisfactory.

32
<PAGE>
the FDA to change the status of any of its "grandfathered" products, but there
is no assurance that such initiatives will not occur in the future.

ANDA PROCESS. FDA approval is required before a generic equivalent to a
previously approved brand drug or new dosage form of an existing brand drug can
be marketed. The Company usually receives approval for such products by
submitting an ANDA to the FDA. When processing an ANDA, the FDA waives the
requirement of conducting complete clinical studies, although it may require
bioavailability and/or bioequivalence studies. "Bioavailability" indicates the
rate and extent of absorption and levels of concentration of a drug product in
the blood stream needed to produce a therapeutic effect. "Bioequivalence"
compares the bioavailability of one drug product with another, and when
established, indicates that the rate of absorption and levels of concentration
of a generic drug in the body are substantially equivalent to the previously
approved drug. An ANDA may be submitted for a drug on the basis that it is
bioequivalent to a previously listed drug, contains the same active ingredient,
has the same route of administration, dosage form, and strength as the listed
drug, and otherwise complies with legal and regulatory requirements.

Among the requirements for drug approval by the FDA is that the Company's
manufacturing procedures and operations conform to cGMPs. The cGMP regulations
must be followed at all times during the manufacture, storage and distribution
of pharmaceutical products. In complying with the standards set forth in the
cGMP regulations, the Company must continue to expend time, money and effort in
the areas of production, quality control and record keeping to ensure full
compliance.

If the FDA believes a company is not in compliance with cGMPs, certain
sanctions are imposed upon that company including: (i) withholding from the
company new drug approvals as well as approvals for supplemental changes to
existing applications; (ii) preventing the company from receiving the necessary
export licenses to export its products; and (iii) classifying the company as an
"unacceptable supplier" and thereby disqualifying the company from selling
products to federal agencies. The Company believes it is currently in compliance
with cGMPs.

In May 1992, the Generic Drug Enforcement Act (the "Generic Act") was
enacted. The Generic Act, a result of the legislative hearings and
investigations into the generic drug approval process, allows the FDA to impose
debarment and other penalties on individuals and companies that commit certain
illegal acts relating to the generic drug approval process. In some situations,
the Generic Act requires the FDA to debar (i.e., not accept or review ANDAs for
a period of time) a company or an individual that has committed certain
violations. It also provides for temporary denial of approval of applications
during the investigation of certain violations that could lead to debarment and
also, in more limited circumstances, provides for the suspension of the
marketing of approved drugs by the affected company. Lastly, the Generic Act
allows for civil penalties and withdrawal of previously approved applications.
Neither the Company nor any of its employees have ever been subject to
debarment.

NDA PROCESS. FDA approval is required before any new drug can be marketed.
An NDA is a filing submitted to the FDA to obtain approval of a drug not
eligible for an ANDA and must contain complete pre-clinical and clinical safety
and efficacy data or a right of reference to such data. Before administering a
new drug in healthy human subjects may begin, stringent government requirements
for preclinical data must be satisfied. The pre-clinical data, typically
obtained from studies in animal species, as well as from laboratory studies, are
submitted in an Investigational New Drug ("IND") application, or its equivalent
in countries outside the United States, where clinical trials are to be
conducted. The preclinical data must provide an adequate basis for evaluating
both the safety and the scientific rationale for the initiation of clinical
trials.

Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, which frequently begins with the initial
introduction of the compound into healthy human subjects prior to introduction
into patients, the product is tested for safety, adverse effects, dosage,
tolerance absorption, metabolism, excretion and other elements of clinical
pharmacology. Phase II

33
<PAGE>
typically involves studies in a small sample of the intended patient population
to assess the efficacy of the compound for a specified indication, to determine
dose tolerance and the optimal dose range as well as to gather additional
information relating to safety and potential adverse effects. Phase III trials
are undertaken to further evaluate clinical safety and efficacy in an expanded
patient population at typically dispersed study sites, in order to determine the
overall risk-benefit ratio of the compound, and to provide an adequate basis for
product labeling. Each trial is conducted in accordance with certain standards
under protocols that detail the objects of the study, the parameters to be used
to monitor safety and efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. In some cases, the FDA allows a company
to rely on data developed in foreign countries and therefore not independently
repeat some or all of those studies.

Data from preclinical testing and clinical trials are submitted to the FDA
as an NDA for marketing approval and to other health authorities as a marketing
authorization application. The process of completing clinical trials for a new
drug may take several years and require the expenditure of substantial
resources. Preparing an NDA or marketing authorization application involves
considerable data collection, verification, analysis and expense, and there can
be no assurance that approval from the FDA or any other health authority will be
granted on a timely basis, if at all. The approval process is affected by a
number of factors, primarily the risks and benefits demonstrated in clinical
trials as well as the severity of the disease and the availability of
alternative treatments. The FDA or other health authorities may deny an NDA or
marketing authorization application if the regulatory criteria are not
satisfied, or such authorities may require additional testing or information.

Even after initial FDA or other health authority approval has been obtained,
further studies, including Phase IV post-marketing studies, may be required to
provide additional data on safety. Additional studies generally also are
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested. Also,
the FDA or other regulatory authorities require post-marketing reporting to
monitor the adverse effects of the drug. Results of post-marketing programs may
limit or expand the further marketing of the products. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process or labeling or a change in the manufacturing facility, an application
seeking approval of such changes must be submitted to the FDA or other
regulatory authority. Additionally, the FDA regulates post-approval promotional
labeling and advertising activities to assure that such activities are being
conducted in conformity with statutory and regulatory requirements. Failure to
adhere to such requirements can result in regulatory actions which could have a
material adverse effect on the Company's business, results of operations and
financial condition.

EMPLOYEES

As of July 20, 1998, the Company employed 309 persons, consisting of 157
manufacturing employees, 80 sales and marketing employees, 36 research and
development employees and 36 management and other employees. The Company's
success depends in large part on attracting and retaining talented and
experienced personnel. See "Risk Factors--Need to Attract and Retain Key
Personnel in Highly Competitive Marketplace." None of the Company's employees
are represented by labor unions and the Company considers its relationship with
its employees to be good.

34
<PAGE>
FACILITIES

The Company's headquarters and administrative, sales and marketing
operations are based in approximately 11,000 square feet of leased space located
in an office building in Lincolnshire, Illinois. In September 1998, the Company
anticipates moving its principal executive offices to an approximately 38,000
square foot office and warehouse facility in Buffalo Grove, Illinois. The
Company's former headquarters, consisting of approximately 30,000 square feet in
Abita Springs, Louisiana, is currently subject to a pending contract for sale
which the Company expects to close by the end of 1998.

The Company owns a 55,000 square-foot manufacturing facility in Decatur,
Illinois and leases a 30,000-square foot manufacturing facility in Somerset, New
Jersey. The Company also owns a 76,000 square foot facility located in Decatur,
Illinois. This facility is currently used for packaging, distribution,
warehousing and office space. The Company also leases approximately 7,000 square
feet of office and warehousing space in San Clemente, California. The Company
considers its facilities adequate to accommodate growth in the foreseeable
future.

LEGAL PROCEEDINGS

From time to time, the Company is a party to legal proceedings arising in
the ordinary course of business. The Company believes that it is not a party to
any legal proceedings which, if adversely decided, would have a material adverse
effect on the Company's business, financial condition and results of operations.

35
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -----------------------------------------------------------------------
<S> <C> <C>
John N. Kapoor, Ph.D............... 54 Chairman of the Board of Directors and Chief Executive Officer
Floyd Benjamin..................... 55 Executive Vice President and Director
R. Scott Zion...................... 47 Senior Vice President
Rita J. McConville................. 40 Vice President, Chief Financial Officer, Secretary and Treasurer
Daniel E. Bruhl, M.D.(1)........... 56 Director
Doyle S. Gaw(1).................... 67 Director
</TABLE>

- ------------------------
(1) Member of the Compensation Committee and the Audit Committee

DR. KAPOOR has served as Chief Executive Officer of the Company since May
1996, and as Chairman of the Board of the Company since May 1995 and from
December 1991 to January 1993. From April 1993 to May 1995, Dr. Kapoor served as
acting Chairman of the Board of the Company. Dr. Kapoor currently serves as
chairman of the board of Option Care, Inc. ("OCI"), a company specializing in
infusion services and supplies, and served as OCI's chief executive officer from
August 1993 to April 1996. Since April 1990, Dr. Kapoor has served as president
of EJ Financial. Dr. Kapoor currently serves as a director for two specialty
pharmaceutical companies, Unimed, Inc. and NeoPharm, Inc.

MR. BENJAMIN has served as Executive Vice President and a director of the
Company since May 1996. Mr. Benjamin has served as President of Taylor
Pharmaceuticals since May 1996. From October 1994 to May 1996, Mr. Benjamin
served as president of PRL. From October 1993 to October 1994, he was a
consultant to PRL. From February 1992 to October 1993, Mr. Benjamin was
president and chief executive officer of Neocrin, Inc., a biomedical venture
capital company. Prior to February 1992, Mr. Benjamin served as chief operating
officer of Lyphomed.

MR. ZION has served as Senior Vice President of the Company since January 4,
1997. In addition, he has served as General Manager of the Company's ophthalmic
business during such period. From February 1993 through November 1996, Mr. Zion
was Senior Vice President of Pilkington Barnes Hind, a worldwide contact lens
manufacturer and marketer. Prior to February 1993, Mr. Zion was in a variety of
sales and sales management positions at Mead Johnson, a Bristol-Myers Squibb
subsidiary.

MS. MCCONVILLE has served as Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company since March 1997. From August 1993 to
March 1997, Ms. McConville served as Senior Director and Controller of OCI. From
June 1990 to July 1993, she served as Controller of VideOcart, Inc., a sales and
marketing company.

DR. BRUHL has served as a director of the Company since 1983. Dr. Bruhl is
an ophthalmologist who serves as president of the Surgery Center of Fort Worth
and as a director of Medsynergies, Inc., a private ophthalmology practice
management company. From 1983 to 1996, Dr. Bruhl served as a director of
Surgical Care Affiliates until it merged with HEALTHSOUTH Corporation.

MR. GAW has served as a director of the Company since 1977. From 1988 to
1990, Mr. Gaw served as Chairman of the Board of Directors of the Company. Mr.
Gaw is a private investor focusing on real estate investments.

The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. Other than Dr. Kapoor, each executive
officer is a full-time employee of the Company.

36
<PAGE>
Dr. Kapoor devotes approximately two days per week to his duties as Chief
Executive Officer. See "Risk Factors--Relationships With Other Entities;
Conflicts of Interest." There are no family relationships between any director
or executive officer of the Company.

COMMITTEES OF THE BOARD OF DIRECTORS

COMPENSATION COMMITTEE. The members of the Compensation Committee are
Daniel E. Bruhl, M.D. and Doyle S. Gaw, both of whom are non-employee directors.
The Compensation Committee reviews various compensation matters with respect to
the executive officers and directors of the Company.

AUDIT COMMITTEE. The members of the Audit Committee are Dr. Bruhl and Mr.
Gaw, both of whom are non-employee directors. The Audit Committee is responsible
for consulting with the independent auditors and discussing audit
recommendations with management and reporting the results of its reviews to the
Board of Directors.

DIRECTOR COMPENSATION

For services as Chairman of the Board of the Company, John N. Kapoor, Ph.D.
receives a fee of $50,000 per year, which is included in the Summary
Compensation Table. Each other director who is not a salaried officer or
consultant of the Company receives a fee for his services as a director of
$1,000 per regular meeting of the Board of Directors, $250 per telephone meeting
and $500 per committee meeting, plus reimbursement of his expenses related to
those services. In addition, the chairman of each committee (other than Dr.
Kapoor) receives an annual fee of $2,500.

All directors of the Company participate in the Company's Stock Option Plan
for Directors, pursuant to which each director of the Company is granted an
option to acquire 5,000 shares of Common Stock on the day after each annual
meeting of shareholder 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 5,000 shares. The Compensation Committee may, in
its sole discretion, grant an option to purchase up to 100,000 shares to a
person who is not already a director and who becomes a director at any time. No
member of the Compensation Committee is eligible to be granted such an option
and any director who has been granted such an option is not permitted to serve
on the Compensation Committee for one year after such grant. Options granted
under the plan expire five years from the date of grant. 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.

37
<PAGE>
EXECUTIVE COMPENSATION

The following table summarizes the compensation paid by the Company for
services rendered during fiscal years 1996 and 1997 and the six-month interim
period ended December 31, 1996 to the Company's chief executive officer and to
each other executive officer of the Company whose total annual salary and bonus
for such year exceeded $100,000 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
---------------------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR ENDED SALARY BONUS OPTIONS COMPENSATION(1)
- ----------------------------- ----------------------- ---------- --------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
John N. Kapoor, Ph.D.(2)..... December 31, 1997 $ 78,750 $ 21,000(3) 5,000 $ 40,000
Chairman and Chief December 31, 1996(4) 34,375 -- 85,938 --
Executive Officer June 30, 1996 10,000 -- 5,000 40,000

Floyd Benjamin(5)............ December 31, 1997 200,000 -- 5,000 2,250
Executive Vice President December 31, 1996(4) 100,000 -- 50,000 --
June 30, 1996 16,667 -- 3,750 --

R. Scott Zion(6)............. December 31, 1997 175,774 54,000(3) 125,000 101,183
Senior Vice President

Rita J. McConville(7)........ December 31, 1997 87,351 26,250(3) 45,000 688
Vice President, Chief
Financial Officer,
Secretary and Treasurer
</TABLE>

- --------------------------
(1) Represents contributions to the Company's 401(k) Plan, except as indicated
in notes (2) and (6).
(2) During the years ended June 30, 1996 and December 31, 1997, Dr. Kapoor
received $50,000 for his services as Chairman of the Board, $40,000 of which
was waived in exchange for other consideration, as described under "Certain
Relationships and Related Transactions." Dr. Kapoor became Chief Executive
Officer on May 31, 1996. Beginning in July 1996, Dr. Kapoor has received
$68,750 annually for his services as Chief Executive Officer.
(3) Represents bonuses awarded for 1997 performance paid in 1998.
(4) Represents the six months ended December 31, 1996. In October 1996, the
Company changed its fiscal year from the year ending June 30 to a calendar
year.
(5) Mr. Benjamin became an executive officer of the Company on May 31, 1996.
(6) Mr. Zion became an executive officer of the Company on January 4, 1997. His
other compensation includes $98,739 for reimbursement of relocation expenses
and $2,444 for an automobile allowance.
(7) Ms. McConville became an executive officer of the Company on February 28,
1997.

38
<PAGE>
The table below sets forth information as to options granted during fiscal
year 1997 to the Named Executive Officers:

OPTIONS GRANTS IN 1997

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES PRICE PER EXPIRATION ----------------------
NAME GRANTED IN 1997 SHARE DATE 5% 10%
- -------------------------------- ----------- --------------------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
John N. Kapoor, Ph.D. .......... 5,000 1% $ 2.28 2/28/02 $ 3,150 $ 6,960
Floyd Benjamin.................. 5,000 1% 2.28 2/28/02 3,150 6,960
R. Scott Zion................... 125,000 13% 2.38 2/28/02 82,021 181,245
Rita J. McConville.............. 45,000 5% 2.38 2/28/02 29,528 65,248
</TABLE>

The table below sets forth information as to options exercised during fiscal
year 1997 by the Named Executive Officers:

AGGREGATED OPTION EXERCISES IN 1997 AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1997 AT DECEMBER 31, 1997
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------ ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
John N. Kapoor, Ph.D. ................................ 67,969 42,969 $ 84,401 $ 64,239
Floyd Benjamin........................................ 33,750 25,000 47,381 37,375
R. Scott Zion......................................... 31,250 93,750 39,063 117,188
Rita J. McConville.................................... 11,250 33,750 14,063 42,188
</TABLE>

1988 INCENTIVE COMPENSATION PROGRAM

Under the 1988 Incentive Compensation Program (the "Incentive Program") any
officer or key employee of the Company is eligible to receive non-qualified
options as designated by the Board of Directors. Currently, 4,500,000 shares of
the Common Stock are reserved to be issued under the Incentive Program of which
approximately 2.3 million shares were still available as of June 30, 1998. The
exercise price of the options granted under the Incentive Program may not be
less than 50% 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 year ended December 31, 1997, the six
months ended December 31, 1996 and the years ended June 30, 1996 and 1995 have
exercise prices equivalent to the market value of the 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.

1991 STOCK OPTION PLAN FOR DIRECTORS

Under the 1991 Stock Option Plan for Directors (the "Directors' Plan")
persons elected as directors of the Company are granted nonqualified options at
the fair market value of the shares subject to the option on the date of the
grant. Each director of the Company is automatically granted an option each year
to acquire 5,000 shares under the Directors' Plan on the day following the
annual meeting of shareholders. As of December 31, 1997, 500,000 shares of the
Common Stock were reserved to be issued under the Directors' Plan. Options
granted under the Directors' Plan are exercisable six months after the date of
grant and expire five years from the date of grant.

39
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN

The Akorn, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan")
permits eligible employees to acquire shares of the Company's common stock
through payroll deductions not exceeding 15.0% of gross compensation, at a 15.0%
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 Stock Purchase Plan.
Purchases of shares were issued from treasury stock and approximated 56,000,
18,000 and 9,000 shares, respectively, during the fiscal year ended June 30,
1996, the six months ended December 31, 1996 and the fiscal year ended December
31, 1997.

RETIREMENT PLAN

All employees who have attained the age of 21 with six months of service are
eligible for participation in the Company's 401(k) Plan. The Company's matching
contribution is a discretionary percentage of the amount contributed by each
employee.

EMPLOYMENT AGREEMENTS

In May 1996, the Company entered into an employment agreement with Floyd
Benjamin providing for an annual salary of $200,000, plus bonuses determined by
a formula stated in the agreement. The Board of Directors has the discretion to
increase Mr. Benjamin's annual salary. Mr. Benjamin's current annual salary is
$212,000.

The agreement terminates three years from inception. If Mr. Benjamin's
employment is otherwise terminated by the Company without "cause" as defined in
the agreement, he is entitled to a lump sum payment equal to his salary through
the remainder of the employment term, plus any performance-based bonus to which
he would have been entitled had the performance goals been achieved. Mr.
Benjamin is also subject to non-compete and confidentiality provisions pursuant
to the terms of his employment agreement.

The Company may pay up to 50.0% of any of Mr. Benjamin's bonuses in options
to purchase Common Stock, with such options being valued at 25.0% of the market
price at the time the options are issued. The options will be issued under the
Incentive Program, on terms similar to other options issued under the Incentive
Program.

40
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For services performed by John N. Kapoor, Ph.D. in connection with the
Company's acquisition of Taylor Pharmaceuticals, the John N. Kapoor Trust, an
entity controlled by Dr. Kapoor (the "Kapoor Trust"), received 125,000 shares of
Common Stock which were subject to forfeiture if the market price of the Common
Stock did not reach $5.00 by January 15, 1996. In August 1995, the Company, the
Kapoor Trust and Dr. Kapoor entered into an agreement under which: (i) the
forfeiture period was extended to January 15, 1998; (ii) the forfeiture would
not occur in the event that persons unaffiliated with Dr. Kapoor acquired
beneficial ownership of more than 50% of the outstanding common stock of the
Company; and (iii) Dr. Kapoor waived his right to receive $40,000 otherwise
payable to him by the Company for serving as Chairman of the Board in fiscal
1996. On May 23, 1997, the Company, the Kapoor Trust and Dr. Kapoor entered into
an agreement under which (i) the forfeiture period was extended to January 15,
2000; and (ii) Dr. Kapoor waived his right to receive $40,000 otherwise payable
to him by the Company for serving as Chairman of the Board in fiscal 1997. On
February 20, 1998, the Common Stock closed at $5.1875 with the result that the
above described forfeiture provision was terminated.

Under agreements between the Company and the Kapoor Trust, the Kapoor Trust
is entitled to designate up to two individuals to be nominated and recommended
by the Board of Directors for election as a director. In 1998, Dr. Kapoor was
nominated by the Kapoor Trust.

In November 1991, the Company and EJ Financial entered into a consulting
agreement whereby EJ Financial serves as an independent consultant which
provides management consulting services relating to the Company's strategic
corporate objectives, primarily in the area of new product opportunities. In
exchange for these services, EJ Financial is paid a consulting fee in the amount
of $1,500 per month in addition to reimbursement by the Company of certain
related expenses.

41
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of June 30, 1998, and as adjusted to reflect the
sale of the Common Stock offered hereby, by: (i) all persons known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock; (ii) each director of the Company, each Named Executive Officer, and each
Selling Stockholder; and (iii) all directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of Common Stock beneficially owned
by them.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES TO OWNED AFTER THE
OFFERING(1) BE SOLD OFFERING(1)
DIRECTORS, EXECUTIVE OFFICERS AND ------------------------ IN THE ------------------------
SELLING STOCKHOLDERS NUMBER PERCENT OFFERING NUMBER PERCENT
- ------------------------------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
John N. Kapoor, Ph.D.(2)(3)........................... 4,313,494 23.9% -- 4,313,494 18.7%
Floyd Benjamin(4)..................................... 521,667 2.9% -- 521,667 2.3%
R. Scott Zion(5)...................................... 87,150 * -- 87,150 *
Rita J. McConville.................................... 30,199 * -- 30,199 *
Daniel E. Bruhl, M.D.................................. 301,767 1.7% -- 301,767 *
Doyle S. Gaw.......................................... 120,360 * -- 120,360 *
Yankoff Revocable Living Trust........................ 412,667 2.3% 200,000 212,667 *
Gencarella Revocable Living Trust..................... 340,000 1.9% 340,000 -- --
All Directors and Executive Officers as a group (6
persons)(6)......................................... 5,374,637 29.4% -- 5,374,637 23.1%
</TABLE>

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

* Less than 1%.

(1) Beneficial ownership of shares, as determined in accordance with applicable
Commission rules, includes shares as to which a person has or shares voting
power and/or investment power. Except as set forth in the accompanying
footnotes, the named persons have sole voting power and sole investment
power over the shares shown as beneficially owned by them. Beneficial
ownership also includes shares issuable upon exercise of options currently
vested or vesting within 60 days of June 30, 1998.

(2) Dr. Kapoor is the only person known to the Company to be the beneficial
owner of 5% or more of the Common Stock. His address is 225 East Deerpath,
Suite 250, Lake Forest, Illinois 60045.

(3) Of such 4,313,494 shares: (i) 4,207,400 are owned directly by the Kapoor
Trust of which Dr. Kapoor is the sole trustee and beneficiary; (ii) 30,000
are owned by a trust, the trustee of which is Dr. Kapoor's wife and the
beneficiaries of which are their children; and (iii) 76,094 are issuable
pursuant to options granted by the Company directly to Dr. Kapoor.

(4) Mr. Benjamin's shares are held by a trust of which Mr. Benjamin and his wife
are trustees and their child is beneficiary. Includes 55,000 shares issuable
pursuant to options granted by the Company directly to Mr. Benjamin.

(5) Of such 87,150 shares, 20,400 are owned by Mr. Zion's minor children.

(6) Of such 5,374,637 shares, 181,094 are not presently outstanding, but are
issuable pursuant to option rights described in the preceding footnotes and
108,750 are issuable pursuant to options held by Named Executive Officers
who are not also directors.

42
<PAGE>
DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock, no par value, and 5,000,000 shares of Preferred Stock, par value
$1.00 per share (the "Preferred Stock"). Prior to the consummation of this
Offering, the Company will have outstanding 17,952,063 shares of Common Stock
and no shares of Preferred Stock. Upon completion of this Offering, the Company
will have outstanding 22,952,063 shares of Common Stock and no shares of
Preferred Stock.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share for the election
of directors and all other matters submitted for stockholder vote, except
matters submitted to the vote of another class or series of shares. Holders of
Common Stock are not entitled to cumulative voting rights. Therefore, the
holders of a majority of the shares voting for the election of directors can
elect all of the directors if they choose to do so. The holders of Common Stock
are entitled to dividends in such amounts and at such times, if any, as may be
declared by the Board of Directors out of funds legally available therefor. The
Company has not paid any dividends on its Common Stock since 1991 and does not
anticipate paying any cash dividends on such Common Stock in the foreseeable
future. See "Dividend Policy." Upon liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
net assets available for distribution to stockholders after payments to
creditors. The Common Stock is not redeemable and has no preemptive or
conversion rights.

The rights of the holders of Common Stock are subject to the rights of the
holders of any Preferred Stock which may, in the future, be issued. All
outstanding shares of Common Stock are, and the shares of Common Stock to be
sold by the Company in this Offering when issued will be, duly authorized,
validly issued, fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority to issue the Preferred Stock in one
or more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others.

LIMITATION OF LIABILITY AND INDEMNIFICATION

LIMITATION OF LIABILITY. As permitted by the Business Corporation Law of
Louisiana (the "BCLL"), the Company's Articles of Incorporation provides that no
director or officer of the Company shall be personally liable for monetary
damages to the Company or its shareholders for breach of fiduciary duty as a
director or officer except for: (i) any breach of the director's or officer's
duty of loyalty to the Company or its shareholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law; (iii) authorizing illegal dividends or redemptions; or (iv) any transaction
from which the director or officer derived an improper personal benefit. In
addition, the provision applies only to claims against a director or officer
arising out of his or her role as a director or officer and not in any other
capacity. Further, liability of a director for violations of the federal
securities laws will not be limited by this provision. Directors and officers
will, however, no longer be liable for monetary damages arising from decisions
involving violations of the duty of care which could be deemed grossly
negligent.

43
<PAGE>
INDEMNIFICATION. The Company's By-laws provide that any person shall be
indemnified who was or is a party or is threatened to be made a party to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including any action by or in the right of the Company) by reason
of the fact that he or she is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of the Company of another entity, against expenses
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding, if he or she acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interest of the corporation or had
no reason to believe his or her conduct was unlawful. In accordance with the
BCLL, indemnification shall be made by the Company only as authorized in a
specific case upon a determination that the applicable standard has been met.
Such determination may be made: (i) by a majority vote of a quorum of the board
of directors who are disinterested; (ii) by independent counsel; or (iii) by the
shareholders. The Company's By-laws permit the Company to procure insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of the Company of another entity, against liability
asserted against him or her in any such capacity, or arising out of his or her
status as such, whether or not the Company would have the power to indemnify him
or her against such liability under the BCLL. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.

REGISTRATION RIGHTS

Pursuant to a Stock Registration Rights Agreement dated as of November 15,
1990, between the Company and the Kapoor Trust, the Company has granted the
Kapoor Trust certain "demand" and "piggyback" registration rights (collectively,
the "Kapoor Registration Rights") with respect to any shares of Common Stock
held by the Kapoor Trust (4,207,400 shares as of June 30, 1998). Subject to
certain conditions, the demand registration rights permit the Kapoor Trust to
request one demand registration. Subject to certain conditions, the piggyback
registration rights permit the Kapoor Trust to include its shares of Common
Stock in a registration of Common Stock (except pursuant to Form S-4 or Form
S-8) or in connection with an exchange offering or offering of securities solely
to existing holders of the Company's securities. The Company will bear expenses
arising from exercise of the Kapoor Registration Rights, except that the Company
shall not pay any underwriting discounts or commissions.

In connection with the acquisition of PRL in May 1996, the Company granted
the Benjamin Family Trust, the Yankoff Revocable Living Trust and the Gencarella
Revocable Living Trust (collectively, the "PRL Shareholders") certain
"piggyback" registration rights with respect to 1,400,000 shares of Common Stock
that were issued in the acquisition. Subject to certain conditions, the
piggyback registration rights permit the PRL Shareholders to include their
shares of Common Stock in a registration of Common Stock (except pursuant to
Form S-4 or S-8). The PRL Shareholders are responsible for any underwriting
discounts and selling commissions and must pay their pro rata share of all
filing fees and blue-sky expenses.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank, Chicago, Illinois.

44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Shares of Common Stock in the hands of "affiliates" are generally deemed
"restricted shares" under Rule 144. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act and lock-up agreements under which certain holders of such shares
have agreed not to sell or otherwise dispose of any of their shares for a period
ranging from 90 to 180 days after the effective date of this Offering without
the prior written consent of BT Alex. Brown Incorporated. All of the "restricted
shares" in the hands of "affiliates" of the Company are eligible for sale by the
holders thereof (other than 1,000,000 shares held by the Kapoor Trust) subject,
however, to the manner of sale, volume, notice information requirements and
other restrictions (other than the holding period) of Rule 144, as applicable.

In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this Offering, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted shares" for at least one
year, including a person who may be deemed an "affiliate" of the Company, is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then-outstanding shares of
Common Stock of the Company (229,520 shares after giving effect to this
Offering) or the average weekly trading volume of the Common Stock as reported
through the Nasdaq National Market during the four calendar weeks preceding such
sale. Sales under Rule 144 of the Securities Act are subject to certain
restrictions relating to manner of sale, notice and the availability of current
public information about the Company. In addition, under Rule 144(k) of the
Securities Act, a person who is not an "affiliate" of the Company at any time 90
days preceding a sale, and who has beneficially owned shares for at least two
years, would be entitled to sell such shares immediately following this Offering
without regard to the volume limitations, manner of sale provisions or notice or
other requirements of Rule 144 of the Securities Act.

The Company is party to a registration rights agreement with the Kapoor
Trust pursuant to which the Kapoor Trust was granted certain "demand" and
"piggyback" registration rights with respect to any shares of Common Stock held
by the Kapoor Trust (4,207,400 shares as of June 30, 1998). In addition, certain
shareholders of the Company received "piggyback" registration rights in
connection with the acquisition of PRL in 1996 relating to the 1,400,000 shares
of Common Stock issued in such acquisitions. See "Description of Capital
Stock--Registration Rights." Options to purchase approximately 1,088,894 shares
of Common Stock will be exercisable upon consummation of the Offering. No
prediction can be made as to the effect, if any, that sales of additional shares
or the availability of such additional shares for sale will have on the market
price of the Common Stock. Sales of substantial amounts of Common Stock in the
public market could have an adverse effect on the market price of the Common
Stock.

45
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated and Warburg Dillon Read LLC, have severally agreed to
purchase from the Company and the Selling Stockholders the following respective
number of shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
BT Alex. Brown Incorporated..........................................................................
Warburg Dillon Read LLC..............................................................................
-----------
Total................................................................................................ 5,540,000
-----------
-----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.

The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the public offering,
the offering price and other selling terms may be changed by the Representatives
of the Underwriters.

The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 831,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it in the above table bears to 5,540,000 and the Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 5,540,000 shares are being offered.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

The Company and holders of approximately 5,064,793 shares of Common Stock
have agreed not to offer, sell or otherwise dispose of any of such Common Stock
for a period ranging from 90 to 180 days after the date of this Prospectus
without the prior consent of BT Alex. Brown Incorporated on behalf of the
Representatives of the Underwriters.

The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Exchange Act of 1934, as amended, certain persons
participating in this Offering may engage in transactions, including stabilizing
bids, syndicate covering transactions or the imposition of penalty bids, which
may have the effect of stabilizing or maintaining the market price of the Common
Stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of
the Underwriters for the purpose of fixing or maintaining the price of the
Common Stock. A "syndicate covering transaction" is the bid for the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with this Offering. A "penalty bid"
is an arrangement permitting the Underwriters to reclaim

46
<PAGE>
the selling concession otherwise accruing to an Underwriter or dealer in
connection with this Offering if the Common Stock originally sold by such
Underwriter or dealer is purchased by the Underwriters in a syndicate covering
transaction and has therefore not been effectively placed by such Underwriter or
dealer. The Underwriters have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

As permitted by Rule 103 under the Securities Exchange Act of 1934, as
amended, Underwriters or prospective underwriters that are market makers
("passive market makers") in the Common Stock may make bids for or purchases of
Common Stock on the Nasdaq National Market until such time, if any, when a
stabilizing bid for such securities has been made. Rule 103 generally provides
that: (i) a passive market maker's net daily purchases of the Common Stock may
not exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months (or any 60 consecutive days ending within
the ten days) immediately preceding the filing date of the Registration
Statement of which this Prospectus forms a part; (ii) a passive market maker may
not effect transactions or display bids for the Common Stock at a price that
exceeds the highest independent bid for the Common Stock by persons who are not
passive market makers; and (iii) bids made by passive market makers must be
identified as such.

LEGAL MATTERS

Certain legal matters in connection with the Common Stock offered hereby are
being passed upon for the Company by Winston & Strawn, Chicago, Illinois and
Jones Walker Walchter Poitevent Carrere & Denegre, LLP, New Orleans, Louisiana.
Certain legal matters will be passed upon for the Underwriters by Alston & Bird
LLP, Atlanta, Georgia.

EXPERTS

The financial statements of the Company included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, is required to file reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
Commission at Room 1024, 540 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300,
New York, New York 10048. Copies of the reports, proxy statements and other
information can be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549, upon payment of prescribed rates and, in certain cases,
by accessing the Commission's World Wide Web site at http://www.sec.gov.

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act (together with all amendments, exhibits, schedules
and supplements thereto, the "Registration Statement"), of which this Prospectus
forms a part, with respect to the shares of Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement. Certain items are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus regarding the contents of any contract or any other document to which
reference is made are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all

47
<PAGE>
respects by such reference. A copy of the Registration Statement may be
inspected without charge at the public reference facilities maintained by the
Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the Registration Statement may be obtained from such offices upon the payment of
the fees prescribed by the Commission. The Registration Statement can also be
inspected by accessing the Commission's World Wide Web site at http://
www.sec.gov.

48
<PAGE>
AKORN, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2

Unaudited Condensed Consolidated Financial Statements as of June 30, 1998:

Unaudited Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31,
1997.............................................................................. F-3

Unaudited Condensed Consolidated Statements of Income for the Three Months and the
Six Months Ended June 30, 1998 and June 30, 1997.................................. F-4

Unaudited Condensed Consolidated Statements of Cash Flow for the Three Months and
the Six Months Ended June 30, 1998 and June 30, 1997.............................. F-5

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

Consolidated Financial Statements as of December 31, 1997:

Consolidated Balance Sheets as of December 31, 1997 and 1996........................ F-7

Consolidated Statements of Income for the Year Ended December 31, 1997, the Six
Months Ended December 31, 1996 and the Years Ended June 30, 1996 and 1995......... F-8

Consolidated Statements of Shareholders' Equity for the Year Ended December 31,
1997, the Six Months Ended December 31, 1996 and the Years Ended June 30, 1996 and
1995.............................................................................. F-9

Consolidated Statements of Cash Flows for the Year Ended December 31, 1997, the Six
Months ended December 31, 1996 and the Years Ended June 30, 1996 and 1995......... F-10

Notes to Consolidated Financial Statements.......................................... F-11
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of Akorn, Inc.:

We have audited the accompanying consolidated balance sheets of Akorn, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year ended
December 31, 1997, the six months ended December 31, 1996 and the years ended
June 30, 1996 and 1995. 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 generally accepted auditing
standards. 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 subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the year ended December 31, 1997, the six months ended December 31,
1996 and the years ended June 30, 1996 and 1995 in conformity with generally
accepted accounting principles.

Deloitte & Touche LLP

Chicago, Illinois
February 27, 1998

F-2
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
1997
JUNE 30, --------------
1998
------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 594 $ 2,413
Short-term investments............................................................ -- 96
Accounts receivable, net.......................................................... 8,908 5,429
Inventory......................................................................... 11,922 9,955
Deferred income taxes............................................................. 517 1,350
Prepaid expenses and other assets................................................. 387 390
------------ --------------
Total current assets............................................................ 22,328 19,633

Product licenses and other assets................................................... 13,373 6,687

Property, plant and equipment, net.................................................. 12,519 12,395
------------ --------------

Total assets........................................................................ $ 48,220 $ 38,715
------------ --------------
------------ --------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Short-term borrowings............................................................. $ 250 $ 1,750
Current installments of long-term debt and capital lease obligations.............. 3,722 149
Trade accounts payable............................................................ 3,680 3,447
Income taxes payable.............................................................. 333 462
Accrued compensation.............................................................. 881 985
Accrued expenses and other liabilities............................................ 2,032 1,819
------------ --------------
Total current liabilities....................................................... 10,898 8,612

Long-term debt and capital lease obligations........................................ 13,763 9,003

Other liabilities................................................................... 297 849

Shareholders' equity:
Common stock...................................................................... 17,104 16,241
Retained earnings................................................................. 6,158 4,010
------------ --------------
Total shareholders' equity...................................................... 23,262 20,251
------------ --------------

Total liabilities and shareholders' equity.......................................... $ 48,220 $ 38,715
------------ --------------
------------ --------------
</TABLE>

See notes to condensed consolidated financial statements.

F-3
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales.......................................................... $ 13,987 $ 10,176 $ 26,038 $ 19,044
Cost of goods sold................................................. 6,966 5,260 12,775 10,700
--------- --------- --------- ---------
Gross profit..................................................... 7,021 4,916 13,263 8,344

Selling, general and administrative expenses....................... 3,675 3,246 7,420 5,804
Research and development........................................... 1,246 368 1,974 729
Relocation charges................................................. -- -- -- 1,451
--------- --------- --------- ---------
4,921 3,614 9,394 7,984
--------- --------- --------- ---------
Operating income................................................. 2,100 1,302 3,869 360

Interest expense................................................... (301) (138) (492) (254)
Interest and other income, net..................................... -- 14 2 155
--------- --------- --------- ---------
(301) (124) (490) (99)
--------- --------- --------- ---------
Income before income taxes......................................... 1,799 1,178 3,379 261

Income taxes....................................................... 698 436 1,230 97
--------- --------- --------- ---------

Net income......................................................... $ 1,101 $ 742 $ 2,149 $ 164
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share:
Basic............................................................ $ 0.06 $ 0.04 $ 0.12 $ 0.01
Diluted.......................................................... 0.06 0.04 0.11 0.01
Weighted average shares outstanding:
Basic............................................................ 17,850 16,598 17,769 16,596
Diluted.......................................................... 19,094 16,800 18,837 16,802
</TABLE>

See notes to condensed consolidated financial statements.

F-4
<PAGE>
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................................. $ 2,149 $ 164
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation and amortization........................................................... 1,846 809
Building and equipment write down....................................................... -- 400
Changes in operating assets and liabilities............................................. (4,669) 1,724
--------- ---------
Net cash (used) provided by operating activities............................................ (674) 3,097

INVESTING ACTIVITIES
Purchases of property, plant and equipment................................................ (950) (981)
Product license acquisitions.............................................................. (7,580) (4,305)
Net maturities of investments............................................................. 96 --
--------- ---------
Net cash used in investing activities....................................................... (8,434) (5,286)

FINANCING ACTIVITIES
Repayment of long-term debt............................................................... -- (21)
Issuance of long-term debt................................................................ 8,405 1,500
Proceeds from sale of stock............................................................... 583 13
Reductions in capital lease obligations................................................... (73) (78)
Short-term borrowings, net................................................................ (1,500) 132
Debt acquisition costs.................................................................... (126) --
--------- ---------
Net cash provided by financing activities................................................... 7,289 1,546
--------- ---------

Increase (decrease) in cash and cash equivalents............................................ (1,819) (643)

Cash and cash equivalents at beginning of period............................................ 2,413 1,380
--------- ---------

Cash and cash equivalents at end of period.................................................. $ 594 $ 737
--------- ---------
--------- ---------
</TABLE>

See notes to condensed consolidated financial statements.

F-5
<PAGE>
AKORN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
include the accounts of Akorn, Inc. and its wholly owned subsidiaries (the
Company). Intercompany transactions and balances have been eliminated in
consolidation. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
accordingly do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three- and six-month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for a full year.
For further information, refer to the consolidated financial statements and
footnotes for the year ended December 31, 1997, included in the Company's Annual
Report on Form 10-K.

NOTE B--NONCASH TRANSACTIONS

On June 5, 1998, a former employee exercised options for 105,000 shares of
the Company's common stock. The individual tendered approximately 22,000 shares
of the Company's outstanding stock as consideration for the option exercise and
approximately 33,000 shares to satisfy the personal income tax withholding
requirements of the transaction, all of which was recorded as treasury stock.
The net effect of this transaction was to increase accrued liabilities by
$280,000, increase common stock and paid in capital by $185,000, and increase
treasury stock by $465,000.

NOTE C--SUBSEQUENT EVENTS

On July 14, 1998, the Company announced the acquisition of three ophthalmic
diagnostic products from Allergan, Inc. The Company paid Allergan $4.65 million,
with $2.0 million paid upon closing, $1.5 million payable one year from the
closing and $1.15 million payable two years from the closing.

On July 16, 1998, the Company announced the acquisition of the Advanced
Remedies, Inc. ophthalmic manufacturing and development operation from Sidmak
Laboratories, Inc. The Company paid Sidmak approximately $4.0 million cash,
financed through the Company's line of credit.

NOTE D--RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which requires all items of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Other comprehensive income may include foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. The accumulated
balance of other comprehensive income must be displayed separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. The Company has adopted this accounting standard January 1,
1998, as required. Currently, the Company does not have any items that qualify
as "other comprehensive income." Accordingly, no separate statement has been
presented herein.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company will adopt this
accounting standard as of December 31, 1998, as required. The Company expects to
continue reporting on ophthalmic and injectable segments.

F-6
<PAGE>
AKORN, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 2,413 $ 1,380
Certificates of deposit.................................................................. 96 576
Trade accounts receivable (less allowances for uncollectibles of $522 and $359 at
December 31, 1997 and 1996, respectively).............................................. 5,429 1,544
Inventory................................................................................ 9,955 8,838
Deferred income taxes.................................................................... 1,350 1,101
Prepaid expenses and other assets........................................................ 390 401
--------- ---------
Total current assets................................................................... 19,633 13,840
Other assets:
Intangibles, net......................................................................... 6,588 1,162
Other.................................................................................... 99 178
--------- ---------
Total other assets..................................................................... 6,687 1,340
Property, plant and equipment, net......................................................... 12,395 12,833
--------- ---------
Total assets........................................................................... $ 38,715 $ 28,013
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.................................................................... $ 1,750 $ 250
Current installments of long-term debt................................................... -- 19
Current portion of capital lease obligations............................................. 149 151
Pre-funded development costs............................................................. -- 685
Trade accounts payable................................................................... 3,447 1,892
Income taxes payable..................................................................... 462 1
Accrued compensation..................................................................... 985 885
Accrued reorganization costs............................................................. 83 108
Deferred royalties....................................................................... -- 167
Accrued expenses and other liabilities................................................... 1,736 1,478
--------- ---------
Total current liabilities.............................................................. 8,612 5,636
Long-term debt............................................................................. 8,800 4,858
Capital lease obligations.................................................................. 203 353
Deferred income taxes...................................................................... 849 792
Commitments and contingencies (see Note P)................................................. -- --
Shareholders' equity:
Preferred stock, $1.00 par value--authorized 5,000,000 shares; none issued............... -- --
Common stock, no par value--authorized 40,000,000 shares; issued 17,630,076 shares in
1997 and 16,600,927 shares in 1996; outstanding 17,630,076 and 16,591,918 shares at
December 31, 1997 and 1996, respectively............................................... 16,241 14,174
Treasury stock, at cost--9,009 shares at December 31, 1996............................... -- (31)
Retained earnings........................................................................ 4,010 2,231
--------- ---------
Total shareholders' equity............................................................. 20,251 16,374
--------- ---------
Total liabilities and shareholders' equity................................................. $ 38,715 $ 28,013
--------- ---------
--------- ---------
</TABLE>

See notes to consolidated financial statements.

F-7
<PAGE>
AKORN, INC.

CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED JUNE 30,
DECEMBER 31, ENDED DECEMBER --------------------
1997 31, 1996 1996 1995
-------------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Net sales................................................. $ 42,323 $ 16,519 $ 33,925 $ 37,505
Cost of goods sold........................................ 23,547 10,761 21,972 22,328
-------------- -------------- --------- ---------
Gross profit............................................ 18,776 5,758 11,953 15,177

Selling, general and administrative expenses.............. 12,287 4,819 8,974 10,376
Research and development.................................. 1,873 809 1,213 891
Relocation costs.......................................... 1,451 -- -- --
Acquisition and severance costs........................... -- -- 677 --
-------------- -------------- --------- ---------
15,611 5,628 10,864 11,267
-------------- -------------- --------- ---------
Operating income........................................ 3,165 130 1,089 3,910

Interest and other income (expense):
Interest income......................................... 41 33 113 106
Interest expense........................................ (497) (243) (441) (25)
Gain (loss) on marketable equity securities............. -- -- 80 (308)
Other income, net....................................... 135 150 136 55
-------------- -------------- --------- ---------
(321) (60) (112) (172)
-------------- -------------- --------- ---------
Income before income taxes................................ 2,844 70 977 3,738

Income taxes.............................................. 1,052 26 189 1,232
-------------- -------------- --------- ---------
Net income................................................ $ 1,792 $ 44 $ 788 $ 2,506
-------------- -------------- --------- ---------
-------------- -------------- --------- ---------
Net income per share:
Basic................................................... $ 0.11 $ 0.00 $ 0.05 $ 0.15
Diluted................................................. 0.11 0.00 0.05 0.15
Weighted average shares outstanding:
Basic................................................... 16,614 16,580 16,383 16,236
Diluted................................................. 16,925 16,763 16,788 16,799
</TABLE>

See notes to consolidated financial statements.

F-8
<PAGE>
AKORN, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
-------------------------- RETAINED GAIN (LOSS)
SHARES EARNINGS TREASURY ON MARKETABLE
OUTSTANDING AMOUNT (DEFICIT) STOCK EQUITY SECURITIES TOTAL
------------- ----------- ----------- ----------- ------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1994................ 16,198 $ 13,959 $ (719) $ (503) $ (32) $ 12,705

Net income.............................. 2,506 2,506
Exercise of stock options............... 35 8 70 78
Unrealized loss on marketable equity
securities............................ (276) (276)
Reversal of unrealized loss on
marketable equity securities, net of
tax................................... 308 308
Unrealized gain on marketable equity
securities, net of tax................ 87 87
Treasury stock reissued................. 72 35 142 177
------------- ----------- ----------- ----------- ------ ---------

Balances at June 30, 1995............... 16,305 13,959 1,830 (291) 87 15,585

Net income.............................. 788 788
Exercise of stock options............... 249 215 186 198 599
Treasury stock received in lieu of
cash.................................. (36) (123) (123)
Dividends paid to Subchapter S
shareholders.......................... (583) (583)
Reversal of unrealized gain on
marketable equity securities, net of
tax................................... (87) (87)
Treasury stock reissued................. 56 (2) 124 122
------------- ----------- ----------- ----------- ------ ---------

Balances at June 30, 1996............... 16,574 14,174 2,219 (92) -- 16,301

Net income.............................. 44 44
Treasury stock reissued................. 18 (32) 61 29
------------- ----------- ----------- ----------- ------ ---------

Balances at December 31, 1996........... 16,592 14,174 2,231 (31) -- 16,374

Net income.............................. 1,792 1,792
Exercise of stock options............... 22 46 46
Exercise of warrant..................... 1,000 2,000 2,000
Treasury stock reissued................. 9 (13) 31 18
Employee stock purchase plan............ 7 21 21
------------- ----------- ----------- ----------- ------ ---------

Balances at December 31, 1997........... 17,630 $ 16,241 $ 4,010 $ -- $ -- $ 20,251
------------- ----------- ----------- ----------- ------ ---------
------------- ----------- ----------- ----------- ------ ---------
</TABLE>

See notes to consolidated financial statements.

F-9
<PAGE>
AKORN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS YEAR ENDED JUNE 30,
DECEMBER 31, ENDED DECEMBER --------------------
1997 31, 1996 1996 1995
-------------- -------------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $ 1,792 $ 44 $ 788 $ 2,506
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 1,515 720 984 980
(Gain) loss on marketable equity securities.......... -- -- (80) 308
Provision for losses on accounts receivable and
inventory.......................................... 1,188 303 825 160
Deferred income taxes................................ 34 651 (578) 2
Write down of building and equipment................. 400 -- -- --
Other................................................ 43 26 -- (1)
Changes in operating assets and liabilities:
Accounts receivable................................ (4,170) 267 424 (350)
Inventory, prepaid expenses and other assets....... (2,235) (132) (3,129) (1,420)
Trade accounts payable and accrued expenses........ 1,721 1,438 1,229 (1,514)
Income taxes payable............................... 461 (625) (155) 70
Pre-funded development costs....................... (685) (139) (298) (29)
------- ------- --------- ---------
Net cash provided by operating activities.................. 64 2,553 10 712
INVESTING ACTIVITIES
Purchases of property, plant and equipment................. (1,154) (1,986) (1,360) (4,818)
Product licensing costs.................................... (68) (28) (172) (421)
Purchases of investments................................... -- (576) (1,173) (2,023)
Sales of investments....................................... 480 902 1,832 2,319
Purchase of product intangibles............................ (5,645) (340) -- --
------- ------- --------- ---------
Net cash used in investing activities...................... (6,387) (2,028) (873) (4,943)
FINANCING ACTIVITIES
Proceeds from sale of stock................................ 2,085 29 599 256
Repayments of long-term debt............................... (33) (447) (442) (944)
Proceeds from issuance of long-term debt................... 3,955 1,500 400 3,900
Pre-funded development costs............................... -- -- 150 --
Principal payments under capital lease obligations......... (151) (74) (151) (58)
Short-term borrowings, net................................. 1,500 (1,044) 1,006 128
Dividends paid............................................. -- -- (583) --
Debt acquisition costs..................................... -- -- -- (170)
------- ------- --------- ---------
Net cash provided by (used in) financing activities........ 7,356 (36) 979 3,112
------- ------- --------- ---------
Increase (decrease) in cash and cash equivalents........... 1,033 489 116 (1,119)
Cash and cash equivalents at beginning of year............. 1,380 891 775 1,894
------- ------- --------- ---------
Cash and cash equivalents at end of year................... $ 2,413 $ 1,380 $ 891 $ 775
------- ------- --------- ---------
------- ------- --------- ---------
</TABLE>

See notes to consolidated financial statements.

F-10
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION: The accompanying consolidated financial statements include
the accounts of Akorn, Inc. (the Company) and its wholly owned subsidiaries,
Compass Vision, Inc. (Compass), Spectrum Scientific Pharmaceuticals, Inc.
(Spectrum), Walnut Pharmaceuticals, Inc. (Walnut) and Taylor Pharmaceuticals,
Inc. (Taylor). Balances and activities of Compass, Spectrum and Walnut are
immaterial. Intercompany transactions and balances have been eliminated in
consolidation.

The Company acquired Pasadena Research Laboratories, Inc. (PRL) effective
May 31, 1996 in a business combination accounted for as a pooling of interests.
The acquired operations of PRL were merged into Taylor's operations subsequent
to the acquisition (see Note B). All financial information presented for periods
prior to the acquisition has been restated to include the operations of PRL.

CHANGE IN FISCAL YEAR END: Effective July 1, 1996, the Company changed its
fiscal year end from June 30 to December 31. The following table sets forth the
results of operations for the transition period ended December 31, 1996 and the
unaudited results of operations for the six months ended December 31, 1995, the
prior period comparable to the transition period:

<TABLE>
<CAPTION>
SIX MONTHS
SIX MONTHS ENDED
ENDED DECEMBER 31,
DECEMBER 31, 1995
1996 (UNAUDITED)
-------------- --------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net sales................................................. $ 16,519 $ 16,949
Gross profit.............................................. 5,758 6,477
Income before income taxes................................ 70 1,289
Provision for income taxes................................ 26 493
Net income................................................ 44 796
Net income per share--basic............................... $ 0.00 $ 0.05
Net income per share--diluted............................. $ 0.00 $ 0.05
</TABLE>

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

REVENUE RECOGNITION: The Company recognizes sales upon the shipment of
goods.

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

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

STOCK COMPENSATION PLANS: The Company has an Incentive Compensation Plan
under which any officer or key employee is eligible to receive options as
designated by the Company's Board of Directors.

F-11
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company also has a Stock Option Plan for Directors under which directors are
granted nonqualified options.

INTANGIBLES: Intangibles consist primarily of product licensing and other
such costs which 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. Accumulated amortization at December 31, 1997 and 1996 was $661,432 and
$323,829, respectively.

The Company annually assesses the impairment of intangibles based on several
factors, including probable fair market value and anticipated cash flows.

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

ACCRUAL FOR CHARGEBACKS: The Company accrues an estimate of the difference
between the gross sales price of certain products sold to wholesalers and
expected resale prices of such products under contractual arrangements with
third parties such as hospitals and group purchasing organizations at the time
of sale. As part of the Company's sales terms to wholesale customers, it agrees
to reimburse wholesalers for such differentials between wholesale prices and
contract prices. Because this accrual relates to amounts not yet collected from
the wholesalers, this accrual is carried as a reduction of accounts receivable.

INTEREST CAPITALIZATION: The Company capitalizes interest during periods of
construction of qualifying assets. For the six months ended December 31, 1996
and the year ended June 30, 1995, the Company capitalized interest costs of
$39,880 and $282,007, respectively. No interest was capitalized during the years
ended December 31, 1997 and June 30, 1996.

INCOME TAXES: The Company files a consolidated federal income tax return
with all of its subsidiaries. Deferred income taxes are provided in the
financial statements to account for the tax effects of temporary differences
resulting from reporting revenues and expenses for income tax purposes in
periods different from those used for financial reporting purposes.

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

NET INCOME PER COMMON SHARE: In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share," which
requires presentation of basic and diluted earnings per share. Basic net income
per common share is based upon weighted average common shares outstanding.
Diluted net income per common share is based upon the weighted average number of
common shares outstanding, including the dilutive effect of stock options and
warrants using the treasury stock method. All prior period amounts have been
restated to conform to current reporting requirements.

F-12
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B--ACQUISITION OF PASADENA RESEARCH LABORATORIES, INC.

On May 31, 1996, the Company acquired Pasadena Research Laboratories, Inc.
(PRL) in a business combination accounted for as a pooling of interests. The
Company issued 1.4 million shares of its common stock in exchange for all of the
outstanding shares of PRL. PRL was merged into the operations of Taylor and the
Company was realigned into an ophthalmic division and an injectable division.

The Company's financial statements for each of the two years in the period
ended June 30, 1996, as contained herein, have been restated to include the
results of PRL for all periods presented. Combined and separate results of
operations of the Company and PRL during the periods preceding the merger are
presented below.

<TABLE>
<CAPTION>
AKORN PRL COMBINED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Eleven months ended May 31, 1996 (unaudited):
Net sales................................................ $ 27,361 $ 3,684 $ 31,045
Net income............................................... 675 409 1,084
Fiscal year ended June 30, 1995:
Net sales................................................ 32,863 4,642 37,505
Net income............................................... 2,280 226 2,506
</TABLE>

These combined financial results include no significant adjustments to
conform the accounting policies of the two companies.

In connection with the merger, the Company recorded certain charges in the
fourth quarter of the fiscal year ended June 30, 1996 for transaction costs
($109,534) and transitional costs ($567,772) associated with the realignment of
the company into two separate reporting divisions. The transaction costs include
legal, accounting and other directly related acquisition costs. Transitional
costs consist primarily of provisions for severance related costs.

NOTE C--REORGANIZATION OF MANUFACTURING OPERATIONS

On January 15, 1992, the Company acquired Taylor Pharmacal Company in a
business combination accounted for as a pooling of interests. Taylor was a
contract manufacturer of sterile pharmaceuticals, which it produced and
delivered pursuant to contracts with third parties.

As part of the acquisition of Taylor in 1992, the Company paid a finder's
fee to an affiliate of Dr. John N. Kapoor, Chairman of the Board and Chief
Executive Officer (the affiliate). This finder's fee was in the form of 250,000
shares of Company Common Stock valued at $3.50 per share. Of the total shares
issued, 125,000 were subject to forfeiture if the market price of the Company's
Common Stock did not reach at least $5.00 per share by January 15, 1996. In
August 1995, the Company, the affiliate and Dr. Kapoor entered into an agreement
under which (i) the forfeiture period was extended to January 15, 1998, (ii)
forfeiture would not occur in the event that persons unaffiliated with Dr.
Kapoor acquire beneficial ownership of more than 50% of the outstanding common
stock of the Company and (iii) Dr. Kapoor waived his right to receive $40,000
otherwise payable to him by the Company for serving as Chairman of the Board in
fiscal 1996. In May 1997 the Company extended the forfeiture period to January
15, 2000 in consideration for which Dr. Kapoor waived his right to receive
$40,000 otherwise payable to him for serving as Chairman of the Board in 1997.

F-13
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D--PRODUCT ACQUISITIONS

Effective December 15, 1997, the Company entered into an agreement with
Advanced Remedies, Inc. (ARI), a subsidiary of Sidmak Laboratories, Inc., to
acquire the ANDAs of two ophthalmic ointments, "Erythromycin Ophthalmic Ointment
USP, 0.5%" and "Bacitracin Zinc & Polymyxin B Sulfate Ophthalmic Ointment USP".
These products were previously purchased by the Company from third party
manufacturers. The total acquisition cost was $1.75 million, payable in seven
equal monthly installments, and is included in the accompanying Balance Sheet as
short term borrowings at December 31, 1997. The acquisition cost has been
allocated to intangibles and will be amortized over 15 years.

Effective April 1, 1997, the Company entered into an agreement with
Becton-Dickinson and Company to acquire the NDAs, ANDAs and the trademarks and
trade names of three products. As part of this agreement, the Company also
acquired certain product inventory. The total acquisition cost was $4.0 million,
of which $2.5 million was paid in cash financed through the Company's revolving
line of credit and $1.5 million was paid with a non-interest bearing note
maturing in April 1999, secured by an irrevocable bank line of credit. The
Company has imputed interest on the note at an annual rate of 7.5%. The portion
of the acquisition costs allocated to intangibles amounted to $3,725,000 and
will be amortized over 18 years.

Effective July 1, 1996, the Company entered into an agreement with Janssen
Pharmaceutica, Inc. (Janssen) to acquire the NDAs and the U.S. trademarks and
trade names of two injectable products, as well as certain high-speed inspection
equipment. In exchange, the Company paid Janssen $1.6 million, financed
primarily through a $1.5 million commercial credit facility. The portion of the
acquisition costs allocated to intangibles amounted to $340,000 and will be
amortized over 15 years.

NOTE E--ALLOWANCE FOR UNCOLLECTIBLES

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

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED JUNE 30,
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, --------------------
1997 1996 1996 1995
--------------- --------------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of year.............. $ 359 $ 339 $ 291 $ 272
Provision for bad debts................... 285 24 124 60
Accounts written off...................... (122) (4) (76) (41)
----- ----- --------- ---------
Balance at end of year.................... $ 522 $ 359 $ 339 $ 291
----- ----- --------- ---------
----- ----- --------- ---------
</TABLE>

F-14
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE F--INVENTORY

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Finished goods........................................................... $ 6,774 $ 5,181
Work in process.......................................................... 1,093 1,375
Raw materials and supplies............................................... 2,088 2,282
--------- ---------
$ 9,955 $ 8,838
--------- ---------
--------- ---------
</TABLE>

Inventory at December 31, 1997 and 1996 is reported net of reserves for
slow-moving, unsalable and obsolete items of $709,957 and $589,007,
respectively.

NOTE G--PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Land................................................................... $ 479 $ 479
Buildings and leasehold improvements................................... 8,031 8,217
Furniture and equipment................................................ 12,723 11,238
Automobiles............................................................ 133 135
--------- ---------
21,366 20,069
Accumulated depreciation............................................... (9,606) (8,415)
--------- ---------
11,760 11,654
Construction in progress............................................... 635 1,179
--------- ---------
$ 12,395 $ 12,833
--------- ---------
--------- ---------
</TABLE>

NOTE H--PRE-FUNDED DEVELOPMENT COSTS

As part of a cross-licensing agreement with Pfizer, Inc. (Pfizer), the
Company was paid an advance of $1 million to be used to fund the costs of
developing a non-steroidal anti-inflammatory drug for ophthalmic indications.
During the twelve months ended December 31, 1997, the six months ended December
31, 1996 and during fiscal 1996 and 1995, the Company incurred development costs
of $534,696, $138,829, $297,463 and $29,012, respectively, which were charged
against the pre-funded balance.

As part of the same agreement, Pfizer paid the Company an advance royalty of
$1 million. The Company recognized this deferred revenue over a one year period
beginning in March 1996.

F-15
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I--FINANCING ARRANGEMENTS

The Company's short-term borrowings are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Payable under bank and other notes....................................... $ 1,750 $ 250
--------- ---------
$ 1,750 $ 250
--------- ---------
--------- ---------
</TABLE>

Long-term debt consists of (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Payable under lines of credit............................................ $ 7,300 $ --
Notes payable secured by various assets, with maturities through 2000 at
interest rates ranging from 8% to 10.25%................................ 1,500 4,855
Other obligations........................................................ -- 22
--------- ---------
8,800 4,877
Less current portion..................................................... -- (19)
--------- ---------
Long-term debt........................................................... $ 8,800 $ 4,858
--------- ---------
--------- ---------
</TABLE>

Maturities of long-term debt are as follows (in thousands):

<TABLE>
<S> <C>
Years ending December 31:
1998............................................................... $ --
1999............................................................... 8,800
---------
Total.............................................................. $8,800
---------
---------
</TABLE>

In April 1997, the Company entered into an agreement to purchase certain
products from Becton-Dickinson and Company (See Note D). As consideration for
this purchase, the Company issued a $1,500,000 non-interest bearing note secured
by an irrevocable bank letter of credit. The Company recognizes interest expense
on the note at an imputed rate of 7.5 percent.

In December 1997, the Company entered into a $15,000,000 revolving credit
agreement with The Northern Trust Company, of which there were outstanding
borrowings of $7,300,000 and the above discussed $1,500,000 letter of credit at
December 31, 1997. The total outstanding principal balance is payable in full on
December 29, 1999. Outstanding borrowings under this facility currently bear
interest at the federal funds rate plus 1.25 percent, which interest rate was
7.09 percent at December 31, 1997. The Company is in compliance with its
financial covenants under the revolving credit facility.

F-16
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The agreement provides that an annual commitment fee be paid by the Company
based on 0.25 percent of the average daily unused amount of the facility. The
agreement also requires the Company to maintain certain financial covenants
including, but not limited to: minimum net income, minimum net worth, minimum
cash flow coverage and maximum funded debt to EBITDA. The agreement prohibits
the Company from declaring any cash dividends on its common stock. The revolving
credit facility is secured by substantially all of the assets of the Company and
its subsidiaries, excluding real property located in Decatur, Illinois.

NOTE J--LEASING ARRANGEMENTS

The Company leases certain equipment under capital leasing arrangements
which expire through the year 2000.

Property, plant and equipment includes the following amounts relating to
such capital leases (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Furniture and equipment..................................................... $ 806 $ 806
Less accumulated depreciation............................................... (383) (226)
--------- ---------
$ 423 $ 580
--------- ---------
--------- ---------
</TABLE>

Depreciation expense provided on these assets was $157,034, $78,517, $94,254
and $25,822 for the year ended December 31, 1997, the six months ended December
31, 1996 and the years ended June 30, 1996 and 1995, respectively. The following
is a schedule, by year, of future minimum lease payments under these capital
leases together with the present value of the net minimum lease payments (in
thousands).

<TABLE>
<S> <C>
Years ending December 31:
1998................................................................. $ 173
1999................................................................. 173
2000................................................................. 43
---------
Total Minimum Lease Payments......................................... 389
Less: Amount Representing Interest................................... (37)
---------
Present Value of Net Minimum Lease Payments.......................... $ 352
---------
---------
</TABLE>

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 $289,276, $38,051,
$73,196 and $169,825 for the year ended December 31, 1997, the six months ended
December 31, 1996 and the years ended June 30, 1996 and 1995, respectively. The

F-17
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J--LEASING ARRANGEMENTS (CONTINUED)
following is a schedule, by year, of future minimum rental payments required
under these non-cancelable operating leases (in thousands):

<TABLE>
<S> <C>
Years ending December 31:
1998............................................................... $ 326
1999............................................................... 317
2000............................................................... 315
2001............................................................... 311
2002............................................................... 317
2003............................................................... 71
---------
Total Minimum Payments Required.................................... $ 1,657
---------
---------
</TABLE>

NOTE K--STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN

Under the 1988 Incentive Compensation Program (the Incentive Program) any
officer or key employee of the Company is eligible to receive nonqualified
options as designated by the Company's Board of Directors. As of December 31,
1997, 3,000,000 shares of the Company's Common Stock are reserved to be issued
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
year ended December 31, 1997, the six months ended December 31, 1996 and the
years ended June 30, 1996 and 1995 have exercise prices equivalent to the market
value of the Company's Common Stock on the date of grant. Options granted under
the Incentive Program generally vest over a period of three years and expire
within a period of five years.

Under the 1991 Stock Option Plan for Directors (the Directors' Plan) persons
elected as directors of the Company are granted nonqualified options at the fair
market value of the shares subject to option on the date of the grant. As of
December 31, 1997, 500,000 shares of the Company's Common Stock are reserved to
be issued under the Directors' Plan. Options granted under the Directors' Plan
are exercisable six months after the date of grant and expire five years from
the date of grant.

A summary of the status of the Company's stock options as of December 31,
1997 and 1996 and June 30, 1996 and 1995 and changes during the year ended
December 31, 1997, the six months ended

F-18
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K--STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
December 31, 1996 and the years ended June 30, 1996 and 1995 is presented below
(shares in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995
------------------------ ------------------------ ------------------------ -----------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period....................... 1,281 $ 2.35 1,243 $ 2.57 1,624 $ 2.56 1,459
Granted....................... 927 $ 2.38 401 $ 2.19 215 $ 2.75 238
Exercised..................... (22) $ 2.13 -- -- (250) $ 2.40 (73)
Expired/Canceled.............. (287) $ 2.46 (363) $ 3.00 (346) $ 3.00 --
----- ----- ----- -----
Outstanding at end of
period....................... 1,899 $ 2.35 1,281 $ 2.35 1,243 $ 2.57 1,624
----- ----- ----- -----
----- ----- ----- -----

Options exercisable at end of
period....................... 1,086 $ 2.35 870 $ 2.33 1,134 $ 2.56 1,348

Options available for future
grant........................ 1,246 886 924 793

Weighted average fair value of
options granted during the
period....................... $ 1.04 $ 0.83 $ 1.04

<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE
-----------
<S> <C>
Outstanding at beginning of
period....................... $ 2.51
Granted....................... $ 2.93
Exercised..................... $ 2.34
Expired/Canceled.............. $ --
Outstanding at end of
period....................... $ 2.56
Options exercisable at end of
period....................... $ 2.67
Options available for future
grant........................
Weighted average fair value of
options granted during the
period.......................
</TABLE>

The fair value of each option granted during the year ended December 31,
1997 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 39%, (iii) risk-free interest rate of 5.75% and (iv) expected life
of 5 years.

The fair value of each option granted during the six months ended December
31, 1996 and the year ended June 30, 1996 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 28%, (iii) risk-free interest
rate of 6.5% and (iv) expected life of 5 years.

F-19
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K--STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997 (shares in thousands):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT DECEMBER 31, CONTRACTUAL EXERCISE AT DECEMBER 31, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
- --------------- ----------------- ----------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
$1.50 88 2.4 years $ 1.50 88 $ 1.50
$1.75 - $2.12 306 0.6 years $ 1.90 306 $ 1.90
$2.13 - $2.20 692 4.2 years $ 2.14 248 $ 2.14
$2.28 - $2.54 410 4.3 years $ 2.37 132 $ 2.36
$2.63 - $2.81 185 3.1 years $ 2.75 131 $ 2.76
$2.88 - $3.94 218 2.3 years $ 3.59 181 $ 3.52
----- -----
1,899 1,086
----- -----
----- -----
</TABLE>

The Company applies Accounting Principles Board (APB) Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option plans.

Had compensation cost for the Company's stock-based compensation plans been
determined based on SFAS No. 123, the Company's net income and earnings per
share for the year ended December 31, 1997, the six months ended December 31,
1996 and the year ended June 30, 1996 would have been the pro forma amounts
indicated below (in thousands, except per share amounts).

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 JUNE 30, 1996
------------------------ ------------------------ ------------------------
AS AS AS
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income, (loss)......................... $ 1,792 $ 1,441 $ 44 $ (40) $ 788 $ 769
----------- ----------- ----- ----------- ----- -----
----------- ----------- ----- ----------- ----- -----
Net income per share--basic................ $ 0.11 $ 0.09 $ 0.00 $ 0.00 $ 0.05 $ 0.05
----------- ----------- ----- ----------- ----- -----
----------- ----------- ----- ----------- ----- -----

Net income per share--diluted.............. $ 0.11 $ 0.09 $ 0.00 $ 0.00 $ 0.05 $ 0.05
----------- ----------- ----- ----------- ----- -----
----------- ----------- ----- ----------- ----- -----
</TABLE>

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 gross compensation, at a 15% discount from market price. A
maximum of 1,000,000 shares of the Company's common stock may be acquired under
the terms of the Plan. Purchases of shares were issued from treasury stock
through the first half of 1997 and approximated 9,000, 18,000, 56,000 and 72,000
shares, respectively, during the year ended December 31, 1997, the six months
ended December 31, 1996 and the years ended June 30, 1996 and 1995. New shares
issued under the plan approximated 11,000 in 1997.

F-20
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE L--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, 1997:
Federal..................................................... $ 1,005 $ (79) $ 926
State....................................................... 13 113 126
--------- ----------- ---------
$ 1,018 $ 34 $ 1,052
--------- ----------- ---------
--------- ----------- ---------

Six months ended December 31, 1996:
Federal..................................................... $ (557) $ 581 $ 24
State....................................................... (68) 70 2
--------- ----------- ---------
$ (625) $ 651 $ 26
--------- ----------- ---------
--------- ----------- ---------
Year ended June 30, 1996:
Federal..................................................... $ 756 $ (516) $ 240
State....................................................... 11 (62) (51)
--------- ----------- ---------
$ 767 $ (578) $ 189
--------- ----------- ---------
--------- ----------- ---------
Year ended June 30, 1995:
Federal..................................................... $ 1,177 $ 2 $ 1,179
State....................................................... 53 -- 53
--------- ----------- ---------
$ 1,230 $ 2 $ 1,232
--------- ----------- ---------
--------- ----------- ---------
</TABLE>

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

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, --------------------
1997 1996 1996 1995
-------------- --------------------- --------- ---------
<S> <C> <C> <C> <C>
Computed "expected" tax expense........................... $ 947 $ 24 $ 332 $ 1,271
Increase in income taxes resulting from:
State income taxes, net of federal income tax
benefits.............................................. 85 2 4 32
Pre-merger earnings of PRL.............................. -- -- (139) (84)
Other, net.............................................. 20 -- (8) 13
------- --- --------- ---------
Income tax expense........................................ $ 1,052 $ 26 $ 189 $ 1,232
------- --- --------- ---------
------- --- --------- ---------
</TABLE>

F-21
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE L--INCOME TAXES (CONTINUED)

Deferred tax assets (liabilities) at December 31, 1997 and 1996 include (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
--------------- ---------------
<S> <C> <C>
Accrued reorganization costs.................................. $ -- $ 40
Other accrued expenses........................................ 517 711
Pre-funded development costs.................................. -- 253
Intangible assets, net........................................ (288) (99)
Property, plant and equipment, net............................ (374) (537)
Other, net.................................................... 646 (59)
----- -----
$ 501 $ 309
----- -----
----- -----
</TABLE>

The net deferred tax asset is classified in the accompanying balance sheets
as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
Deferred tax asset--current................................... $ 1,350 $ 1,101
Deferred tax liability--noncurrent............................ (849) (792)
------- -------
$ 501 $ 309
------- -------
------- -------
</TABLE>

NOTE M--CHANGES IN ACCOUNTING ESTIMATES

The Company accrues an estimate of the difference between the gross sales
price of certain products sold to wholesalers and expected resale prices of such
products under contractual arrangements with third parties such as hospitals and
group purchasing organizations at the time of sale. This reserve is carried as a
reduction of accounts receivable. The Company evaluates the reserve balance
against actual chargebacks processed by wholesalers. Actual chargebacks
processed can vary substantially from period to period. The acquisition of two
injectable anesthesia products from Janssen Pharmaceutica in the third quarter
of 1996 resulted in a substantial increase in chargeback activity. Initial
receipt of actual chargeback requests from wholesalers was sporadic during 1996.
By year-end 1997, management felt that chargeback activity for these products
had stabilized and that sufficient data had been obtained to validate
adjustments to chargeback accrual assumptions. During the fourth quarter of the
year ended December 31, 1997, the Company revised its assumptions underlying the
reserve for chargebacks, resulting in an increase in net sales of $1,300,000.
During the fourth quarter of the year ended June 30, 1996, the Company revised
its assumptions underlying the reserve for chargebacks, resulting in a reduction
of net sales of $250,000.

The Company records a reserve for slow-moving and obsolete inventory based
upon evaluation of product dating and unit sales forecasts. During the fourth
quarter of the year ended December 31, 1997, the Company increased its estimate
for unsalable inventory by approximately $900,000. During the quarters ended
March 31, June 30 and December 31, 1996, the Company increased its estimate for
unsalable inventory by approximately $300,000, $200,000 and $260,000,
respectively. These changes in estimate are reported as an increase in cost of
goods sold.

F-22
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M--CHANGES IN ACCOUNTING ESTIMATES (CONTINUED)
During the quarter ended December 31, 1997, the Company increased its
estimate for management bonuses by approximately $300,000.

NOTE N--RETIREMENT PLAN

All employees who have attained the age of 21 with six months of service are
eligible for participation in the Company's 401(k) Plan. The plan-related
expense recognized for the year ended December 31, 1997, the six months ended
December 31, 1996 and the years ended June 30, 1996 and 1995 totaled $65,704,
$34,805, $100,615 and $86,296, respectively. The employer's matching
contribution is a discretionary percentage of the amount contributed by each
employee and is funded on a current basis.

NOTE O--INDUSTRY SEGMENT INFORMATION

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

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------
1997 1996 1996 1995
-------------- -------------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES
Ophthalmic................................. $ 24,901 $ 10,271 $ 20,833 $ 23,791
Injectable................................. 17,422 6,248 13,092 13,714
-------------- -------------- --------- ---------
Total net sales.......................... $ 42,323 $ 16,519 $ 33,925 $ 37,505
-------------- -------------- --------- ---------
-------------- -------------- --------- ---------

OPERATING INCOME
Ophthalmic................................. $ 1,598 $ 691 $ 1,037 $ 3,515
Injectable................................. 2,428 (192) 994 1,466
General Corporate.......................... (861) (369) (942) (1,071)
-------------- -------------- --------- ---------
Total operating income................... 3,165 130 1,089 3,910
Interest and other (expense), net.......... (321) (60) (112) (172)
-------------- -------------- --------- ---------
Income before income taxes................. $ 2,844 $ 70 $ 977 $ 3,738
-------------- -------------- --------- ---------
-------------- -------------- --------- ---------

IDENTIFIABLE ASSETS
Ophthalmic................................. $ 20,957 $ 12,293 $ 13,179 $ 13,171
Injectable................................. 17,758 15,720 16,388 14,320
-------------- -------------- --------- ---------
Total identifiable assets................ $ 38,715 $ 28,013 $ 29,567 $ 27,491
-------------- -------------- --------- ---------
-------------- -------------- --------- ---------
DEPRECIATION AND AMORTIZATION
Ophthalmic................................. $ 516 $ 214 $ 331 $ 395
Injectable................................. 999 506 653 585
-------------- -------------- --------- ---------
Total depreciation and amortization...... $ 1,515 $ 720 $ 984 $ 980
-------------- -------------- --------- ---------
-------------- -------------- --------- ---------
</TABLE>

F-23
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE O--INDUSTRY SEGMENT INFORMATION (CONTINUED)
For the year ended December 31, 1997, operating income for the ophthalmic
segment includes non-recurring charges of $1,451,000 related to the relocation
of the division from Abita Springs, Louisiana to the Chicago area. For the same
period, operating income for the injectable segment includes non-recurring
charges of $213,000 related to a change in an estimate of the timing of
absorption of manufacturing overhead.

For the year ended June 30, 1996, operating income for the ophthalmic and
injectable segments includes non-recurring charges of $385,000 and $292,000,
respectively, related to the acquisition of PRL and the realignment of the
Company into two separate divisions.

The Company records sales between the segments at fully absorbed cost.

NOTE P--COMMITMENTS AND CONTINGENCIES

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

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

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------
1997 1996 1996 1995
-------------- -------------- --------- ---------
<S> <C> <C> <C> <C>
Interest and taxes paid:
Interest............................................. $ 592 $ 189 $ 442 $ 25
Income taxes......................................... 788 -- 867 1,150
Noncash investing and financing activities:
Treasury stock received for exercise of stock
options............................................ -- -- 123 --
Notes issued for product acquisitions................ 3,250 -- -- --
Additions to capital lease obligations............... -- -- -- 706
</TABLE>

NOTE R--SUBSEQUENT EVENTS

On January 21, 1998, the Company announced the purchase of the NDA,
trademark and U.S. trade name rights to Paremyd, a topical mydriatic combination
product, from Allergan. Paremyd has been off the market for all of 1997 due to a
raw material shortage. The Company will, with Allergan's assistance, move
quickly to obtain FDA approval to manufacture the product at Taylor. The total
purchase price was $700,000, with $500,000 paid in cash upon closing and
$200,000 payable upon receipt of an approved supplement from the FDA or twelve
months from closing, whichever is sooner.

On January 13, 1998, the Company announced the purchase of two branded
injectable products, Sufenta and Alfenta, from Janssen Pharmaceutica, Inc. The
products are injectable opioid analgesics indicated for use in the induction and
maintenance of general anesthesia. Both are NDA products, and Alfenta remains
covered under patent. The total purchase price was $6,600,000, with $2,200,000
paid in cash upon closing and two additional payments of $2,200,000 payable on
the next anniversary of the

F-24
<PAGE>
AKORN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE R--SUBSEQUENT EVENTS (CONTINUED)
closing date and on December 29, 1999, respectively. The second two payments are
secured by irrevocable bank letters of credit, which are issued under the
revolving credit facility (see Note I).

NOTE S--RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which requires all items of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Other comprehensive income may include foreign currency
items, minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. The accumulated balance of
other comprehensive income must be displayed separately from retained earnings
and additional paid-in capital in the equity section of a statement of financial
position. The Company adopted this accounting standard on January 1, 1998, as
required. Because the Company had no other items of comprehensive income,
reclassification of financial statements for earlier periods was not required.

F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 5
The Company.................................... 13
Use of Proceeds................................ 13
Dividend Policy................................ 13
Price Range of Common Stock.................... 14
Capitalization................................. 15
Selected Consolidated Financial Data........... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 17
Business....................................... 23
Management..................................... 36
Certain Relationships and Related
Transactions................................. 41
Principal and Selling Stockholders............. 42
Description of Capital Stock................... 43
Shares Eligible for Future Sale................ 45
Underwriting................................... 46
Legal Matters.................................. 47
Experts........................................ 47
Additional Information......................... 47
Index to Consolidated Financial Statements..... F-1
</TABLE>

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

5,540,000 Shares

AKORN, INC.

Common Stock

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

PROSPECTUS
------------

BT Alex. Brown
Warburg Dillon Read LLC

, 1998

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth fees payable by the Company incurred in
connection with the issuance and distribution of the Common Stock. All such fees
and expenses, except the Securities and Exchange Commission registration fee,
are estimated:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.............. $ 13,275
NASD Fee......................................................... 5,000
Nasdaq Stock Market Listing Fee.................................. 2,000
Transfer Agent Fees and Expenses.................................
Printing Engraving Fees and Expenses.............................
Legal Fees and Expenses.......................................... 250,000
Accounting Fees and Expenses.....................................
Miscellaneous....................................................
---------
Total........................................................ $
---------
---------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 83 of the Business Corporation Law of Louisiana (the "BCLL") and the
Company's By-laws provide for the indemnification of directors and officers
under certain circumstances, on a case by case basis, against expenses actually
and reasonably incurred by a director or officer who was or is a party or is
threatened to be made a party to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (including any action by or in the
right of the Company) by reason of the fact that he or she is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of the Company of
another entity. In accordance with the BCLL, indemnification shall be made by
the Company only as authorized in a specific case upon a determination that the
applicable standard has been met. Such determination may be made (a) by a
majority vote of a quorum of the board of directors who are disinterested, (b)
by independent counsel or (c) by the shareholders.

The Company's By-laws permit the Company to procure insurance on behalf of
any current or former director, officer, employee or agent of the Company, or
person who is or was serving at the request of the Company as a director,
officer, employee or agent of the Company of another entity, against liability
asserted against him or her in any such capacity, or arising out of his or her
status as such, whether or not the Company would have the power to indemnify him
or her against such liability under the BCLL.

As permitted by the BCLL, the Articles of Incorporation provide that
directors and officers of the Company shall have no personal liability to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director or officer, except for (i) any breach of the director's or officer's
duty of loyalty to the Company or its shareholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law, (iii) authorizing illegal dividends or redemptions or (iv) any transaction
from which the director or officer derived an improper personal benefit.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On December 13, 1997, the John N. Kapoor Trust dated September 20, 1989 (the
"Kapoor Trust"), of which John N. Kapoor, the Chairman and Chief Executive
Officer of the Company, is sole trustee and beneficiary, purchased 1,000,000
shares of Common Stock. The price per share was $2.00 per share and

II-1
<PAGE>
the aggregate purchase price was $2.0 million. The shares were purchased in
connection with the exercise of a warrant originally issued to the Kapoor Trust
on September 3, 1992.

In connection with the acquisition of PRL on May 31, 1996, the Company
issued to the Benjamin Family Trust, the Yankoff Revocable Living Trust and the
Gencarella Revocable Living Trust, as selling shareholders of PRL, 1,400,000
shares of Common Stock as consideration for all of the outstanding shares of
PRL. The conversion rate was 14,814.815 shares of Common Stock for each share of
PRL stock outstanding at the time of conversion.

As to all such transactions described above, an exemption is claimed under
Section 4(2) of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

The following exhibits are filed as part of this Registration Statement:

<TABLE>
<C> <S>
(1.1)** Form of Underwriting Agreement.

(2.1) Agreement and Plan of Merger dated December 17, 1991, by and among Akorn,
Inc., Aksub, Inc., Taylor Pharmacal Company (currently known as Taylor
Pharmaceuticals, Inc. and formerly doing business as Taylor
Pharmaceuticals and referred to herein as "Taylor") and certain former
shareholders of Taylor, incorporated by reference to the Company's
report on Form 8-K dated January 15, 1992 (file no. 000-13976) (the
"1992 8-K").

(2.2) Agreement and Plan of Merger among Akorn Manufacturing, 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 (file no. 000-13976) (the "1996 10-K").

(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 (file no. 000-13976) (the
"1991 10-K").

(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 (file no. 000-13976) (the "1996 Transition
10-K").

(3.3) Current Composite of By-laws of the Company, incorporated by reference to
Exhibit 3.3 to the 1996 Transition 10-K.

(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 (file no. 000-13976).

(5.1)** Opinion of Jones Walker Walchter Poitevent Carrere & Denegre, LLP ("Jones
Walker") as to the legality of the securities to be registered.

(10.1) Akorn, Inc. Savings and Retirement Plan effective July 1, 1984,
incorporated by reference to Form 10-K for the fiscal year ended June
30, 1987 (file no. 000-13976).

(10.2) Consulting Agreement dated November 15, 1990 by and between EJ Financial
Enterprises, Inc., a Delaware corporation, and the Company, incorporated
by reference to Exhibit 10.24 to the 1991 10-K.
</TABLE>

II-2
<PAGE>
<TABLE>
<C> <S>
(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) Stock Purchase Agreement dated November 15, 1990 by and between the John
N. Kapoor Trust dated September 20, 1989 and the Company, incorporated
by reference to Exhibit 10.21 to the 1991 10-K.

(10.5) Amendment dated February 15, 1991 amending Stock Purchase Agreement dated
November 15, 1990 by and between the John N. Kapoor Trust dated
September 20, 1989 and the Company, incorporated by reference to Exhibit
10.25 to the 1991 10-K.

(10.6) Stock Registration Rights Agreement dated November 15, 1990 by and between
the John N. Kapoor Trust dated September 20, 1989 and the Company,
incorporated by reference to Exhibit 10.24 to the 1991 10-K.

(10.7) Employment Agreement among Akorn, Inc., Taylor and Floyd Benjamin dated
May 31, 1996, incorporated by reference to Exhibit 10.24 of the 1996
10-K.

(10.8)* Credit Agreement, dated as of December 29, 1997, among the Company, Taylor
and The Northern Trust Company.

(10.9)* First Amendment to Credit Agreement, dated as of March 27, 1998, among the
Company, Taylor and The Northern Trust Company.

(10.10)* Second Amendment to Credit Agreement, dated as of June 30, 1998, among the
Company, Taylor and The Northern Trust Company.

(10.11) Amended and Restated Akorn, Inc. 1988 Incentive Compensation Program dated
February 12, 1998, incorporated by reference to Exhibit A to the
Company's definitive Proxy Statement dated April 20, 1998.

(11.1)* Computation of Earnings Per Share.

(21.1)* Subsidiaries of the Company.

(23.1)* Consent of Deloitte & Touche LLP.

(23.2)** Consent of Jones Walker (contained in the opinion filed as Exhibit 5.1).
</TABLE>

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

* Filed herewith

** To be filed by amendment

ITEM 17. UNDERTAKINGS

(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

(b) The undersigned Registrant hereby undertakes that:

II-3
<PAGE>
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lincolnshire, in the
State of Illinois, on the 28th day of July, 1998.

<TABLE>
<S> <C> <C>
AKORN, INC.

By: /s/ JOHN N. KAPOOR, PH.D.
-----------------------------------------
Name: John N. Kapoor, Ph.D
Title: Chief Executive Officer
</TABLE>

POWER OF ATTORNEY

The undersigned directors and officers of Akorn, Inc. do hereby constitute
and appoint John N. Kapoor, Ph.D. and Rita J. McConville, and each of them, with
full power of substitution, our true and lawful attorneys-in-fact and agents to
do any and all acts and things in our name and behalf in our capacities as
directors and officers, and to execute any and all instruments for us and in our
names in the capacities indicated below which such person may deem necessary or
advisable to enable Akorn, Inc. to comply with the Securities Act of 1933, as
amended (the "Securities Act"), and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but not limited to, power and authority to
sign for us, or any of us, in the capacities indicated below and any and all
amendments (including pre-effective and post-effective amendments or any other
registration statement filed pursuant to the provisions of Rule 462(b) under the
Securities Act) hereto; and we do hereby ratify and confirm all that such person
or persons shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ JOHN N. KAPOOR, PH.D. Chairman of the Board of July 28, 1998
- ------------------------------ Directors and Chief
John N. Kapoor, Ph.D. Executive Officer
(Principal Executive
Officer)

/s/ FLOYD BENJAMIN Executive Vice President July 28, 1998
- ------------------------------ and Director
Floyd Benjamin

/s/ R. SCOTT ZION Senior Vice President July 28, 1998
- ------------------------------
R. Scott Zion
</TABLE>

II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ RITA J. MCCONVILLE Vice President, Chief July 28, 1998
- ------------------------------ Financial Officer,
Rita J. McConville Secretary and Treasurer
(Principal Financial and
Accounting Officer)

/s/ DANIEL E. BRUHL, M.D. Director July 28, 1998
- ------------------------------
Daniel E. Bruhl, M.D.

/s/ DOYLE S. GAW Director July 28, 1998
- ------------------------------
Doyle S. Gaw
</TABLE>

II-6
<PAGE>
EXHIBIT LIST

<TABLE>
<S> <C>
(1.1)** Form of Underwriting Agreement.

(2.1) Agreement and Plan of Merger dated December 17, 1991, by and among Akorn, Inc.,
Aksub, Inc., Taylor and certain former shareholders of Taylor, incorporated by
reference to the 1992 8-K.

(2.2) Agreement and Plan of Merger among Akorn Manufacturing, Inc., Taylor and Pasadena
Research Laboratories, Inc. dated May 7, 1996, incorporated by reference to the
1996 10-K.

(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 the 1991
10-K.

(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 1996 Transition 10-K.

(3.3) Current Composite of By-laws of the Company, incorporated by reference to Exhibit
3.3 to the 1996 Transition 10-K.

(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 (file
no. 000-13976).

(5.1)** Opinion of Jones Walker as to the legality of the securities to be registered.

(10.1) Akorn, Inc. Savings and Retirement Plan effective July 1, 1984, incorporated by
reference to Form 10-K for the fiscal year ended June 30, 1987 (file no.
000-13976).

(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) Stock Purchase Agreement dated November 15, 1990 by and between the John N.
Kapoor Trust dated September 20, 1989 and the Company, incorporated by
reference to Exhibit 10.21 to the 1991 10-K.

(10.5) Amendment dated February 15, 1991 amending Stock Purchase Agreement dated
November 15, 1990 by and between the John N. Kapoor Trust dated September 20,
1989 and the Company, incorporated by reference to Exhibit 10.25 to the 1991
10-K.

(10.6) Stock Registration Rights Agreement dated November 15, 1990 by and between the
John N. Kapoor Trust dated September 20, 1989 and the Company, incorporated by
reference to Exhibit 10.24 to the 1991 10-K.

(10.7) Employment Agreement among Akorn, Inc., Taylor and Floyd Benjamin dated May 31,
1996, incorporated by reference to Exhibit 10.24 of the 1996 10-K.

(10.8)* Credit Agreement, dated as of December 29, 1997, among the Company, Taylor and
The Northern Trust Company.

(10.9)* First Amendment to Credit Agreement, dated as of March 27, 1998, among the
Company, Taylor and The Northern Trust Company.

(10.10)* Second Amendment to Credit Agreement, dated as of June 30, 1998, among the
Company, Taylor and The Northern Trust Company.

(10.11) Amended and Restated Akorn, Inc. 1988 Incentive Compensation Program dated
February 12, 1998, incorporated by reference to Exhibit A to the Company's
definitive Proxy Statement dated April 20, 1998.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(11.1)* Computation of Earnings Per Share.

(21.1)* Subsidiaries of the Company.

(23.1)* Consent of Deloitte & Touche LLP.

(23.2)** Consent of Jones Walker (contained in the opinion filed as Exhibit 5.1).
</TABLE>

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

* Filed herewith

** To be filed by amendment

<PAGE>

CREDIT AGREEMENT

Dated as of December 29, 1997

among

AKORN, INC.

and

TAYLOR PHARMACEUTICALS, INC.

as Borrowers,

and

THE NORTHERN TRUST COMPANY,

as Lender

<PAGE>

<TABLE>
<CAPTION>
TABLE OF CONTENTS

Section Page
- ------- ----
<S> <C>
DEFINITIONS AND OTHER TERMS . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER DEFINITIONAL PROVISIONS . . . . . . . . . . . . . . . . . . . .18
1.3 INTERPRETATION OF AGREEMENT . . . . . . . . . . . . . . . . . . . . .18

2. AMOUNT AND TERMS OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . .18
2.1 ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
2.2 LETTERS OF CREDIT. . . . . . . . . . . . . . . . . . . . . . . . . .19
2.3 PREPAYMENT, COMMITMENT REDUCTION . . . . . . . . . . . . . . . . . .23
2.4 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . .23
2.5 INTEREST ON LOANS. . . . . . . . . . . . . . . . . . . . . . . . . .23
2.6 FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
2.7 CHARGING OF ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . .25
2.8 APPLICATION AND ALLOCATION OF PAYMENTS . . . . . . . . . . . . . . .25
2.9 LOAN ACCOUNT AND ACCOUNTING. . . . . . . . . . . . . . . . . . . . .25
2.10 INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
2.11 ACCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
2.12 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
2.13 CAPITAL ADEQUACY; INCREASED COSTS; ILLEGALITY. . . . . . . . . . . .29
2.14 CONVERSION AND CONTINUATION ELECTIONS. . . . . . . . . . . . . . . .30

3. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . . . .31
3.1 CONDITIONS TO THE INITIAL ADVANCE. . . . . . . . . . . . . . . . . .31
3.2 FURTHER CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . .32

4. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . .33
4.1 CORPORATE EXISTENCE; COMPLIANCE WITH LAW . . . . . . . . . . . . . .33
4.2 EXECUTIVE OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . .33
4.3 CORPORATE POWER AUTHORIZATION, ENFORCEABLE
OBLIGATIONS33. 4.4 FINANCIAL STATEMENTS . . . . . . . . . . . . . .34
4.5 MATERIAL ADVERSE EFFECT. . . . . . . . . . . . . . . . . . . . . . .34
4.6 TITLE AND LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . .34
4.7 RESTRICTIONS; NO DEFAULT . . . . . . . . . . . . . . . . . . . . . .34
4.8 LABOR MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . .35
4.9 VENTURES, SUBSIDIARIES AND AFFILIATES; OUTSTANDING
STOCK35 . 4.10 GOVERNMENT REGULATION . . . . . . . . . . . . . . . .35
4.11 MARGIN REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . .36
4.12 TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
4.13 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
4.14 NO LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .38
4.15 PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES . . . . . . . . . . . .38
4.16 FULL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . .38
4.17 HAZARDOUS MATERIALS. . . . . . . . . . . . . . . . . . . . . . . . .39
4.18 INSURANCE POLICIES . . . . . . . . . . . . . . . . . . . . . . . . .39
4.19 DEPOSIT AND DISBURSEMENT ACCOUNTS. . . . . . . . . . . . . . . . . .39
4.20 CUSTOMER AND TRADE RELATIONS . . . . . . . . . . . . . . . . . . . .39
4.21 INDEBTEDNESS.. . . . . . . . . . . . . . . . . . . . . . . . . . . .40

<PAGE>
5. FINANCIAL STATEMENTS AND INFORMATION. . . . . . . . . . . . . . . . . . .40
5.1 REPORTS AND NOTICES. . . . . . . . . . . . . . . . . . . . . . . . .40
5.2 COMMUNICATION WITH ACCOUNTANTS . . . . . . . . . . . . . . . . . . .41

6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . .41
6.1 MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS . . . . . . . . . .41
6.2 PAYMENT OF OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . .42
6.3 BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . .42
6.4 AUDITS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
6.5 LITIGATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
6.6 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
6.7 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . . .44
6.8 SUPPLEMENTAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . .44
6.9 EMPLOYEE PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . .44
6.10 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . .45
6.11 LANDLORDS' AGREEMENTS, BAILEE LETTERS AND MORTGAGEE
AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
6.12 LEASED LOCATIONS OF COLLATERAL . . . . . . . . . . . . . . . . . . .45

7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .46
7.1 MERGERS, SUBSIDIARIES, ETC . . . . . . . . . . . . . . . . . . . . .46
7.2 INVESTMENTS; LOANS AND ADVANCES. . . . . . . . . . . . . . . . . . .46
7.3 INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
7.4 EMPLOYEE LOANS AND AFFILIATE TRANSACTIONS. . . . . . . . . . . . . .47
7.5 CAPITAL STRUCTURE AND BUSINESS . . . . . . . . . . . . . . . . . . .48
7.6 GUARANTEED INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . .48
7.7 LIENS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
7.8 SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . .49
7.9 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
7.10 FINANCIAL COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . .49
7.11 HAZARDOUS MATERIALS. . . . . . . . . . . . . . . . . . . . . . . . .50
7.12 SALE-LEASEBACKS. . . . . . . . . . . . . . . . . . . . . . . . . . .50
7.13 CANCELLATION OF INDEBTEDNESS . . . . . . . . . . . . . . . . . . . .50
7.14 RESTRICTED PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . .50
7.15 FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
7.16 CHANGE OF CORPORATE NAME OR LOCATION . . . . . . . . . . . . . . . .51

8. EVENTS OF DEFAULT: RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . .51
8.1 EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . .51
8.2 REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
8.3 WAIVERS BY BORROWERS . . . . . . . . . . . . . . . . . . . . . . . .54

9. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . . . . .55
9.1 SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . .55

10. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
10.1 SETOFF. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
10.2 COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT . . . . . . . . . . .55
10.3 AMENDMENTS AND WAIVERS. . . . . . . . . . . . . . . . . . . . . . .55
10.4 FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . .56
10.5 NO WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
10.6 REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

<PAGE>
10.7 SURVIVAL OF OBLIGATIONS UPON TERMINATION OF
FINANCING AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . .57
10.8 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .58
10.9 CONFLICT OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . .58
10.10 AUTHORIZED SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . .58
10.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . .58
10.12 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
10.13 SECTION TITLES. . . . . . . . . . . . . . . . . . . . . . . . . . .60
10.14 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .60
10.15 WAIVER OF JURY TRIAL. . . . . . . . . . . . . . . . . . . . . . . .60
10.16 REINSTATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . .61

11. CROSS-GUARANTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
11.1 CROSS-GUARANTY . . . . . . . . . . . . . . . . . . . . . . . . . . .61
11.2 OBLIGATIONS ABSOLUTE . . . . . . . . . . . . . . . . . . . . . . . .61
11.3 WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
11.4 RECOVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
11.5 LIABILITY CUMULATIVE . . . . . . . . . . . . . . . . . . . . . . . .62
</TABLE>
<PAGE>
INDEX OF SCHEDULES AND EXHIBITS

<S> <C>
Exhibit A - Form of Notice of Advance
Exhibit B - Form of Note
Exhibit C - Form of Security Agreement
Exhibit D - Form of Notice of Conversion/Continuation

Schedule 4.2 - Executive Offices
Schedule 4.8 - Labor Matters
Schedule 4.9 - Ventures, Subsidiaries and Affiliates; Outstanding Stock
Schedule 4.13 - ERISA Plans
Schedule 4.15 - Intellectual Property and Trade Names
Schedule 4.17 - Hazardous Materials
Schedule 4.18 - Insurance Policies
Schedule 4.19 - Deposit and Disbursement Accounts
Schedule 7.3 - Indebtedness
Schedule 7.4(a) - Transactions with Affiliates
Schedule 7.7 - Liens
Schedule 10.10 - Authorized Signature

Schedule A - Letters of Credit
Schedule B - Schedules of Additional Closing Documents
</TABLE>
<PAGE>

CREDIT AGREEMENT

This CREDIT AGREEMENT (this "AGREEMENT"), dated as of December 29,
1997, among AKORN, INC., a Louisiana corporation ("AKORN"), TAYLOR
PHARMACEUTICALS, INC., an Illinois corporation ("TAYLOR"; collectively with
Akorn, the "BORROWERS", and each a "BORROWER"), and THE NORTHERN TRUST
COMPANY, an Illinois banking corporation (the "LENDER").

RECITALS

WHEREAS, the Borrowers have requested the Lender to extend a
revolving credit facility to the Borrowers in the aggregate maximum principal
amount of $15,000,000 to provide working capital financing for the Borrowers
and funds for acquisitions and other general corporate purposes of the
Borrowers;

WHEREAS, each of the Borrowers desires to guaranty the payment of
each other Borrower's Obligations under the Loan Documents;

WHEREAS, the Borrowers desire to secure their obligations under the
Loan Documents by granting the Lender a security interest in and lien upon
certain of their respective property;

WHEREAS, the Lender is willing to extend such financial
accommodations upon the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the premises and the mutual
covenants and undertakings herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Borrowers and the Lender hereby agree as follows:

1. DEFINITIONS AND OTHER TERMS.

1.1 DEFINITIONS. In addition to terms defined elsewhere in this
Agreement or any Exhibit hereto, when used herein, the following terms shall
have the following meanings (such meanings shall be equally applicable to the
singular and plural forms of the terms used, as the context requires):

"ADVANCE" shall have the meaning assigned to it in SECTION 2.1(a).

"AFFILIATE" shall mean, with respect to any Person, (i) each Person
that, directly or indirectly, owns or controls, whether beneficially, or as a
trustee, guardian or other fiduciary, five percent (5%) or more of the Stock
having ordinary voting power in the election of directors of such Person,
(ii) each Person that controls, is controlled by or is under common control
with such

1
<PAGE>

Person or any Affiliate of such Person or (iii) each of such Person's
officers, directors, joint venturers and partners. For the purposes of this
definition, "control" of a Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of its management
or policies, whether through the ownership of voting securities, by contract
or otherwise; PROVIDED, HOWEVER, that the term "AFFILIATE" shall specifically
exclude Lender.

"APPLICABLE PERCENTAGE" shall mean at any time of determination, with
respect to LIBOR Loans or Federal Funds Rate Loans, the applicable percentage
set forth below based on the ratio of Funded Debt to EBITDA on a consolidated
basis of the Borrowers at such time:

<TABLE>
<CAPTION>
LIBOR Loan and Federal Funds
Level Funded Debt to EBITDA Ratio Rate Loan
<S> <C> <C>
1 Less than or equal to 1.25x 1.125%

2 GREATER THAN 1.25x but 2.00x 1.25%

3 GREATER THAN 2.00x but 2.50x 1.50%

4 GREATER THAN 2.50x 1.625%

</TABLE>

For purposes of the foregoing, (a) from the Closing Date until March 31,
1998, the Applicable Percentages shall be determined in accordance with
Level 2, (b) from and after such date, the Applicable Percentages shall be
determined at any time by reference to the ratio of Funded Debt to EBITDA
in effect at the time, (c) any change in the Applicable Percentages based
on a change in such ratio shall be effective for all purposes five (5)
Business Days from delivery to the Lender of an officer's certificate of
Akorn with respect to the Financial Statements to be delivered pursuant to
SECTION 5.1, (i) setting forth in reasonable detail the calculation of such
ratio for such fiscal period and (ii) stating that the signer has reviewed
the terms of this Agreement and has made, or caused to be made under his or
her supervision, a review in reasonable detail of the transactions and
condition of Akorn and its Subsidiaries during the accounting period
covered by the related financial statements and that such review has not
disclosed the existence during or at the end of such accounting period, and
that the signer does not have knowledge of the existence as at the date of
such officer's certificate, of any condition or event that constitutes a
Default or an Event of Default and (d) notwithstanding the foregoing
provisions of clauses (b) and (c), no reduction in the Applicable
Percentages shall be effective if a Default or Event of Default shall have
occurred and be continuing. It is

2
<PAGE>

understood that the foregoing officer's certificate shall be permitted
to be delivered prior to, but in no event later than, the time of the
actual delivery of the financial statements required to be delivered
pursuant to SECTION 5.1 for the applicable fiscal period. Any change
in the Applicable Percentages due to a change in the applicable Level
shall be effective on the effective date of such change in the
applicable Level and shall apply to all LIBOR Loans made on or after
the commencement of the period (and to Federal Funds Rate Loans that are
outstanding at any time during the period) commencing on the effective date
of such change in the applicable Level and ending on the date immediately
preceding the effective date of the next such change in applicable Level.

"BUSINESS DAY" shall mean any day that is (i) not a Saturday, a
Sunday or a day on which banks are required or permitted to be closed in the
State of Illinois and (ii) a Eurodollar Business Day.

"CAPITAL LEASE" shall mean, with respect to any Person, any lease
of any property (whether real, personal or mixed) by such Person as lessee
that, in accordance with GAAP, either would be required to be classified and
accounted for as a capital lease on a balance sheet of such Person or
otherwise be disclosed as such in a note to such balance sheet, other than
any such lease under which such Person is the lessor.

"CAPITAL LEASE OBLIGATION" shall mean, with respect to any Capital
Lease, the amount of the obligation of the lessee thereunder that, in
accordance with GAAP, would appear on a balance sheet of such lessee in
respect of such Capital Lease or otherwise be disclosed in a note to such
balance sheet.

"CHARGES" shall mean all federal, state, county, city, municipal,
local, foreign or other governmental taxes (including, without limitation,
Taxes and taxes owed to the PBGC at the time due and payable), levies,
assessments, charges, liens, claims or encumbrances upon or relating to (i)
the Collateral, (ii) the Obligations, (iii) the employees, payroll, income or
gross receipts of any Borrower or any of its Subsidiaries, (iv) any
Borrower's or any of their Subsidiaries' ownership or use of any properties
or other assets, or (v) any other aspect of any Borrower's or any of their
Subsidiaries' businesses.

"CLOSING DATE" shall mean the date on which the conditions set
forth in SECTION 3 shall have been satisfied in a manner satisfactory to the
Lender.

"CODE" shall mean the Uniform Commercial Code as the same may, from
time to time, be in effect in the State of Illinois; PROVIDED, HOWEVER, in
the event that, by reason of mandatory

3
<PAGE>

provisions of law, any or all of the attachment, perfection or priority of
Lender's security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of
Illinois, the term "Code" shall mean the Uniform Commercial Code as in effect
in such other jurisdiction solely for purposes of the provisions hereof
relating to such attachment, perfection or priority and for purposes of
definitions related to such provisions.

"COLLATERAL" shall mean the property covered by the Security
Agreement and any other personal property, tangible or intangible, now
existing or hereafter acquired, that may at any time be or become subject to
a security interest or Lien in favor of Lender to secure the Obligations.

"COMMITMENT" shall mean the aggregate commitment of the Lender to
make Advances and issue Letters of Credit, which aggregate commitment shall
be Fifteen Million United State Dollars ($15,000,000) on the Closing Date, as
such amount may be adjusted, if at all, from time to time in accordance with
SECTION 2.3 of the Agreement.

"CONVERSION/CONTINUATION DATE" shall mean any date on which, under
SECTION 2.14, Borrower (a) converts Loans of one type to another type, or (b)
continues as Loans of the same type, but with a new LIBOR Period, Loans
having LIBOR Periods expiring on such date.

"CURRENCY AGREEMENT" shall mean any foreign exchange contract,
currency swap agreement, futures contract, option contract, synthetic cap or
other similar agreement designed to protect the Persons entering into same
against fluctuations in currency values.

"DEA" shall mean the Drug Enforcement Agency and comparable
agencies in foreign countries.

"DEBT SERVICE" shall mean, with respect to any Person for any
period, an amount equal to the sum of (i) the Interest Charges and Letter of
Credit fees for such period, measured at the end of each Fiscal Quarter for
the four immediately preceding Fiscal Quarters then ended, and (ii) the
scheduled amortization of any outstanding current maturities on Indebtedness,
measured at the end of each Fiscal Quarter for the four immediately following
Fiscal Quarters.

"DEFAULT" shall mean any event which, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.

"DEFAULT RATE" shall have the meaning assigned to it in SECTION
2.5(d).

4
<PAGE>

"DOLLARS" or "$" shall mean, lawful currency of the United States
of America.

"EBITDA" means for any period of determination, Akorn's
consolidated net earnings (or loss) after provision for taxes, PLUS cash
charges against income for foreign, federal and state income taxes for such
period, PLUS depreciation and amortization expenses for such period, PLUS
Akorn's consolidated aggregate interest expense for such period, PLUS any
extraordinary losses arising outside of the ordinary course of business
during such period which have been included in the calculation of net
earnings, MINUS extraordinary gains arising outside the ordinary course of
business during such period which have been included in the calculation of
net earnings, all determined on a consolidated basis.

"EBIT" shall mean, with respect to Borrowers for any period, the
consolidated net earnings (or loss) after provision for taxes, PLUS charges
against income for foreign, federal and state income taxes for such period,
PLUS interest expense for such period of Borrowers and their consolidated
Subsidiaries determined in accordance with GAAP.

"ENVIRONMENTAL LAWS" shall mean all federal, state, local and
foreign laws, statutes, ordinances and regulations, now or hereafter in
effect, and in each case as amended or supplemented from time to time, and
any applicable judicial or administrative interpretation thereof, including
any applicable judicial or administrative order, consent decree or judgment,
relative to the applicable real estate, relating to the regulation and
protection of human health, safety, the environment and natural resources
(including ambient air, surface water, groundwater, wetlands, land surface or
subsurface strata, wildlife, aquatic species and vegetation). Environmental
Laws include, but are not limited to, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C.
Sections 9601 ET SEQ.); the Hazardous Material Transportation Act, as amended
(49 U.S.C. Sections 1801 ET SEQ.); the Federal Insecticide, Fungicide, and
Rodenticide Act, as amended (7 U.S.C. Sections 136 ET SEQ.); the Resource
Conservation and Recovery Act, as amended (42 U.S.C. Sections 6901 ET SEQ.);
the Toxic Substance Control Act, as amended (15 U.S.C. Sections 2601 ET
SEQ.); the Clean Air Act, as amended (42 U.S.C. Sections 740 ET SEQ.); the
Federal Water Pollution Control Act, as amended (33 U.S.C. Sections 1251 ET
SEQ.); the Occupational Safety and Health Act, as amended (29 U.S.C.
Sections 651 ET SEQ.); and the Safe Drinking Water Act, as amended (42 U.S.C.
Sections 300(f) ET SEQ.), and any and all regulations promulgated
thereunder, and all analogous state, local and foreign counterparts or
equivalents and any transfer of ownership notification or approval statutes.

"ENVIRONMENTAL LIABILITIES AND COSTS" shall mean all liabilities,
obligations, responsibilities, remedial actions, removal actions, losses,
damages, punitive damages, consequential

5
<PAGE>

damages, treble damages, costs and expenses (including all fees,
disbursements and expenses of counsel, experts and consultants and costs of
investigation and feasibility studies), fines, penalties, sanctions and
interest incurred as a result of any claim, suit, action or demand by any
person or entity, whether based in contract, tort, implied or express
warranty, strict liability, criminal or civil statute or common law
(including any thereof arising under any Environmental Law, permit, order or
agreement with any Governmental Authority) and which relate to any health or
safety condition regulated under any Environmental Law or in connection with
any other environmental matter or Release, threatened Release or the presence
of a Hazardous Material or threatened Release of a Hazardous Material.

"ERISA" shall mean the Employee Retirement Income Security Act of
1974 (or any successor legislation thereto), as amended from time to time,
and any regulations promulgated thereunder.

"ERISA AFFILIATE" shall mean, with respect to any Borrower or any
Subsidiary thereof, any trade or business (whether or not incorporated) under
common control with such Borrower or such Subsidiary and which, together with
such Borrower or such Subsidiary, are treated as a single employer within the
meaning of Sections 414(b), (c), (m) or (o) of the IRC.

"ERISA EVENT" shall mean, with respect to any of the Borrowers or
any Subsidiary thereof or ERISA Affiliate, (i) a Reportable Event with
respect to a Title IV Plan or a Multiemployer Plan; (ii) the withdrawal of
any Borrower or any Subsidiary thereof or ERISA Affiliate from a Title IV
Plan subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer, as defined in Section 4001(a)(2) of ERISA; (iii) the
complete or partial withdrawal of any Borrower or Subsidiary thereof or ERISA
Affiliate from any Multiemployer Plan; (iv) the filing of a notice of intent
to terminate a Title IV Plan or the treatment of a plan amendment as a
termination under Section 4041 of ERISA; (v) the institution of proceedings
to terminate a Title IV Plan or Multiemployer Plan by the PBGC; (vi) the
failure to make required contributions to a Qualified Plan; or (vii) any
other event or condition which might reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Title IV Plan or Multiemployer
Plan or the imposition of any liability under Title IV of ERISA, other than
PBGC premiums due but not delinquent under Section 4007 of ERISA.

"EURODOLLAR BUSINESS DAY" shall mean a Business Day on which banks
in the city of London are generally open for interbank or foreign exchange
transactions.

6
<PAGE>

"EVENT OF DEFAULT" shall have the meaning assigned to it in SECTION
9.1.

"FDA" shall mean the Federal Food and Drug Administration and
comparable agencies in foreign countries.

"FEDERAL FUNDS RATE" shall mean, for any day, (a) an interest rate
per annum equal to the weighted average of the rates on overnight Federal
funds transactions, with members of the Federal Reserve System only, arranged
by Federal funds brokers. The Federal Funds Rate shall be determined by the
Lender on the basis of reports by Federal funds brokers to, and published
daily by, the Federal Reserve Bank of New York in the Composite Closing
Quotations for U.S. Government Securities. If such publication is
unavailable or the Federal Funds Rate is not set forth therein, the Federal
Funds Rate shall be determined on the basis of any other source reasonably
selected by the Lender. The Federal Funds Rate applicable each day shall be
the Federal Funds Rate reported as applicable to Federal Funds transactions
on that date. In the case of Saturday, Sunday or legal holiday, the Federal
Funds Rate shall be the rate applicable to Federal funds transactions on the
immediately preceding day for which the Federal Funds Rate is reported, PLUS
(b) the Applicable Percentage.

"FEDERAL FUNDS RATE LOAN" shall mean a portion of an Advance
bearing interest by reference to the Federal Funds Rate.

"FEDERAL RESERVE BOARD" shall have the meaning assigned to it in
SECTION 4.11.

"FEES" shall mean any and all fees payable to Lender pursuant to
the Agreement or any of the other Loan Documents.

"FINANCIAL STATEMENTS" shall mean the financial statements referred
to in SCHEDULE 4.4.

"FISCAL QUARTER" shall mean any of the quarterly accounting periods
of a Borrower of each Fiscal Year.

"FISCAL YEAR" shall mean any of the annual accounting periods of a
Borrower ending on December 31, of each year.

"FLOATING RATE LOANS" shall mean Prime Rate Loans and Federal Funds
Rate Loans.

"FUNDED DEBT" shall mean, with respect to Borrowers, all
Indebtedness for borrowed money evidenced by notes, bonds, debentures, or
similar evidences of Indebtedness, including, but not limited to, the
Obligations (including, but not limited to, Letter of Credit Obligations),
and unsecured financing by a seller of product lines to Borrowers which by
its terms matures less than

7
<PAGE>

eighteen months from the date of determination thereof, but excluding
Indebtedness of Borrowers secured by the real estates owned by Borrowers and
their Subsidiaries.

"FUNDING ARRANGEMENTS" shall have the meaning assigned to it in
SECTION 2.10(b).

"GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect on the Closing Date, consistently
applied.

"GOVERNMENTAL AUTHORITY" shall mean any nation or government, any
state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.

"GUARANTEED INDEBTEDNESS" shall mean, as to any Person, any
obligation of such Person guaranteeing any indebtedness, lease, dividend, or
other obligation ("PRIMARY OBLIGATIONS") of any other Person (the "PRIMARY
OBLIGOR") in any manner, including any obligation or arrangement of such
other Person (i) to purchase or repurchase any such primary obligation, (ii)
to advance or supply funds (a) for the purchase or payment of any such
primary obligation or (b) to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or solvency or any
balance sheet condition of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment
of such primary obligation, or (iv) to indemnify the owner of such primary
obligation against loss in respect thereof. The amount of any Guaranteed
Indebtedness at any time shall be deemed to be an amount equal to the lesser
at such time of (y) the stated or determinable amount of the primary
obligation in respect of which such Guaranteed Indebtedness is made or (z)
the maximum amount for which such Person may be liable pursuant to the terms
of the Instrument embodying such Guaranteed Indebtedness; or, if not stated
or determinable, the maximum reasonably anticipated liability (assuming full
performance) in respect thereof.

"HAZARDOUS MATERIAL" shall mean any substance, material or waste,
the generation, handling, storage, treatment or disposal of which is
regulated by or forms the basis of liability now or hereafter under, any
Government Authority in any jurisdiction in which any Borrower or any
Subsidiary thereof has owned, leased, or operated real property or disposed
of hazardous materials, or by any Federal government authority, including,
without limitation, any material or substance which is (i) defined as a
"solid waste," "hazardous waste," "hazardous material," "hazardous
substance," "extremely hazardous waste" or "restricted hazardous waste" or
other similar term or phrase under any Environmental Laws, (ii)

8
<PAGE>

petroleum or any fraction or by-product thereof, asbestos, polychlorinated
biphenyls (PCB's), any radioactive substance, methane, volative hydrocarbons
or any industrial solvent, (iii) designated as a "hazardous substance"
pursuant to Section 311 of the Clean Water Act, 33 U.S.C. Sections 1251 ET
SEQ. (33 U.S.C. Sections 1321) or listed pursuant to Section 307 of the Clean
Water Act (33 U.S.C. Section 1317), (iv) defined as a "hazardous waste"
pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901, ET SEQ. (42 U.S.C. Section 6903), or (v) defined as a
"hazardous substance" pursuant to Section 1012 of the Comprehensive
Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section
9601 ET SEQ. (42 U.S.C. Section 9601).

"INDEBTEDNESS" of any Person shall mean (i) all indebtedness of
such Person for borrowed money or for the deferred purchase price of property
payment for which is deferred six (6) months or more, but excluding
obligations to trade creditors incurred in the ordinary course of business
that are not overdue by more than six (6) months unless being contested in
good faith, (ii) reimbursement and all other obligations with respect to
letters of credit, bankers' acceptances and surety bonds, whether or not
matured, (iii) all obligations evidenced by notes, bonds, debentures or
similar Instruments, (iv) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property), (v) all Capital Lease Obligations,
(vi) all obligations of such Person under Interest Rate Agreements, Currency
Agreements, commodity purchase or option agreements or other interest or
exchange rate or commodity price hedging arrangements, (vii) all Indebtedness
referred to in clause (i), (ii), (iii), (iv), (v) or (vi) above secured by
(or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien upon or in property or
other assets (including accounts and contract rights) owned by such Person,
even though such Person has not assumed or become liable for the payment of
such Indebtedness, and (viii) with respect to any Borrower or any Subsidiary
thereto, the Obligations.

"INDEMNIFIED PERSON" shall have the meaning assigned to it in
SECTION 2.10(a).

"INTEREST CHARGES" shall mean, with respect to any Person for any
period, the amount which, in conformity with GAAP, would be set forth
opposite the caption "INTEREST EXPENSE" (or any like caption) on a
consolidated income statement of such Person and all other Persons with which
such Person's financial statements are to be consolidated in accordance with
GAAP for the relevant period ended on such date.

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"INTEREST PAYMENT DATE" means (a) as to any Prime Rate Loan or any
Federal Funds Rate Loan, the last Business Day of each month to occur while
such Loan is outstanding, and (b) as to any LIBOR Loan, the last day of the
LIBOR Period applicable thereto; PROVIDED, HOWEVER, that, in addition to the
foregoing, each of (x) the date upon which both the Commitment has been
terminated and the Loans have been paid in full and (y) the Termination Date
shall be deemed to be an "Interest Payment Date" with respect to any interest
which is then accrued hereunder.

"INTEREST RATE AGREEMENT" shall mean any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement,
interest rate futures contract, interest rate option contract or other
similar agreement or arrangement to which any Borrower or any Subsidiary
thereof is a party, designed to protect such Borrower or such Subsidiary
against fluctuations in interest rates.

"INVESTMENTS" shall have the meaning assigned to it in SECTION 7.2.

"IRC" shall mean the Internal Revenue Code of 1986, as amended, and
any successor thereto.

"IRS" shall mean the Internal Revenue Service, or any successor
thereto.

"ISSUANCE REQUEST" shall mean a request and certificate duly
executed by an authorized officer of any Borrower, in form and substance
satisfactory to the Lender, for the issuance by the Lender of a Letter of
Credit.

"LEASES" shall mean all leasehold estates in real property now
owned or hereafter acquired by any Borrower, or any of its Subsidiaries, as
lessee.

"LETTER OF CREDIT OBLIGATION" shall mean any outstanding obligation
incurred by Lender at the request of Akorn, for the account of any Borrower,
whether direct or indirect, contingent or otherwise, due or not due, in
connection with the issuance by Lender of the Letter of Credit. The amount
of such Letter of Credit Obligation shall equal the maximum amount which may
be payable by Lender thereupon or pursuant thereto.

"LETTER OF CREDIT" shall mean a standby letter of credit issued
from time to time before, on or after the Closing Date at the request of
Akorn and for the account of Borrowers in the aggregate maximum face amount
not exceeding the Commitment for which Lender has incurred any Letter of
Credit Obligation pursuant thereto.

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"LIBOR LOAN" shall mean a portion of an Advance bearing interest by
reference to the LIBOR Rate.

"LIBOR PERIOD" shall mean, with respect to any LIBOR Loan, each
period commencing on the last day of the next preceding LIBOR Period
applicable to such LIBOR Loan and ending one (1), two (2)or three (3) months
thereafter, as selected by Akorn's irrevocable notice to Lender as set forth
in SECTION 2.6(e) hereof; PROVIDED that the foregoing provision relating to
LIBOR Periods is subject to the following:

(1) if any LIBOR Period pertaining to a LIBOR Loan would otherwise
end on a day that is not a Eurodollar Business Day, such LIBOR Period shall
be extended to the next succeeding Eurodollar Business Day unless the
result of such extension would be to carry such LIBOR Period into another
calendar month in which event such LIBOR Period shall end on the
immediately preceding Eurodollar Business Day;

(2) any LIBOR Period that would otherwise extend beyond the
Termination Date shall end two (2) Eurodollar Business Days prior to such
applicable date;

(3) any LIBOR Period pertaining to a LIBOR Loan that begins on the
last Eurodollar Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar month at the end
of such LIBOR Period) shall end on the last Eurodollar Business Day of a
calendar month;

(4) Akorn shall select LIBOR Periods so as not to require a payment or
prepayment of any LIBOR Loan during a LIBOR Period for such Loan; and

(5) Akorn shall select LIBOR Periods so that there shall be no more
than five (5) separate LIBOR Loans which are Advances in existence at any
one time.

"LIBOR RATE" shall mean for each LIBOR Period, a rate of interest
determined by the Lender equal to (a) that fixed rate of interest per year for
deposits with maturity periods of one (1), two (2) or three (3) months (which
maturity period Akorn shall select subject to the terms stated herein), in
United States dollars offered to the Lender in or through the London interbank
market at or about 11:00 A.M., London time, two (2) Eurodollar Business Days
before the first (1st) day of each LIBOR Period and for the London deposit
maturity requested, DIVIDED BY one minus any applicable reserve requirement
(expressed as a decimal) on Eurodollar deposits of the same amount and maturity
as determined by Lender, PLUS the Applicable Percentage.

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<PAGE>

"LIEN" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including any lease or title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the
filing of, or agreement to give, any financing statement perfecting a
security interest under the Code or comparable law of any jurisdiction).

"LOAN" shall mean, as the context may require, the aggregate amount
of Advances outstanding at any time to any Borrower or to all Borrowers.

"LOAN ACCOUNT" shall have the meaning assigned to it in SECTION 2.9.

"LOAN DOCUMENTS" shall mean the Agreement, the Note, the Security
Agreement, the Letters of Credit, and all other agreements, instruments,
documents and certificates identified in the Schedule of Documents in favor
of Lender and including (without limitation) all other pledges, powers of
attorney, consents, assignments, contracts, notices, and all other written
matter whether heretofore, now or hereafter executed by or on behalf of any
Borrower or any of its Affiliates, or any employee of any Borrower or any of
its Affiliates, and delivered to Lender in connection with the Agreement or
the transactions contemplated hereby.

"MARGIN STOCK" shall have the meaning assigned to it in SECTION
4.11.

"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on
(i) the business, assets, operations, prospects or financial or other
condition of Borrowers and their Subsidiaries considered as a whole, (ii)
Borrowers' ability to pay the Loans or any of the other Obligations in
accordance with the terms thereof, (iii) the Collateral or Lender's Liens on
the Collateral or the priority of any such Lien, or (iv) Lender's rights and
remedies under the Agreement or any of the other Loan Documents.

"MAXIMUM LAWFUL RATE" shall have the meaning assigned to it in
SECTION 2.5(f).

"MULTIEMPLOYER PLAN" shall mean a "multiemployer plan" as defined
in Section 4001(a)(3) of ERISA, and to which any Borrower or any of the
Subsidiaries thereof or ERISA Affiliate is making, is obligated to make, has
made or been obligated to make, contributions on behalf of participants who
are or were employed by any of them.

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<PAGE>

"NET INCOME" shall mean, with respect to any period, the aggregate
of the net income (loss) of the Person in question for such period,
determined in accordance with GAAP on a consolidated basis, provided that (i)
the net income (loss) of any Person which is not a Subsidiary shall be
included only to the extent of the amount of cash dividends or distributions
paid to the Person in question or to a consolidated Subsidiary of such Person
and (ii) the net income (loss) of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded. There shall be excluded in computing Net Income the
excess (but not the deficit), if any, of (i) any gain which must be treated
as an extraordinary item under GAAP or any gain realized upon the sale or
other disposition of any real property or equipment that is not sold in the
ordinary course of business or of any capital stock of the Person or a
Subsidiary of the Person over (ii) any loss which must be treated as an
extraordinary item under GAAP or any loss realized upon the sale or other
disposition of any real property or equipment that is not sold in the
ordinary course of business or of any capital stock of the Person or a
Subsidiary of the Person.

"NET WORTH" shall mean the book value of the assets of Borrowers on
a consolidated basis (inclusive of goodwill, patents, trademarks, tradenames,
copyrights, organization expenses, treasury stock, debt discount and expense,
deferred charges and other like intangibles), MINUS (i) reserves applicable
thereto, and (ii) all of Borrowers' liabilities on a consolidated basis
(including accrued and deferred income taxes).

"NON-USE FEE" shall have the meaning assigned to it in SECTION
2.6(b).

"NOTE" shall have the meaning assigned to it in SECTION 2.1(b) and
shall be substantially in the form of EXHIBIT B.

"NOTICE OF ADVANCE" shall have the meaning assigned to it in
SECTION 2.1.

"NOTICE OF CONVERSION/CONTINUATION" shall mean a notice in
substantially the form of EXHIBIT D.

"OBLIGATIONS" shall mean all loans, advances, debts, liabilities
and obligations, including, without limitation, the Loans and Letter of
Credit Obligations, for the performance of covenants, tasks or duties or for
payment of monetary amounts (whether or not such performance is then required
or contingent, or amounts are liquidated or determinable) owing by any
Borrower or any Subsidiary thereof to Lender, and all covenants and duties
regarding such amounts, of any kind or nature, present or future, whether or
not evidenced by any note, agreement or other Instrument, arising under the
Agreement or any of the other Loan Documents. This term includes all
principal, interest (including,

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<PAGE>

without limitation, all interest which accrues after the commencement of any
case or proceedings in bankruptcy after the insolvency of, or for the
reorganization of, any Borrower or any Subsidiary thereof, whether or not
allowed in such proceeding), Fees, Charges, expenses, attorneys' fees and any
other sum chargeable to any Borrower or any Subsidiary thereof under the
Agreement or any of the other Loan Documents.

"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor thereto.

"PENSION PLAN" shall mean an employee pension benefit plan, as
defined in Section 3(2) of ERISA (other than a Multiemployer Plan), which is
not an individual account plan, as defined in Section 3(34) of ERISA, and
which any Borrower or any Subsidiary thereof or, if a Title IV Plan, any
ERISA Affiliate maintains, contributes to or has an obligation to contribute
to on behalf of participants who are or were employed by any of them.

"PERMITTED ENCUMBRANCES" shall mean the following encumbrances: (i)
Liens for taxes or assessments or other governmental Charges or levies, not
yet due and payable; (ii) pledges or deposits securing obligations under
workmen's compensation, unemployment insurance, social security or public
liability laws or similar legislation; (iii) pledges or deposits securing
bids, tenders, contracts (other than contracts for the payment of money) or
leases to which any Borrower or any Subsidiary thereof is a party as lessee
made in the ordinary course of business; (iv) deposits securing statutory
obligations of any Borrower or any Subsidiary thereof; (v) inchoate and
unperfected workers', mechanics', suppliers' or similar liens arising in the
ordinary course of business; (vi) carriers', warehousemen's or other similar
possessory liens arising in the ordinary course of business and securing
liabilities in an outstanding aggregate amount not in excess of $100,000 at
any time; (vii) deposits securing, or in lieu of, surety, appeal or customs
bonds in proceedings to which any Borrower or any Subsidiary thereof is a
party; (viii) any attachment or judgment lien, unless the judgment it secures
shall not, within 30 days after the entry thereof, have been discharged or
execution thereof stayed pending appeal, or shall not have been discharged
within 30 days after the expiration of any such stay; (ix) zoning
restrictions, easements, licenses, or other restrictions on the use of real
property or other minor irregularities in title (including leasehold title)
thereto, so long as the same do not materially impair the use, value, or
marketability of such real property, lease or leasehold estate; (x) Liens
existing on the Closing Date and listed on SCHEDULE 7.7 hereto; and (xi)
other Liens securing Indebtedness or the purchase price permitted pursuant to
the terms of this Agreement, including but not limited to, under SECTION 7.1
hereof.

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<PAGE>

"PERSON" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company, institution, public benefit
corporation, other entity or government (whether federal, state, county,
city, municipal, local, foreign, or otherwise, including any instrumentality,
division, agency, body or department thereof).

"PLAN" shall mean, with respect to any Borrower, any Subsidiary
thereof or any ERISA Affiliate, at any time, an employee benefit plan, as
defined in Section 3(3) of ERISA, which any Borrower or any Subsidiary
thereof maintains, contributes to or has an obligation to contribute to on
behalf of participants who are or were employed by any of them.

"PRIME RATE" shall mean a rate per year equal to that rate of
interest per year announced from time to time by Lender called its prime
rate, which rate at any time may not be the lowest rate charged by Lender.
Changes in the Prime Rate shall take effect on the date set forth in each
announcement for a change in the Prime Rate.

"PRIME RATE LOAN" shall mean a portion of an Advance bearing
interest by reference to the Prime Rate.

"QUALIFIED PLAN" shall mean an employee pension benefit plan, as
defined in Section 3(2) of ERISA, which is intended to be tax-qualified under
Section 401(a) of the IRC, and which any Borrower, any Subsidiary thereof or
any ERISA Affiliate maintains, contributes to or has an obligation to
contribute to on behalf of participants who are or were employed by any of
them.

"REIMBURSEMENT OBLIGATION" shall have the meaning assigned to it in
SECTION 2.2(e).

"RELEASE" shall mean, as to any Person, any material release,
spill, emission, leaking, pumping, injection, deposit, disposal, discharge,
dispersal, dumping, leaching or migration of Hazardous Materials in the
indoor or outdoor environment by such Person, including the movement of
Hazardous Materials through or in the air, soil, surface water, ground water
or property.

"REPORTABLE EVENT" shall mean any of the events described in
Section 4043(b) (1), (2), (3), (5), (6), (8) or (9) of ERISA.

"RESTRICTED PAYMENT" shall mean (i) the declaration or payment of
any dividend or the incurrence of any liability to make any other payment or
distribution of cash or other property or assets in respect of a Person's
Stock, (ii) any payment on account of the purchase, redemption, defeasance or
other retirement of a Person's Stock or any other payment or distribution
made in respect thereof, either directly or indirectly, or (iii) any payment,
loan,

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<PAGE>

contribution, or other transfer of funds or other property to any Stockholder
of such Person, except salary and cash bonuses paid to Guarantor.

"RETIREE WELFARE PLAN" shall refer to any Welfare Plan providing
for continuing coverage or benefits for any participant or any beneficiary of
a participant after such participant's termination of employment, other than
continuation coverage provided pursuant to Section 4980B of the IRC and at
the sole expense of the participant or the beneficiary of the participant.

"SCHEDULE OF DOCUMENTS" shall mean the schedule, including all
appendices, exhibits or schedules thereto, listing certain documents and
information to be delivered in connection with the Agreement, the other Loan
Documents and the transactions contemplated thereunder, substantially in the
form attached hereto as SCHEDULE B.

"SECURITY AGREEMENT" shall mean the Security Agreement of even date
herewith entered into among Lender, Borrowers and their Subsidiaries,
substantially in the form of EXHIBIT C, including all amendments,
restatements, modifications and supplements thereto, and shall refer to the
Security Agreement as the same may be in effect at the time such reference
becomes operative.

"SOLVENT" shall mean, with respect to any Person, that (i) the
fair salable value of its assets exceeds the fair present value of its
liabilities (including all liabilities whether reflected on a balance sheet
prepared in accordance with GAAP or otherwise and whether direct, indirect,
fixed, contingent, disputed or undisputed); (ii) such Person is able to pay
its debts when due; and (iii) such Person has capital sufficient to carry on
its current business and all businesses in which it is about to engage.

"STATED AMOUNT" of each Letter of Credit means the "Stated Amount"
as defined therein.

"STATED EXPIRY DATE" shall have the meaning assigned to it in
SECTION 2.2.

"STOCK" shall mean all shares, options, warrants, general or
limited partnership interests or other equivalents (regardless of how
designated) of or in a corporation, partnership or equivalent entity whether
voting or nonvoting, including common stock, preferred stock or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General
Rules and Regulations promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended).

"SUBSIDIARY" shall mean, with respect to any Person, (i) any
corporation of which an aggregate of more than fifty percent (50%) of the
outstanding Stock having ordinary voting power to

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<PAGE>

elect a majority of the board of directors of such corporation (irrespective
of whether, at the time, Stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening
of any contingency) is at the time, directly or indirectly, owned legally or
beneficially by such Person and/or one or more Subsidiaries of such Person,
or with respect to which any such Person has the right to vote or designate
the vote of fifty percent (50%) or more of such Stock whether by proxy,
agreement, operation of law or otherwise and (ii) any partnership in which
such Person and/or one or more Subsidiaries of such Person shall have an
interest (whether in the form of voting or participation in profits or
capital contribution) of more than fifty percent (50%) or of which any such
Person is a general partner or may exercise the powers of a general partner.

"TAXES" shall mean taxes, levies, imposts, deductions, Charges or
withholdings, and all liabilities with respect thereto, excluding taxes
imposed on or measured by the net income of Lender by the jurisdictions under
the laws of which Lender is organized or any political subdivision thereof.

"TERMINATION DATE" shall mean the earliest of (i) December 29,
1999, (ii) the date of termination of Lender's obligations to advance funds
or permit existing advances to remain outstanding pursuant to SECTION 8.2,
and (iii) the date of indefeasible prepayment in full by Borrowers of the
Loans, and the permanent reduction of the Commitment to zero dollars ($0), in
accordance with the provisions of SECTION 2.3.

"TITLE IV PLAN" shall mean a Pension Plan, other than a
Multiemployer Plan, which is covered by Title IV of ERISA.

"UNFUNDED PENSION LIABILITY" shall mean, at any time, the aggregate
amount, if any, of the sum of (i) the amount by which the present value of
all accrued benefits under each Title IV Plan exceeds the fair market value
of all assets of such Title IV Plan allocable to such benefits in accordance
with Title IV of ERISA, all determined as of the most recent valuation date
for each such Title IV Plan using the actuarial assumptions in effect under
such Title IV Plan, and (ii) for a period of five (5) years following a
transaction reasonably likely to be covered by Section 4069 of ERISA, the
liabilities (whether or not accrued) that could be avoided by any Borrower,
any Subsidiary thereof or any ERISA Affiliate as a result of such transaction.

"WELFARE PLANS" shall mean any welfare plan, as defined in Section
3(1) of ERISA, which is maintained or contributed to by any Borrower, any
Subsidiary thereof or any ERISA Affiliate.

"WITHDRAWAL LIABILITY" shall mean, at any time, the aggregate
amount of the liabilities, if any, pursuant to Section

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<PAGE>

4201 of ERISA, and any increase in contributions pursuant to Section 4243 of
ERISA with respect to all Multiemployer Plans.

1.2 OTHER DEFINITIONAL PROVISIONS. Unless otherwise defined or the
context otherwise requires, all financial and accounting terms used herein or
in any certificate or other document made or delivered pursuant hereto shall
be defined in accordance with GAAP. Unless otherwise defined therein, all
terms defined in this Agreement shall have the defined meanings when used in
the Note or in any certificate or other document made or delivered pursuant
hereto. Terms used in this Agreement which are defined in any Exhibit hereto
shall, unless the context otherwise indicates, have the meanings given them
in such Exhibit. Other terms used in this Agreement shall, unless the
context indicates otherwise, have the meanings provided for by the UCC to the
extent the same are used or defined therein.

1.3 INTERPRETATION OF AGREEMENT. A SECTION, an EXHIBIT or a
SCHEDULE is, unless otherwise stated, a reference to a section hereof, an
exhibit hereto or a schedule hereto, as the case may be. Section captions
used in this Agreement are for convenience only, and shall not affect the
construction of this Agreement. The words "hereof," "herein," "hereto" and
"hereunder" and words of similar purport when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of
this Agreement.

2. AMOUNT AND TERMS OF CREDIT

2.1 ADVANCES. (a) Subject to the terms and conditions of this
Agreement, the Lender agrees to make advances (the "ADVANCE(S)") to the
Borrowers, from time to time from the date of this Agreement until the
Termination Date, at such times and in such amounts as the Borrowers may
request, not to exceed in the aggregate at any one time outstanding the
difference of (i) the Commitment, MINUS (ii) the Letter of Credit Obligation.
Until all amounts outstanding in respect of the Loans shall become due and
payable on the Termination Date, Borrowers may from time to time borrow,
repay and reborrow under this SECTION 2.1(a). Each Advance to a Borrower
shall be made on notice by such Borrower to the Lender at its principal
banking office at 50 South LaSalle Street, Chicago, Illinois 60675, given no
later than 11:00 a.m. (Chicago time) on (a) the Business Day of the proposed
Advance or, (b) in the case of a request for an Advance that is a LIBOR Loan,
two (2) Business Days prior to the date of the proposed Advance; PROVIDED,
HOWEVER, that any Advance requested as a LIBOR Loan shall be in a minimum
amount of $250,000 and integral multiples of $50,000 in excess of such
amount. Each such notice (a "NOTICE OF ADVANCE") shall be substantially in
the form of EXHIBIT A hereto, specifying therein the requested date, the
amount and type of such Advance, and such other information as may be
required by Lender and shall be given in writing (by telecopy or overnight
courier) or by telephone confirmed immediately in writing if requested by the

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Lender. Lender shall be entitled to rely upon, and shall be fully protected
under this Agreement in relying upon, any Notice of Advance believed by
Lender to be genuine and to assume that each Person executing and delivering
the same was duly authorized unless the responsible individual acting thereon
for Lender shall have, at the time of reliance thereon, actual knowledge to
the contrary.

(b) Borrowers shall execute and deliver to the Lender a note
to evidence the Loans, such note to be in the principal amount of the
Commitment, dated the date hereof and substantially in the form of EXHIBIT B
hereto (the "NOTE"). The Note shall represent the joint and several
obligation of each Borrower to pay the amount of the Commitment or, if less,
the aggregate unpaid principal amount of all Advances made by the Lender to
Borrowers and all other obligations with interest thereon as prescribed in
SECTION 2.5. The date and amount of each Advance and each payment of
principal with respect thereto shall be recorded on the books and records of
the Lender, which books and records shall constitute PRIMA FACIE evidence of
the accuracy of the information therein recorded. The entire unpaid balance
of the Loans shall be immediately due and payable on the Termination Date.

(c) Each Borrower hereby designates Akorn as its sole agent
for the purposes of issuing Notices of Advances, requesting an issuance of a
Letter of Credit, selecting interest rate options and receiving notices and
consents hereunder.

2.2 LETTERS OF CREDIT.

(a) REQUESTS. By delivering to Lender an Issuance Request
substantially in the form of SCHEDULE A hereto, on or before 3:00 p.m.,
Chicago time, Borrowers may request, from time to time prior to the
Termination Date and on not less than two Business Days' notice, that the
Lender issue a standby letter of credit, and for such purposes described in
the Issuance Request (as used herein, the term "issue" when referring to
Letters of Credit shall include any increase in the amount of or extension
of the term of any Letter of Credit). The Stated Amount of any Letter of
Credit requested to be issued pursuant to such Issuance Request shall be
denominated in U.S. dollars. Each Letter of Credit shall by its terms:

(i) be issued in a Stated Amount which, together with all Letter
of Credit Obligations and the Loans, in the aggregate does not exceed (or
would not exceed) the Commitment;

(ii) be stated to expire on a date (its "STATED EXPIRY DATE") no
later than the Termination Date; and

(iii) on or prior to its Stated Expiry Date:

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(A) terminate immediately upon notice to the Lender from
the beneficiary thereunder that all obligations covered thereby have
been terminated, paid, or otherwise satisfied in full, or

(B) reduce in part immediately and to the extent the
beneficiary thereunder has notified the Lender thereof that the
obligations covered thereby have been paid or otherwise satisfied in
part.

By delivery to the Lender of an Issuance Request at least two Business Days
prior to the Stated Expiry Date of any Letter of Credit, Borrowers may
request the Lender to extend the Stated Expiry Date of such Letter of Credit
for an additional period not to exceed the period ending on the Termination
Date.

(b) ISSUANCES AND EXTENSIONS. Subject to the terms and conditions
of this Agreement, the Lender shall issue Letters of Credit, and extend the
Stated Expiry Dates of outstanding Letters of Credit, in accordance with the
Issuance Requests made therefor. If the Issuance Request consists of, or is
supplemented by, the Lender's standard letter of credit application form, the
terms of such application shall apply with respect to such Letter of Credit,
but only to the extent such terms are not inconsistent with the provisions
hereof.

(c) FEES AND EXPENSES. Borrowers agree to pay to the Lender, (i)
in respect of each standby Letter of Credit, a fee equal to 1.00% per annum
(calculated from and including the date of issuance (or date of renewal or
extension, if any) thereto to the Stated Expiry Date thereof) on the Stated
Amount of each such Letter of Credit, payable in advance on the last Business
Day of each Fiscal Quarter and on the Termination Date, and (ii)upon demand
from time to time, Lender's standard issuance, administrative, operating and
other fees and charges in effect from time to time in connection with the
fronting, issuance, maintenance, modification (if any) and administration of
each Letter of Credit.

(d) DISBURSEMENTS. The Lender will notify Akorn promptly of the
presentment for payment of any Letter of Credit, together with notice of the
date (the "DISBURSEMENT DATE") such payment shall be made. Subject to the
terms and provisions of such Letter of Credit, the Lender shall make such
payment to the beneficiary (or its designee) of such Letter of Credit. Prior
to 12:00 noon, Chicago time, on the Disbursement Date, Borrower will
reimburse the Lender for all amounts which it has disbursed under such Letter
of Credit. To the extent the Lender is not reimbursed in full in accordance
with this subsection, Borrower's Reimbursement Obligation shall accrue
interest at a fluctuating rate determined by reference to the Prime Rate,
plus a margin of 2% per annum, payable on demand. In the event the Lender is
not

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<PAGE>

reimbursed by Borrower on the Disbursement Date, or if the Lender must for
any reason return or disgorge such reimbursement, the Lender shall fund the
Reimbursement Obligation therefor by making Loans as provided in SECTION 2.1
(Borrowers being deemed to have given a timely request therefor for such
amount); PROVIDED, HOWEVER, for the purpose of determining the availability
of the Advances immediately prior to giving effect to the application of the
proceeds of such Loans, such Reimbursement Obligations shall be deemed not to
be outstanding at such time.

(e) REIMBURSEMENT. Borrowers' obligation (a "REIMBURSEMENT
OBLIGATION") under subsection (d) of this SECTION 2.2 to reimburse the Lender
with respect to each Disbursement (as defined below) (including interest
thereon) shall be absolute and unconditional under any and all circumstances
and irrespective of any set-off, counterclaim, or defense to payment which
Borrowers may have or have had against the Lender or any beneficiary of a
Letter of Credit, including any defense based upon the occurrence of any
Event of Default or Default, any draft, demand, or certificate, or other
document presented under a Letter of Credit proving to be forged, fraudulent,
invalid, or insufficient, the failure of any Disbursement to conform to the
terms of the applicable Letter of Credit (if, in the Lender's good faith
opinion, such Disbursement is determined to be appropriate) or any
non-application or misapplication by the beneficiary of the proceeds of such
Disbursement, or the legality, validity, form, regularity, or enforceability
of such Letter of Credit. "DISBURSEMENT" means any payment made under a
Letter of Credit by the Lender to the beneficiary thereunder.

(f) DEEMED DISBURSEMENTS. Upon the occurrence and during the
continuation of any Event of Default, an amount equal to that portion of
Letter of Credit Obligations attributable to outstanding and undrawn Letters
of Credit shall, at the option of the Lender, and without demand upon or
notice to Akorn, be deemed to have been paid or disbursed by the Lender under
such Letters of Credit (notwithstanding that such amount may not in fact have
been so paid or disbursed), and, upon notification by the Lender to Akorn of
its obligations under this subsection, Borrowers shall be immediately
obligated to reimburse the Lender the amount deemed to have been so paid or
disbursed by the Lender. Any amounts so received by the Lender from
Borrowers pursuant to this subsection shall be held as collateral security
for the repayment of Borrowers' obligations in connection with the Letters of
Credit. At any time when such Letters of Credit shall terminate and all
Reimbursement Obligations to the Lender are either terminated or paid or
reimbursed to the Lender in full, the obligations of Borrowers under this
subsection shall be reduced accordingly (subject, however, to reinstatement
in the event any payment in respect of such Letters of Credit is recovered in
any manner from any Lender), and, if no Event of Default shall be continuing,
the Lender will return to Borrowers the excess, if any, of

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(i) the aggregate amount deposited by Borrowers with the Lender and
not theretofore applied by the Lender to any Reimbursement Obligation; over

(ii) the aggregate amount of all Reimbursement Obligations to the
Lender pursuant to this subsection, as so adjusted.

At such time when all Events of Default shall have been cured or waived, the
Lender shall return to Borrower all amounts then on deposit with the Lender
pursuant to this subsection. All amounts on deposit pursuant to this subsection
shall, until their application to any Reimbursement Obligation or their return
to Borrowers, as the case may be, bear interest at the daily average Federal
Funds Rate (without taking into account the Applicable Percentage) from time to
time in effect (net of the costs of any reserve requirements, in respect of
amounts on deposit pursuant to this Section, pursuant to Federal Reserve Board
Regulation D), which interest shall be held by the Lender as additional
collateral security for the repayment of the Letter of Credit obligations in
connection with the Letters of Credit issued by the Lender.

(g) NATURE OF REIMBURSEMENT OBLIGATIONS. Borrowers shall assume all
risks of the acts, omissions, or misuse of any Letter of Credit by the
beneficiary thereof. The Lender (except to the extent of its own gross
negligence or wilful misconduct) shall not be responsible for:

(i) the form, validity, sufficiency, accuracy, genuineness, or legal
effect of any Letter of Credit or any document submitted by any party in
connection with the application for an issuance of a Letter of Credit, even
if it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent, or forged;

(ii) the form, validity, sufficiency, accuracy, genuineness, or legal
effect of any instrument transferring or assigning or purporting to
transfer or assign a Letter of Credit or the rights or benefits thereunder
or proceeds thereof in whole or in part, which may prove to be invalid or
ineffective for any reason;

(iii) failure of the beneficiary to comply fully with conditions
required in order to demand payment under a Letter of Credit;

(iv) errors, omissions, interruptions, or delays in transmission or
delivery of any messages, by mail, cable, telegraph, telex or otherwise; or

(v) any loss or delay in the transmission or otherwise of any
document or draft required in order to make a

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<PAGE>

Disbursement under a Letter of Credit or of the proceeds thereof.

None of the foregoing shall affect, impair, or prevent the vesting of any of the
rights or powers granted the Lender hereunder.

2.3 PREPAYMENT, COMMITMENT REDUCTION. Borrowers shall have the right
at any time on three (3) days' prior written notice to the Lender to voluntarily
prepay all or part of the Loans and permanently reduce or terminate the
Commitment, and no prepayment fee, premium or penalty shall be payable in
connection with any such voluntary prepayment, except LIBOR funding breakage
costs in accordance with SECTION 2.10(b). Within three (3) days from a closing
date of a real estate financing by the Borrowers, the Loans shall be prepaid and
the Commitment shall be permanently reduced by an amount equal to 75% of the
difference of (i) the net proceeds of such financing, MINUS (ii) $1,000,000, in
accordance with the terms of this SECTION 2.3. Upon any such prepayment and
permanent reduction or termination of the Commitment, Borrowers' right to
receive Advances shall simultaneously terminate or be permanently reduced, as
the case may be.

2.4 USE OF PROCEEDS. Borrowers shall utilize the proceeds of
Advances for working capital financing for the Borrowers and funding for
acquisitions and other general corporate purposes of the Borrowers.

2.5 INTEREST ON LOANS.

(a) Borrowers shall pay interest to Lender, in arrears on each
applicable Interest Payment Date, based on the amounts outstanding from time to
time under the Loan, at a rate equal to (i) the Prime Rate, (ii) the applicable
LIBOR Rate or (iii) the Federal Funds Rate.

(b) If any payment on the Loans becomes due and payable on a day
other than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day (except as set forth in the definition of LIBOR Period)
and, with respect to payments of principal, interest thereon shall be payable at
the then applicable rate during such extension.

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

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<PAGE>

(d) So long as any Event of Default shall have occurred and be
continuing, and after written notice from the Lender to Akorn, the interest
rates applicable to the Loans and any other Obligations shall be increased by
two percent (2%) per annum above the rate of interest otherwise applicable
hereunder ("DEFAULT RATE").

(e) Notwithstanding anything to the contrary set forth in
this SECTION 2.5, if, at any time until payment in full of all of the
Obligations, the rate of interest payable hereunder exceeds the highest rate
of interest permissible under any law which a court of competent jurisdiction
shall, in a final determination, deem applicable hereto (the "MAXIMUM LAWFUL
RATE"), then in such event and so long as the Maximum Lawful Rate would be so
exceeded, the rate of interest payable hereunder shall be equal to the
Maximum Lawful Rate; PROVIDED, HOWEVER, that if at any time thereafter the
rate of interest payable hereunder is less than the Maximum Lawful Rate,
Borrowers shall continue to pay interest hereunder at the Maximum Lawful Rate
until such time as the total interest received by Lender from the making of
such advances hereunder is equal to the total interest which would have been
received had the interest rate payable hereunder been (but for the operation
of this paragraph) the interest rate payable since the Closing Date as
otherwise provided in this Agreement. Thereafter, the interest rate payable
hereunder shall be the rate of interest provided in SECTIONS 2.5(b) through
(d) of this Agreement, unless and until the rate of interest again exceeds
the Maximum Lawful Rate, in which event this paragraph shall again apply. In
no event shall the total interest received by Lender pursuant to the terms
hereof exceed the amount which Lender could lawfully have received had the
interest due hereunder been calculated for the full term hereof at the
Maximum Lawful Rate. In the event the Maximum Lawful Rate is calculated
pursuant to this paragraph, such interest shall be calculated at a daily rate
equal to the Maximum Lawful Rate divided by the number of days in the year in
which such calculation is made. In the event that a court of competent
jurisdiction, notwithstanding the provisions of this SECTION 2.5(e), shall
make a final determination that Lender has received interest hereunder or
under any of the other Loan Documents in excess of the Maximum Lawful Rate,
Lender shall, to the extent permitted by applicable law, promptly apply such
excess first to any interest due and not yet paid hereunder in respect of the
Loans, then to the outstanding principal of the Loans, then to Fees and any
other unpaid Obligations and thereafter shall refund any excess to Borrowers
or as a court of competent jurisdiction may otherwise order.

2.6 FEES. As compensation for Lender's costs and risks in making the
Loan available to Borrowers, Borrowers agree to pay to Lender, in arrears, on
the last Business Day of each month prior to the Termination Date and on the
Termination Date, a fee for Borrowers' non-use of available funds (the "NON-USE
FEE") in an amount equal to one quarter of one percent (0.25%) per annum

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<PAGE>

(calculated on the basis of a 360 day year for actual days elapsed) of the
difference between the respective daily averages of (i) the Commitment (as it
may be adjusted from time to time hereunder) and (ii) the sum of (x) the amount
of the Loan outstanding, PLUS (y) the Letter of Credit Obligations during the
period for which the Non-Use Fee is due.

2.7 CHARGING OF ACCOUNTS. The Borrowers hereby authorize the Lender,
and the Lender may, in its sole and absolute discretion charge to the Borrowers
at any time all or any portion of any of the Obligations then due and owing (and
interest, if any, thereon) including but not limited to any Fees and other costs
and expenses of the Lender for which the Borrowers are liable pursuant to the
terms of this Agreement or any other Loan Document, by charging Akorn's demand
deposit account or any other bank account with the Lender; PROVIDED, HOWEVER
that the provisions of this SECTION 2.7 shall not affect the Borrowers'
obligation to pay when due all amounts payable by the Borrowers under this
Agreement, the Note or any other Loan Document, whether or not there are
sufficient funds therefor in the demand deposit account or any other bank
account of Akorn with the Lender.

2.8 APPLICATION AND ALLOCATION OF PAYMENTS. Lender is authorized to,
and at its option may, make or cause to be made Advances on behalf of Borrowers
for payment of all Fees, expenses, Charges, costs, principal, interest, or other
Obligations owing by Borrower under this Agreement or any of the other Loan
Documents if and to the extent any such Borrower fails to promptly pay any such
amounts as and when due, even if such Advance would cause total Advances to
exceed the Loan Commitment. At Lender's option and to the extent permitted by
law, any advances so made shall be deemed Advances constituting part of the Loan
hereunder. Following the occurrence and during the continuance of an Event of
Default, Borrowers hereby irrevocably waive the right to direct the application
of any and all payments at any time or times hereafter received from or on
behalf of any such Borrower, and each Borrower hereby irrevocably agrees that
Lender shall have the continuing exclusive right to apply any and all such
payments against the then due and payable Obligations of Borrowers and in
repayment of the Loan as Lender may deem advisable notwithstanding any previous
entry by Lender upon the Loan Account or any other books and records. In the
absence of a specific determination by Lender with respect thereto, the same
shall be applied in the following order: (i) to then due and payable interest
payments on the Loans; (ii) to principal payments on the Loan; (iii) to then due
and payable Fees and expenses; (iv) to then due and payable Obligations other
than Fees, expenses and interest and principal payments; and (v) to all other
then due and payable Obligations.

2.9 LOAN ACCOUNT AND ACCOUNTING. Lender shall maintain a loan
account (the "LOAN ACCOUNT") on its books to record:(a) all Advances, (b) all
payments made by Borrowers and (c) all other

25
<PAGE>

appropriate debits and credits as provided in this Agreement with respect to
the Loans or any other Obligations. All entries in the Loan Account shall be
made in accordance with Lender's customary accounting practices as in effect
from time to time. Borrowers shall pay all Obligations as such amounts
become due or are declared due pursuant to the terms of this Agreement.

The balance in the Loan Account shall be presumptive evidence of
the amounts due and owing to Lender by Borrower; PROVIDED, THAT, any failure
to so record or any error in so recording shall not limit or otherwise affect
Borrowers' obligations to pay the Obligations. Any accounting provided by
Lender to Akorn regarding the Loan Account shall (absent manifest error) be
deemed final, binding and conclusive upon Borrowers in all respects as to all
matters reflected therein, unless Akorn, within thirty (30) days after the
date any such accounting is rendered, shall notify Lender in writing of any
objection which Borrowers may have to any such accounting, describing the
basis for such objection with specificity. In that event, only those items
expressly objected to in such notice shall be deemed to be disputed by
Borrowers. Lender's determination, based upon the facts available, of any
item objected to by Akorn in such notice shall (absent manifest error) be
final, binding and conclusive on Borrowers.

2.10 INDEMNITY.(a) Each Borrower shall indemnify and hold each of
Lender and its Affiliates, and each of Lender's and its Affiliates'
respective officers, directors, employees, attorneys, agents and
representatives (each an "INDEMNIFIED PERSON") harmless from and against any
and all suits, actions, proceedings, claims, damages, losses, liabilities and
expenses (including attorneys' fees and disbursements and other costs of
investigation or defense, including those incurred upon any appeal) which may
be instituted or asserted against or incurred by any such Indemnified Person
as the result of credit having been extended under this Agreement and the
other Loan Documents or in connection with or arising out of the transactions
contemplated hereunder and thereunder or any actions or failures to act in
connection therewith, including any and all Environmental Liabilities and
Costs; PROVIDED, THAT no Borrower shall be liable for any indemnification to
such Indemnified Person to the extent that any such suit, action, proceeding,
claim, damage, loss, liability or expense results solely from such
Indemnified Person's gross negligence or willful misconduct, as finally
determined by a court of competent jurisdiction after exhaustion of all
available appeals. NEITHER LENDER NOR ANY OTHER INDEMNIFIED PERSON SHALL BE
RESPONSIBLE OR LIABLE TO ANY OTHER PARTY HERETO, ANY SUCCESSOR, ASSIGNEE OR
THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER PERSON ASSERTING CLAIMS
DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR
CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN
EXTENDED OR TERMINATED UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

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<PAGE>

(b) Borrowers understand that in connection with Lender's
arranging to provide the LIBOR Rate interest option, Lender may enter into
funding arrangements with third parties ("FUNDING ARRANGEMENTS") on terms and
conditions which could result in losses to Lender if such LIBOR Rate funds do
not remain outstanding at the interest rates provided herein for the entire
LIBOR Period with respect to which the LIBOR Rate has been fixed.
Consequently, in order to induce Lender to provide such options on the terms
provided herein and in consideration of Lender entering into such Funding
Arrangements from time to time, if any LIBOR Loans are repaid in whole or in
part prior to the last day of any such LIBOR Period therefor, whether such
repayment is made pursuant to any provision of this Agreement or any other
Loan Document or is the result of acceleration, by operation of law or
otherwise, Borrowers shall indemnify and hold harmless Lender from and
against and in respect of any and all losses, costs and expenses resulting
from, or arising out of or imposed upon or incurred by Lender by reason of
the liquidation or reemployment of funds acquired or committed to be acquired
by Lender to fund such LIBOR Loans, pursuant to the Funding Arrangements.
The amount of any losses, costs or expenses resulting in an obligation of
Borrowers to make a payment pursuant to the foregoing sentence shall not
include any losses attributable to lost profit to Lender but shall represent
the excess, if any, of (A) Lender's cost of borrowing the LIBOR Rate funds,
pursuant to the Funding Arrangements over (B) the return to Lender on its
reinvestment of such funds; PROVIDED, HOWEVER, that if Lender terminates any
Funding Arrangements in respect of the LIBOR Loans, the amount of such
losses, costs and expenses shall include the cost to Lender of such
termination. In reinvesting any funds borrowed by Lender pursuant to the
Funding Arrangements, Lender shall take into consideration the remaining
maturity of such borrowings. As promptly as practicable under the
circumstances, Lender shall provide Akorn with its written calculation of all
amounts payable pursuant to the next preceding sentence, and such calculation
shall be binding on the parties hereto unless Akorn shall object thereto in
writing within ten (10) Business Days of receipt thereof.

2.11 ACCESS. (a) Each Borrower shall provide full access during
normal business hours, from time to time upon one (1) Business Day's prior
notice, to Lender and any of its officers, employees and agents, as
frequently as Lender determines, in its reasonable discretion, to be
appropriate (unless a Default or Event of Default shall have occurred and be
continuing, in which event Lender and its officers, employees, designees,
agents and representatives shall have access at any and all times and without
any advance notice), to the properties, facilities, books, and records of
Borrowers and their Subsidiaries, to the Collateral, to the accountants of
Borrowers and the Subsidiaries thereof and to the work papers of such
accountants, and in addition, (x) while any Default or Event of Default shall
have occurred and be continuing, (y) at any time for purposes of inspection,
audit or verification

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<PAGE>

of Accounts, or (z) upon the consent of Akorn, to such Borrower's suppliers,
customers, advisors and employees (including officers). Without limiting the
generality of the foregoing, each Borrower shall (i) permit Lender, and any
of its officers, employees, agents and representatives, to inspect, audit and
make extracts from all of such Borrower's and its Subsidiaries' records,
files and books of account and (ii) permit Lender, and any of its officers,
employees, agents and representatives, to inspect, review and evaluate the
Accounts at such Borrower's and its Subsidiaries' locations and at premises
not owned by or leased to such Borrower or any Subsidiary of such Borrower.
Each Borrower shall make available to Lender and its counsel, as quickly as
is possible under the circumstances, originals or copies of all books,
records, board minutes, contracts, insurance policies, environmental audits,
business plans, files, financial statements (actual and pro forma), filings
with federal, state and local regulatory agencies, and other instruments and
documents which Lender may request. Each Borrower shall deliver any document
or instrument necessary for Lender, as it may from time to time request, to
obtain records from any service bureau or other Person which maintains
records for such Borrower, and shall maintain duplicate records or supporting
documentation on media, including computer tapes and discs owned by such
Borrower. Borrowers shall instruct their certified public accountants to
make available to Lender such information and records as Lender may request.

(b) A fee of $500 per day per individual or Lender's then standard
rate, whichever is greater, (plus all reasonable out-of-pocket costs and
expenses) in connection with Lender's field examinations permitted under
SECTION 2.11(a) above and SECTION 5(g) of the Security Agreement shall be
paid promptly by Borrowers in connection with each field audit conducted
after the Closing Date.

2.12 TAXES. (a) Any and all payments by any Borrower hereunder or
under the Note shall be made, in accordance with this SECTION 2.12, free and
clear of and without deduction for any and all present or future Taxes. If
any Borrower shall be required by law to deduct any Taxes from or in respect
of any sum payable hereunder or under the Note, (i) the sum payable shall be
increased as much as shall be necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this SECTION 2.12) Lender shall receive an amount equal to the sum Lender
would have received had no such deductions been made, (ii) such Borrower
shall make such deductions, and (iii) such Borrower shall pay the full amount
deducted to the relevant taxing or other authority in accordance with
applicable law.

(b) Borrowers shall indemnify and pay, within ten (10) days of
demand therefor, Lender for the full amount of Taxes (including any Taxes
imposed by any jurisdiction on amounts payable under this SECTION 2.12) paid by
Lender and any liability (including penalties, interest and expenses) arising
therefrom or

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<PAGE>

with respect thereto, whether or not such Taxes were correctly or legally
asserted.

2.13 CAPITAL ADEQUACY; INCREASED COSTS; ILLEGALITY. (a) In the
event that Lender shall have determined that the adoption after the date
hereof of any law, treaty, governmental (or quasi-governmental) rule,
regulation, guideline or order regarding capital adequacy, reserve
requirements or similar requirements or compliance by Lender with any request
or directive regarding capital adequacy, reserve requirements or similar
requirements (whether or not having the force of law and whether or not
failure to comply therewith would be unlawful) from any central bank or
governmental agency or body having jurisdiction does or would have the effect
of increasing the amount of capital, reserves or other funds required to be
maintained by Lender and thereby reducing the rate of return on Lender's
capital as a consequence of its obligations hereunder, then Borrowers shall
from time to time within fifteen (15) days after notice and demand on Akorn
by Lender (together with the certificate referred to in the next sentence)
pay to Lender additional amounts sufficient to compensate Lender for such
reduction. A certificate as to the amount of such cost and showing the basis
of the computation of such cost submitted by Lender to Borrowers shall,
absent manifest error, be final, conclusive and binding for all purposes.

(b) If, due to either (i) the introduction of or any change
in or in the interpretation of any law or regulation or (ii) the compliance
with any guideline or request from any central bank or other Governmental
Authority (whether or not having the force of law), including, without
limitation, any requirement that Lender hold reserves with respect to the
Loan, or the Loan Commitment, there shall be any increase in the cost to
Lender of agreeing to make or making, funding or maintaining of any Loan,
then Borrowers shall from time to time, upon demand by Lender, pay to Lender
for the account of Lender additional amounts sufficient to compensate Lender
for such increased cost. A certificate as to the amount of such increased
cost, submitted to Akorn by Lender, shall be conclusive and binding on
Borrowers for all purposes, absent manifest error. Lender agrees that, as
promptly as practicable after it becomes aware of any circumstances referred
to in CLAUSE (i) or (ii) above which would result in any such increased cost
to Lender, it shall, to the extent not inconsistent with Lender's internal
policies of general application, use reasonable commercial efforts to
minimize costs and expenses incurred by it and payable to it by Borrowers
pursuant to this SECTION 2.13 (b).

(c) Notwithstanding anything to the contrary contained herein,
if the introduction of or any change in or in the interpretation of any law or
regulation shall make it unlawful, or any central bank or other Governmental
Authority shall assert that it is unlawful, for Lender to agree to make or to
make or to

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<PAGE>

continue to fund or maintain any LIBOR Loan, then, unless Lender is able to
agree to make or to make or to continue to fund or to maintain such LIBOR
Loan at another branch or office of Lender without, in Lender's opinion,
adversely affecting it or its Loans or the income obtained therefrom, on
notice thereof and demand therefor by Lender to Borrowers, (i) the obligation
of Lender to agree to make or to make or to continue to fund or maintain
LIBOR Loans shall terminate and (ii) Borrowers shall forthwith prepay in full
all outstanding LIBOR Loans, together with interest accrued thereon, UNLESS
Borrowers, within five (5) Business Days after the delivery of such notice
and demand, convert all such Loans into a Loan bearing interest based on the
Prime Rate.

(d) Upon Lender obtaining actual knowledge of the occurrence
of any of the events set forth in this SECTION 2.13, Lender shall promptly
notify Akorn of the occurrence of such event. Borrowers shall have the right
within five (5) days of receipt of such notice to convert any outstanding
LIBOR Loans to Prime Rate Loans.

2.14 CONVERSION AND CONTINUATION ELECTIONS.

(a) Borrowers may, upon irrevocable written notice (or telephonic
notice promptly confirmed in writing) to Lender in accordance with SECTION
2.14(b):

(i) elect, as of any Business Day, in the case of Floating Rate
Loans, or as of the last day of the applicable LIBOR Period, in the
case of LIBOR Loans, to convert any such Loans (or any part thereof in
an aggregate minimum amount of $50,000, or integral multiples of
$10,000 in excess thereof, in the case of Floating Rate Loans, and
$250,000, or integral multiples of $50,000 in excess thereof, in the
case of LIBOR Loans) into Loans of any other type; or

(ii) elect as of the last day of the applicable LIBOR Period, to
continue any LIBOR Loans having LIBOR Periods expiring on such day (or
any part thereof in an amount not less than $250,000, or that is in an
integral multiple of $50,000 in excess thereof);

PROVIDED, that if at any time the aggregate amount of LIBOR Loans in
respect of any borrowing is reduced, by payment, prepayment, or conversion
of part thereof to be less than $250,000, such LIBOR Loans shall
automatically convert into Floating Rate Loans, and on and after such date
the right of Borrower to continue such LIBOR Loans as, and convert such
LIBOR Loans into, LIBOR Loans shall terminate.

(b) Borrower shall deliver a Notice of Conversion/Continuation to be
received by Lender not later

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<PAGE>

than 10:00 a.m. (Chicago time) at least (i) two Business Days in advance
of the Conversion/ Continuation Date, if the Loans are to be converted
into or continued as LIBOR Loans and (ii) on the date of the Conversion/
Continuation Date, if the Loans are to be converted into Floating Rate
Loans, specifying:

(i) the proposed Conversion/Continuation Date;

(ii) the aggregate amount of Loans to be converted or continued;

(iii) the type of Loans resulting from the proposed conversion
or continuation; and

(iv) other than in the case of conversions into Floating Rate
Loans, the duration of the requested LIBOR Period.

(c) If upon the expiration of any LIBOR Period applicable to LIBOR
Loans, Borrowers have failed to select a new LIBOR Period to be applicable
to such LIBOR Loans by the time specified in SECTION 2.14(b), or if any
Event of Default then exists, Borrowers shall be deemed to have elected to
convert such LIBOR Loans into Federal Funds Rate Loans effective as of the
expiration date of such LIBOR Period.

3. CONDITIONS PRECEDENT

3.1 CONDITIONS TO THE INITIAL ADVANCE.

Notwithstanding any other provision of this Agreement and without
affecting in any manner the rights of Lender hereunder, Borrowers shall have no
rights under this Agreement (but shall have all applicable obligations
hereunder), and Lender shall not be obligated to make any Advance or to incur
any Letter of Credit Obligation, or to take, fulfill, or perform any other
action hereunder, until the following conditions have been satisfied, in
Lender's sole discretion, or waived in writing by Lender:

(a) CREDIT AGREEMENT. This Agreement or counterparts hereof
shall have been duly executed by, and delivered to, Borrowers and Lender.

(b) LOAN DOCUMENTS. Lender shall have received such guaranties,
documents, instruments, agreements and legal opinions as Lender shall request in
connection with the transactions contemplated by this Agreement and the other
Loan Documents, including all guaranties, documents, instruments, agreements and
legal opinions listed in the Schedule of Documents attached hereto as SCHEDULE
B, each in form and substance satisfactory to Lender.

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<PAGE>

(c) GOVERNMENTAL APPROVALS. Evidence satisfactory to Lender
that Borrowers have obtained consents and acknowledgments of all Persons
whose consents and acknowledgments may be required, including, but not
limited to, all requisite Governmental Authorities, to the terms, and to the
execution and delivery, of this Agreement, the other Loan Documents, and the
consummation of the transactions contemplated hereby and thereby.

(d) INSURANCE. Evidence satisfactory to Lender that the
insurance policies provided for in SECTION 5.6 are in full force and effect,
together with appropriate evidence showing loss payable and/or additional
insured clauses or endorsements, as requested by Lender, in favor of Lender,
and in form and substance satisfactory to Lender.

(e) PAYMENT OF FEES. Payment by Borrowers to Lender of the
fees required to be paid on the Closing Date in the respective amounts
specified in this Agreement.

(f) OFFICER'S CERTIFICATE. Lender shall have received duly
executed originals of a certificate of the chief executive officer or chief
financial officer of Akorn, dated the date hereof, certifying, to the best of
his knowledge after diligent inquiry, to the fulfillment of all conditions
precedent to closing of this Agreement and to the truth and accuracy, as of
such date, of the representations and warranties of Borrowers contained in
this Agreement and each other Loan Document.

(g) COMPLIANCE WITH LAWS. Lender shall have received
evidence satisfactory to Lender and its counsel that each Borrower and each
of its Subsidiaries are in compliance in all material respects, with all
applicable foreign, federal, state and local laws and regulations, including
those relating to labor and environmental matters and ERISA.

3.2 FURTHER CONDITIONS. It shall be a further condition to the
initial and each subsequent Advance and to the incurrence of any Letter of
Credit Obligations that the following statements shall be true on the date of
each such advance or funding, as the case may be:

(i) All of each Borrower's representations and warranties
contained herein or in any of the other Loan Documents shall be true and
correct on and as of the Closing Date and the date on which each such Advance
is made (or such Letter of Credit Obligation is incurred) as though made on
and as of such date, except to the extent that any such representation or
warranty expressly relates to an earlier date and except for changes therein
expressly permitted or expressly contemplated by this Agreement.

(ii) No Material Adverse Effect shall have occurred since the
date hereof.

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(iii) No event shall have occurred and be continuing, or would
result from the making of any Advance (or the incurrence of any Letter of
Credit Obligation), which constitutes or would constitute a Default or an
Event of Default.

The request and acceptance by any Borrower of the proceeds of any
Advance or the incurrence of any Letter of Credit Obligation shall be deemed
to constitute, as of the date of such request or acceptance, a representation
and warranty by Borrowers that the conditions in this SECTION 3.2 have been
satisfied.

4. REPRESENTATIONS AND WARRANTIES

To induce Lender to make the Loans and to incur any Letter of
Credit Obligation, Borrowers make the following representations and
warranties to Lender, each and all of which shall survive the execution and
delivery of this Agreement:

4.1 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each Borrower and
each Subsidiary thereof (i) is a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation and
has been duly qualified to conduct business and is in good standing in each
other jurisdiction where its ownership or lease of property or the conduct of
its business requires such qualifications; (ii) has the requisite corporate
power and authority and the legal right to own, pledge, mortgage or otherwise
encumber and operate its properties, to lease the property it operates under
lease and to conduct its business as now, heretofore and proposed to be
conducted; (iii) has all licenses, permits, consents or approvals from or by,
and has made all filings with, and has given all notices to, all Governmental
Authorities, including but not limited to, FDA and DEA, having jurisdiction,
to the extent required for such ownership, operation and conduct; (iv) is in
compliance with its certificate or articles of incorporation and by-laws; and
(v) is in compliance with all applicable provisions of law, including but not
limited to, the Federal Food, Drug and Cosmetic Act, the Controlled
Substances Act and other United States federal statutes and regulations,
issued by the FDA and DEA.

4.2 EXECUTIVE OFFICES. The current location of each Borrower's
chief executive office and principal place of business is set forth in
SCHEDULE 4.2 and, as of the Closing Date, none of such locations have changed
within the past three (3) months.

4.3 CORPORATE POWER AUTHORIZATION, ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by each Borrower of the Loan Documents
and all instruments and documents to be delivered by such Person and the
creation of all Liens provided for therein: (i) are within such Person's
corporate power; (ii) have been duly authorized by all necessary or proper
corporate and shareholder action; (iii) are not in contravention of any
provision

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of such Person's certificate or articles or incorporation or bylaws; (iv)
will not violate any law or regulation, or any order or decree of any court
or governmental instrumentality; (v) will not conflict with or result in the
breach or termination of, constitute a default under or accelerate any
performance required by, any indenture, mortgage, deed of trust, lease,
agreement or other Instrument to which such Person is a party or by which
such Person or any of its property is bound; (vi) will not result in the
creation or imposition of any Lien upon any of the property of such Person
other than those in favor of Lender pursuant to the Loan Documents; and (vii)
do not require the consent or approval of any Governmental Authority or any
other Person. On or prior to the Closing Date, each of the Loan Documents
shall have been duly executed and delivered for the benefit of or on behalf
of each Borrower and each Loan Document shall then constitute a legal, valid
and binding obligation of such Borrower, enforceable against it in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency or other similar laws affecting the rights of creditors generally
or by application of general principles of equity.

4.4 FINANCIAL STATEMENTS. All financial statements (the
"FINANCIAL STATEMENTS"), of the Borrowers and their respective Subsidiaries
which have been delivered to the Lender, have been prepared in accordance
with GAAP consistently applied throughout the periods involved (except as
disclosed therein and except, with respect to unaudited financial statements,
for the absence of footnotes and normal year-end audit adjustments) and do
present fairly in all material respects the financial condition of the
corporations covered thereby as at the dates thereof and the results of their
operations for the periods then ended.

4.5 MATERIAL ADVERSE EFFECT. Since September 30, 1997, none of
the Borrowers and no Subsidiary thereof has incurred any obligations,
contingent liabilities, or liabilities for Charges, long-term leases or
unusual forward or long-term commitments which are not reflected in the
Financial Statements of Borrowers and their Subsidiaries and which could,
alone or in the aggregate, have or result in a Material Adverse Effect. No
Material Adverse Effect has occurred between September 30, 1997 and the
Closing Date.

4.6 TITLE AND LIENS. All Collateral is and will continue to be
owned by the Borrowers. None of the Collateral or other property or assets
of the Borrowers or any Subsidiary is subject to any Lien (including but not
limited to Liens pursuant to Capitalized Leases under which any Borrower or
any Subsidiary is a lessee) except: (a) Liens in favor of the Lender and (b)
Permitted Encumbrances.

4.7 RESTRICTIONS; NO DEFAULT. No contract, lease, agreement or other
Instrument to which any Borrower is a party or by which it or any of its
properties or assets is bound or

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affected, and no provision of applicable law or governmental regulation, has
or results in a Material Adverse Effect, or could have or result in a
Material Adverse Effect. None of the Borrowers and no Subsidiary thereof is
in default, and to such Borrower's or such Subsidiary's knowledge no third
party is in default, under or with respect to any material contract,
agreement, lease or other Instrument to which it is a party.

4.8 LABOR MATTERS. No strikes or other labor disputes against any
Borrower or any Subsidiary thereof are pending or, to any Borrower's
knowledge, threatened. Hours worked by and payment made to employees of each
Borrower and the Subsidiaries thereof have not been, to any Borrower's
knowledge, in violation of the Fair Labor Standards Act or any other
applicable federal, state, local or foreign law dealing with such matters.
All payments due from such Borrower or any Subsidiary thereof on account of
employee health and welfare insurance have been paid or accrued as a
liability on the books of Borrowers. Except as set forth in SCHEDULE 4.8,
there are no material employment, consulting or management agreements
covering any management employee or Affiliate of any Borrower or any
Subsidiary thereof. A true and complete copy of each such material agreement
has been furnished to Lender. Except as set forth in SCHEDULE 4.8, none of
the Borrowers and none of the Subsidiaries thereof have any obligation under
any collective bargaining agreement, management agreement, consulting
agreement or any employment agreement. There is no organizing activity
involving any Borrower or any Subsidiary thereof pending or, to any
Borrower's knowledge, threatened by any labor union or group of employees.
Except as set forth in SCHEDULE 4.8, there are no representation proceedings
pending or, to any Borrower's knowledge, threatened with the National Labor
Relations Board, and no labor organization or group of employees of any
Borrower or any Subsidiary thereof has made a pending demand for recognition.
Except as set forth in SCHEDULE 4.8, there are no complaints or charges
against any Borrower or any Subsidiary thereof pending or threatened to be
filed with any federal, state, local or foreign court, governmental agency or
arbitrator based on, arising out of, in connection with, or otherwise
relating to the employment or termination of employment by any Borrower or
any Subsidiary thereof of any individual.

4.9 VENTURES, SUBSIDIARIES AND AFFILIATES; OUTSTANDING STOCK.
Except as set forth in SCHEDULE 4.9, none of the Borrowers (i) has any
Subsidiaries, (ii) is engaged in any joint venture or partnership with any
other Person and (iii) is an Affiliate of any other Person. Except as set
forth in SCHEDULE 4.9, there are no outstanding rights to purchase, options,
warrants or similar rights or agreements pursuant to which any Borrower may
be required to issue or sell any Stock or other equity security of any
Subsidiary.

4.10 GOVERNMENT REGULATION. None of the Borrowers and no Subsidiary
thereof is an "investment company" or an "affiliated

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person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended. None of the Borrowers and no Subsidiary thereof is subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act, or any other federal or state statute that restricts or limits its
ability to incur Indebtedness or to perform its obligations hereunder, and
the making of the Advances by Lender, the incurrence of any Letter of Credit
Obligation, the application of the proceeds and repayment thereof by such
Borrower or such Subsidiary and the consummation of the transactions
contemplated by this Agreement and the other Loan Documents will not violate
any provision of any such statute or any rule, regulation or order issued by
the Securities and Exchange Commission.

4.11 MARGIN REGULATIONS. None of the Borrowers and no Subsidiary
thereof is engaged, nor will it engage, principally or as one of its
important activities, in the business of extending credit for the purpose of
"purchasing" or "carrying" any "margin security" as such terms are defined in
Regulation U or G of the Board of Governors of the Federal Reserve System
(the "FEDERAL RESERVE BOARD") as now and from time to time hereafter in
effect (such securities being referred to herein as "MARGIN STOCK"). None of
the Borrowers and no Subsidiary thereof owns any Margin Stock, and the
proceeds of the Advances will not be used, directly or indirectly, for the
purpose of purchasing or carrying any Margin Stock, for the purpose of
reducing or retiring any indebtedness which was originally incurred to
purchase or carry any Margin Stock or for any other purpose which might cause
any of the loans or other extensions of credit under this Agreement to be
considered a "purpose credit" within the meaning of Regulation G, T, U or X
of the Federal Reserve Board.

4.12 TAXES. All federal, state, local and foreign tax returns,
reports and statements, including, but not limited to, information returns
required to be filed by each Borrower or any Subsidiary thereof, have been
filed with the appropriate Governmental Authority and all Charges and other
impositions shown thereon to be due and payable have been paid prior to the
date on which any fine, penalty, interest or late charge may be added thereto
for nonpayment thereof (or any such fine, penalty, interest, late charge or
loss has been paid), and each Borrower and each Subsidiary thereof has paid
when due and payable all Charges required to be paid by it, except such
Taxes, if any, as are being contested in good faith and by appropriate
proceedings and as to which such reserves or other appropriate provisions as
may be required by GAAP have been maintained. Proper and accurate amounts
have been withheld by each Borrower or each Subsidiary thereof from its
respective employees for all periods in full and complete compliance with the
tax, social security and unemployment withholding provisions of applicable
federal, state, local and

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foreign law and such withholdings have been timely paid to the respective
Governmental Authorities.

4.13 ERISA. (a) SCHEDULE 4.13 lists all Plans maintained or
contributed to by any Borrower or any Subsidiary thereof and all Qualified
Plans maintained or contributed to by any ERISA Affiliate, and separately
identifies the Title IV Plans, Multiemployer Plans, any multiple employer
plans subject to Section 4064 of ERISA, unfunded Pension Plans, Welfare Plans
and Retiree Welfare Plans. Each Qualified Plan has been determined by the
IRS to qualify under Section 401 of the IRC, and the trusts created
thereunder have been determined to be exempt from tax under the provisions of
Section 501 of the IRC, and to the best knowledge of each Borrower nothing
has occurred which would cause the loss of such qualification or tax-exempt
status. To any Borrower's knowledge, each Plan is in compliance with the
applicable provisions of ERISA and the IRC, including the filing of reports
required under the IRC or ERISA, and with respect to each Plan, other than a
Qualified Plan, all required contributions and benefits have been paid in
accordance with the provisions of each such Plan. None of the Borrowers and
no Subsidiary or ERISA Affiliate thereof, with respect to any Qualified Plan,
has failed to make any contribution or pay any amount due as required by
Section 412 of the IRC or Section 302 of ERISA or the terms of any such Plan.
With respect to all Retiree Welfare Plans, the present value of future
anticipated expenses pursuant to the latest actuarial projections of
liabilities does not exceed $0; with respect to Pension Plans, other than
Qualified Plans, the present value of the liabilities for current
participants thereunder using PBGC interest assumptions does not exceed $0.
None of the Borrowers and no Subsidiary or ERISA Affiliate thereof has
engaged in a prohibited transaction, as defined in Section 4975 of the IRC or
Section 406 of ERISA, in connection with any Plan, which would subject any
Borrower or any Subsidiary thereof (after giving effect to any exemption) to
a material tax on prohibited transactions imposed by Section 4975 of the IRC
or any other material liability.

(b) Except as set forth in SCHEDULE 4.13: (i) no Title IV Plan has
any Unfunded Pension Liability; (ii) no ERISA Event or event described in
Section 4062(e) of ERISA with respect to any Title IV Plan has occurred or is
reasonably expected to occur; (iii) there are no pending, or to the knowledge
of any Borrower, threatened claims, actions or lawsuits (other than claims
for benefits in the normal course), asserted or instituted against (x) any
Plan or its assets, (y) any fiduciary with respect to any Plan or (z) any
Borrower or any Subsidiary or ERISA Affiliate thereof with respect to any
Plan; (iv) none of the Borrowers and no Subsidiary or ERISA Affiliate thereof
has incurred or reasonably expects to incur any withdrawal liability (and no
event has occurred which, with the giving of notice under Section 4219 of
ERISA, would result in such liability) under Section 4201 of ERISA as a
result of a complete or partial withdrawal from a

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Multiemployer Plan; (v) within the last five years neither any Borrower nor
any Subsidiary or ERISA Affiliate thereof has engaged in a transaction which
resulted in a Title IV Plan with Unfunded Liabilities being transferred
outside of the "controlled group" (within the meaning of Section 4001(a)(14)
of ERISA) of any such entity; (vi) no Plan which is a Retiree Welfare Plan
provides for continuing benefits or coverage for any participant or any
beneficiary of a participant after such participant's termination of
employment (except as may be required by Section 4980B of the IRC and at the
sole expense of the participant or the beneficiary of the participant); (vii)
each Borrower and each Subsidiary and ERISA Affiliate thereof have complied
with the notice and continuation coverage requirements of Section 4980B of
the IRC and the regulations thereunder except where the failure to comply
could not have or result in any Material Adverse Effect; and (viii) no
liability under any Plan has been funded, nor has such obligation been
satisfied, with the purchase of a contract from an insurance company that is
not rated AAA by the Standard & Poor's Corporation or the equivalent by
another nationally recognized rating agency.

4.14 NO LITIGATION. No action, claim or proceeding is now pending
or, to the knowledge of any Borrower, threatened against such Borrower or any
Subsidiary thereof, before any court, board, commission, agency or
instrumentality of any federal, state, local or foreign government or of any
agency or subdivision thereof, or before any arbitrator or panel of
arbitrators, (i) which challenges such Borrower's or such Subsidiary's right
or power to enter into or perform any of its obligations under the Loan
Documents, or the validity or enforceability of any Loan Document or any
action taken thereunder, or (ii) which, if determined adversely, would have
or result in a Material Adverse Effect, nor to the best knowledge of any
Borrower does a state of facts exist which is reasonably likely to give rise
to such proceedings.

4.15 PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES. Except as
otherwise set forth in SCHEDULE 4.15, each Borrower owns all material
licenses, patents, patent applications, copyrights, service marks,
trademarks, trademark applications, and trade names necessary to continue to
conduct its business as heretofore conducted by it or proposed to be
conducted by it, each of which is listed, together with Copyright Office or
Patent and Trademark Office application or registration numbers, where
applicable, on SCHEDULE 4.15. SCHEDULE 4.15 also lists all tradenames or
other names under which any Borrower conducts business. To the best of
Borrower's knowledge, neither the conduct of each Borrower's business nor the
conduct of any of its Subsidiary's business infringes upon any intellectual
property right of any other Person.

4.16 FULL DISCLOSURE. No information contained in this Agreement,
any of the other Loan Documents, the Projections, the Financials, the
Collateral Reports or any written statement

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furnished by or on behalf of any Borrowers or any Subsidiary thereof pursuant
to the terms of this Agreement, which has previously been delivered to
Lender, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained herein or therein
not misleading in light of the circumstances under which they were made. The
Liens granted to Lender pursuant to the Collateral Documents will at the
Closing Date be fully perfected first priority Liens in and to the Collateral
described therein, subject only to Liens set forth in SCHEDULE 4.6 and
Permitted Liens.

4.17 HAZARDOUS MATERIALS. Except as set forth in SCHEDULE 4.17,
(i) the real estate (the "REAL ESTATE") owned by the Borrowers and their
Subsidiaries is free of contamination from any Hazardous Material, or (ii) to
any Borrower's knowledge, the Real Estate leased by the Borrowers or their
Subsidiaries is free of contamination from any Hazardous Material. In
addition, SCHEDULE 4.17 discloses all material environmental liabilities of
any Borrower or any Subsidiary thereof of which any Borrower has knowledge
(i) related to noncompliance with the Environmental Laws, or (ii) associated
with the Real Estate. None of the Borrowers and no Subsidiary thereof has
caused or suffered to occur any Release with respect to any Hazardous
Material at, under, above or upon any real property which it owns or leases.
None of the Borrowers and no Subsidiary thereof is involved in operations
which are likely to result in the imposition of any Lien on its assets or any
material liability on such Borrower or Subsidiary thereof under any
Environmental Law, and none of the Borrowers and no Subsidiary thereof has
permitted any tenant or occupant of such premises to engage in any such
activity. Borrowers have provided to Lender copies of all existing
environmental reports, reviews and audits and all written information
pertaining to actual or potential Environmental Liabilities and Costs, in
each case relating to any of the Borrowers or any of the Subsidiaries thereof.

4.18 INSURANCE POLICIES. SCHEDULE 4.18 lists all insurance of any
nature maintained for current occurrences by any Borrower or any Subsidiary
thereof, as well as a summary of the terms of such insurance.

4.19 DEPOSIT AND DISBURSEMENT ACCOUNTS. SCHEDULE 4.19 lists all
banks and other financial institutions at which any of the Borrowers or any
Subsidiary thereof maintains deposits and/or other accounts, including any
disbursement accounts, and such Schedule correctly identifies the name,
address and telephone number of each depository, the name in which the
account is held, a description of the purpose of the account, and the
complete account number.

4.20 CUSTOMER AND TRADE RELATIONS. There exists no actual or
threatened termination or cancellation of, or any material adverse modification
or change in: (a) the business

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relationship of Borrowers with any customer or group of customers which has
resulted in or is reasonably likely to result in a Material Adverse Effect;
or (b) the business relationship of any Borrower or any Subsidiary thereof
with any supplier material to the operations of such Borrower or such
Subsidiary which has resulted in or is reasonably likely to result in a
Material Adverse Effect.

4.21 INDEBTEDNESS. As of the Closing Date, except for the Loans
and the Letter of Credit, and as set forth in SCHEDULE 7.3, none of the
Borrowers and no Subsidiary thereof has any Indebtedness or has granted any
security interest to any Person other than Lender and First National Bank of
Commerce.

5. FINANCIAL STATEMENTS AND INFORMATION

5.1 REPORTS AND NOTICES. (a) Borrowers each hereby covenant and
agree that from and after the Closing Date and until the Termination Date,
they shall deliver to Lender Financial Statements and notices as follows:

(i) QUARTERLY REPORTS OF BORROWERS. Within 45 days after the end
of each Fiscal Quarter of Borrowers, a copy of an unaudited financial
statement of Borrower prepared on a basis consistent with the audited
financial statements of Borrowers previously furnished to Lender and, if
requested by Lender, prepared on a consolidating and consolidated basis,
signed by an authorized officer of Akorn and consisting of at least (i) a
balance sheet as at the close of such quarter, (ii) a statement of earnings
and cash flow for such quarter and for the period from the beginning of such
fiscal year to the close of such quarter and (iii) an accounts receivable
aging for each Borrower as of the close of such quarter.

(ii) AUDIT REPORT OF BORROWERS. Within 120 days after the end of
each Fiscal Year of Borrowers, a copy of an annual audit report of Borrowers
prepared in conformity with GAAP on a basis consistent with the audited
financial statements of Borrowers and any subsidiary referred to above and,
if requested by Lender, prepared on a consolidating and consolidated basis,
duly certified by independent certified public accountants of recognized
standing satisfactory to Lender, accompanied by an opinion without
significant qualification.

(iii) CERTIFICATES. Contemporaneously with the furnishing of a copy
of each annual audit report and of each quarterly statement provided herein, a
certificate dated the date of such annual audit report or such quarterly
statement and signed by either the President, the Chief Financial Officer or the
Treasurer of each Borrower, to the effect that no Default or Event of Default
has occurred and is continuing, or, if there is any such

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event, describing it and the steps, if any, being taken to cure it, and
containing a computation of, and showing compliance with, any financial ratio
or restriction contained in the Agreement.

(iv) NOTICE OF DEFAULT, LITIGATION AND ERISA MATTERS. Immediately
upon learning of the occurrence of any of the following, written notice
describing the same and the steps being taken by Borrowers or any Subsidiary
affected in respect thereof: (i) the occurrence of a Default or an Event of
Default; or (ii) the institution of, or any adverse determination in, any
litigation, arbitration or governmental proceeding which is material to any
Borrower; (iii) receipt of any notice or communication that the operations of
the Borrowers or any Subsidiary are not in compliance in all material
respects with requirements of any applicable Governmental Authority,
including but not limited to, FDA and DEA, or (iv) the occurrence of any
ERISA Event.

(v) OTHER INFORMATION. Such other information, financial or
otherwise, as Lender may from time to time request in its reasonable
discretion.

(vi) REPORTS OF AKORN. (A) Within 45 days after the end of each
fiscal quarter of Akorn, a copy of Form 10-Q as filed by or on behalf of
Akorn with the Securities and Exchange Commission, and (B) within 120 days
after the end of each fiscal year of Akorn, a copy of Form 10-K as filed by
or on behalf of Akorn with the Securities and Exchange Commission.

5.2 COMMUNICATION WITH ACCOUNTANTS. Each Borrower authorizes Lender
to communicate directly with its independent certified public accountants
acceptable to the Lender and authorizes those accountants and advisors to
disclose to Lender any and all financial statements and other supporting
financial documents and schedules relating to any Borrower and its Subsidiaries
(including, without limitation, copies of any issued management letters) with
respect to the business, financial condition and other affairs of any Borrower
and its Subsidiaries.

6. AFFIRMATIVE COVENANTS

Each Borrower jointly and severally covenants and agrees that,
unless Lender shall otherwise consent in writing, from and after the date
hereof and until the Termination Date:

6.1 MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS. Each Borrower
shall, and shall cause each Subsidiary thereof to,: (a)do or cause to be done
all things necessary to preserve and keep in full force and effect its corporate
existence and its rights and franchises;(b) continue to conduct its business
substantially as now conducted or as otherwise permitted hereunder; (c)at all
times maintain, preserve and protect all of its Copyrights, Patents, Trademarks,
trade names and all other

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<PAGE>

intellectual property and rights as licensee or licensor thereof and preserve
all the remainder of its assets and properties, used or useful in the conduct
of its business, and keep the same in good repair, working order and
condition (taking into consideration ordinary wear and tear) and from time to
time make, or cause to be made, all necessary or appropriate repairs,
replacements and improvements thereto consistent with industry practices; and
(d) transact business only in such corporate and trade names as are set forth
in SCHEDULE 4.15.

6.2 PAYMENT OF OBLIGATIONS. (a) Each Borrower shall pay and
discharge or cause to be paid and discharged promptly all (A) Charges imposed
upon it, its income and profits, or any of its property (real, personal or
mixed), and (B) lawful claims for labor, materials, supplies and services or
otherwise, before any thereof shall become past due.

(b) Each Borrower may in good faith contest, by appropriate
proceedings, the validity or amount of any Charges or claims; PROVIDED, THAT,
at the time of commencement of any such action or proceeding, and during the
pendency thereof (i) no Default or Event of Default shall have occurred and
be continuing, (ii) adequate reserves with respect thereto are maintained on
the books of such Borrower, in accordance with GAAP, (iii) such contest is
maintained and prosecuted continuously and with diligence, (iv) none of the
Collateral becomes subject to forfeiture or loss as a result of such Charges
or claims, (v) no Lien shall be imposed to secure payment of such Charges or
claims other than inchoate tax liens, and (vi) such Borrower shall promptly
pay or discharge such contested Charges and all additional charges, interest,
penalties and expenses, if any, and shall deliver to Lender evidence
acceptable to Lender of such compliance, payment or discharge, if such
contest is terminated or discontinued adversely to such Borrower or the
conditions set forth in this SECTION 6.2(b) are no longer met.

6.3 BOOKS AND RECORDS. Borrowers shall keep adequate records and
books of account with respect to each Borrower's and each of its
Subsidiaries' business activities, in which proper entries, reflecting all
financial transactions, are made in accordance with GAAP and on a basis
consistent with the Financial Statements.

6.4 AUDITS. Commencing with the Fiscal Year ending December 31,
1997 and in each Fiscal Year thereafter, Borrowers will engage independent
certified public accountants of recognized standing satisfactory to Lender to
perform an audit of their respective balance sheets and related statements of
operations, shareholders' equity and cash flows and to render an opinion
based upon such audit.

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6.5 LITIGATION. Each Borrower shall notify Lender in writing,
promptly upon learning thereof, of any litigation commenced or threatened
against such Borrower or any Subsidiary thereof and of the institution
against it of any suit or administrative proceeding that (a) seeks damages in
excess of $500,000 or (b) seeks injunctive relief.

6.6 INSURANCE. (a) Borrowers shall, at their sole cost and
expense, maintain the policies of insurance described on SCHEDULE 4.18 in
form and with insurers rated AA or better by Bests. Such policies shall be
in such amounts as are set forth in SCHEDULE 4.18. Borrowers shall notify
Lender promptly of any occurrence causing a material loss or decline in value
of any real or personal property and the estimated (or actual, if available)
amount of such loss or decline. So long as any Event of Default shall have
occurred and be continuing or if the casualty loss exceeds $500,000: each
Borrower hereby directs all present and future insurers under its "All Risk"
policies of insurance to pay all proceeds payable thereunder directly to
Lender and irrevocably makes, constitutes and appoints Lender (and all
officers, employees or agents designated by Lender) as such Borrower's true
and lawful agent and attorney-in-fact for the purpose of making, settling and
adjusting claims under such "All Risk" policies of insurance and endorsing
the name of such Borrower on any check or other item of payment for the
proceeds of such "All Risk" policies of insurance. In the event any Borrower
at any time or times hereafter shall fail to obtain or maintain any of the
policies of insurance required above or to pay any premium in whole or in
part relating thereto, Lender, without waiving or releasing any Obligations
or Default or Event of Default hereunder, may at any time or times thereafter
(but shall not be obligated to) obtain and maintain such policies of
insurance and pay such premiums and take any other action with respect
thereto which Lender deems advisable. All sums so disbursed, including
attorneys, fees, court costs and other charges related thereto, shall be
payable, on demand, by Borrowers to Lender and shall be additional
Obligations hereunder secured by the Collateral, PROVIDED, THAT, if and to
the extent Borrowers fail to promptly pay any of such sums upon demand
therefor, Lender is authorized to, and at its option may, make or cause to be
made Advances on behalf of Borrowers for payment thereof.

(b) Lender reserves the right at any time, upon any change in any
Borrower's risk profile (including, without limitation, any change in the
product mix maintained by any Borrower or any laws affecting the potential
liability of such Borrower), to require additional forms and limits of insurance
to, in Lender's reasonable opinion, adequately protect Lender's interests in all
or any portion of the Collateral and to ensure that each Borrower and each
Subsidiary thereof is protected by insurance in amounts and with coverage
customary for its industry. If requested by Lender, each Borrower shall deliver
to Lender from

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time to time a report of a reputable insurance broker, satisfactory to
Lender, with respect to its insurance policies.

(c) Borrowers shall deliver to Lender endorsements (i) to all "All
Risk" and business interruption insurance naming Lender as loss payee, and
(ii) to all general liability and other liability policies naming Lender as
additional insured.

(d) The loss, if any, under any property insurance required to be
carried by this SECTION 6.6 shall be adjusted with the insurance companies or
otherwise collected, including the filing of appropriate proceedings by
Borrowers or their Subsidiaries, subject to the reasonable approval of the
Lender in the case of claims in excess of $500,000. If the proceeds payable
under any policy of property insurance are $500,000 or less, Borrowers or
their Subsidiaries shall have the right to use such proceeds to repair or
replace the damaged or destroyed property, provided that a Default or an
Event of Default shall not have occurred and be continuing at the time the
proceeds are paid.

6.7 COMPLIANCE WITH LAWS. Each Borrower shall, and shall cause
each Subsidiary thereof to, comply in all material respects with all federal,
state and local laws and regulations applicable to it, including but not
limited to, (i) the Federal Food, Drug and Cosmetic Act, the Controlled
Substances Act and other United States federal statutes and regulations,
issued by FDA and DEA, and (ii) those relating to licensing, ERISA and labor
matters.

6.8 SUPPLEMENTAL DISCLOSURE. On the request of Lender (in the
event that such information is not otherwise delivered by Borrowers to Lender
pursuant to this Agreement), so long as there are Obligations outstanding
hereunder, but not more frequently than quarterly absent the occurrence and
continuance of a Default or an Event of Default, Borrowers will supplement
each schedule or representation herein with respect to any matter hereafter
arising which, if existing or occurring at the date of this Agreement, would
have been required to be set forth or described in such schedule or as an
exception to such representation or which is necessary to correct any
information in such schedule or representation which has been rendered
inaccurate thereby; PROVIDED, HOWEVER, THAT such supplement to such schedule
or representation shall not be deemed an amendment thereof unless expressly
consented to in writing by Lender, and no such amendments, except as the same
may be consented to in a writing which expressly includes a waiver, shall be
or be deemed a waiver of any Default or Event of Default disclosed therein.

6.9 EMPLOYEE PLANS. Each Borrower shall, and shall cause each
Subsidiary thereof to, notify Lender of (i) any and all claims, actions, or
lawsuits asserted or instituted, and of any threatened litigation or claims,
against such Borrower or against

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any Subsidiary or ERISA Affiliate thereof in connection with any Plan
maintained, at any time, by such Borrower or such Subsidiary or ERISA
Affiliate, or to which such Borrower or such Subsidiary or ERISA Affiliate
has or had at any time any obligation to contribute, or/and against any such
Plan itself, or against any fiduciary of or service provided to any such Plan
and (ii) the occurrence of any material "Reportable Event" with respect to
any Pension Plan of such Borrower or any Subsidiary or ERISA Affiliate
thereof.

6.10 ENVIRONMENTAL MATTERS. Each Borrower shall, and shall cause
each of its Subsidiaries to, (i) comply in all material respects with the
Environmental Laws applicable to it, (ii) notify Lender promptly after such
Borrower or such Subsidiary becomes aware of any Release upon or at any
premises owned or occupied by it, and (iii) promptly forward to Lender a copy
of any order, notice, permit, application, or any communication or report
received by such Borrower or such Subsidiary in connection with any such
Release or any other matter relating to the Environmental Laws that may
affect such premises or such Borrower or such Subsidiary. The provisions of
this SECTION 6.10 shall apply whether or not the Environmental Protection
Agency, any other federal agency or any state, local or foreign environmental
agency has taken or threatened any action in connection with any Release or
the presence of any Hazardous Materials.

6.11 LANDLORDS' AGREEMENTS, BAILEE LETTERS AND MORTGAGEE
AGREEMENTS. Upon the request of Lender, each Borrower shall use its best
efforts to obtain a landlord's agreement in form and substance acceptable to
Lender from the lessor of each leased property currently being used by such
Borrower or any Subsidiary thereof where Collateral is located. Upon the
request of Lender, each Borrower shall use its best efforts to obtain a
bailee letter in form and substance acceptable to Lender and with respect to
any warehouse where Collateral is located. Upon the request of Lender, each
Borrower shall use its best efforts to obtain a mortgagee's agreement in form
and substance satisfactory to Lender from the mortgagee (if other than
Lender) of each property owned by such Borrower or any Subsidiary thereof
where Collateral is located. No real property or warehouse space shall be
leased or acquired by any Borrower or any Subsidiary thereof after the
Closing Date, unless and until a landlord or mortgagee agreement or bailee
letter, as appropriate, shall first have been obtained with respect to such
location.

6.12 LEASED LOCATIONS OF COLLATERAL. Each Borrower shall, and
shall cause each Subsidiary thereof to, timely and fully pay and perform its
obligations under all leases and other agreements with respect to each leased
location or public warehouse where any Collateral is or may be located.
Borrowers shall, and shall cause each Subsidiary thereof to, promptly deliver
to Lender copies of (i) any and all default notices received under or with

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respect to any such leased location or public warehouse, and (ii) such other
notices or documents as Lender may request in its reasonable discretion.

7. NEGATIVE COVENANTS

Borrowers each jointly and severally covenant and agree that,
without the prior written consent of Lender, from and after the date hereof
until the Termination Date:

7.1 MERGERS, SUBSIDIARIES, ETC. No Borrower shall, or shall permit
any Subsidiary to:

(a) be a party to any merger or consolidation;

(b) except in the normal course of its business, sell, transfer,
convey, lease or otherwise dispose of all or any substantial part of the
assets of the Borrowers and their Subsidiaries taken as a whole; or

(c) purchase or otherwise acquire any assets or capital stock of any
Person without the prior written consent of the Lender except where (i) the
purchase price of each such acquisition is not greater than $2,500,000
(including the value of any stock issued, assets exchanged or transaction
expenses incurred to consummate such acquisition) and (ii) there is no
Event of Default or Default after giving effect to such acquisition.

For purposes of this SECTION 7.1 only, a sale, transfer, conveyance,
lease or other disposition of assets shall be deemed to be a "substantial part"
of the assets of the Borrowers and its Subsidiaries only if the value of such
assets, when added to the value of all other assets sold, transferred, conveyed,
leased or otherwise disposed of by the Borrowers and their Subsidiaries (other
than in the normal course of business) during the same Fiscal Year, exceeds 10%
of the Borrowers' consolidated total assets determined as of the end of the
immediately preceding Fiscal Year. As used in the preceding sentence, the term
"value" shall mean, with respect to any asset disposed of, the greater of such
asset's book or fair market value as of the date of disposition, with "book
value" being the value of such asset as would appear immediately prior to such
disposition on a balance sheet of the owner of such asset prepared in accordance
with GAAP.

7.2 INVESTMENTS; LOANS AND ADVANCES. Except as otherwise permitted
in this Agreement, no Borrower shall, or shall cause or permit any Subsidiary
thereof to, make any investment in, or make or accrue loans or advances of money
to any Person, through the direct or indirect lending of money, holding of
securities or otherwise; PROVIDED that so long as no Default or Event of
Default shall have occurred or be continuing, Borrowers may make

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investments in (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof maturing
within one year from the date of acquisition thereof, (ii) commercial paper
maturing no more than one year from the date of creation thereof and
currently having the highest rating obtainable from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., (iii) certificates of
deposit, maturing no more than one year from the date of creation thereof,
issued by commercial banks incorporated under the laws of the United States
of America, each having combined capital, surplus and undivided profits of
not less than $300,000,000 and having a senior secured rating of "A" or
better by a nationally recognized rating agency, provided that the aggregate
amount invested in such certificates of deposit shall not at any time exceed
$100,000 for any one such bank, and (iv) time deposits, maturing no more than
thirty (30) days from the date of creation thereof with commercial banks or
savings banks or savings and loan associations each having membership in the
Federal Deposit Insurance Corporation and in amounts not exceeding the
maximum amounts of insurance thereunder, except that in the case of time
deposits and certificates of deposit maintained with The Northern Trust
Company or its successors so long as such successors meet the criteria in
this SECTION 7.2, such limitations of amounts shall not apply unless notice
thereof shall be provided by Lender to Akorn.

7.3 INDEBTEDNESS. No Borrower shall, or shall cause or permit any
Subsidiary thereof to, create, incur, assume or permit to exist any
Indebtedness, except (i) Indebtedness secured by Liens permitted under
SECTION 7.7, (ii) the Loans and the other Obligations, (iii) deferred taxes,
and (iv) unfunded pension fund and other employee benefit plan obligations
and liabilities to the extent they are permitted to remain unfunded under
applicable law, (v) existing Indebtedness set forth in SCHEDULE 7.3 and
refinancings thereof on terms and conditions acceptable to Lender, in its
reasonable discretion, which shall in any event be on terms no less favorable
to any Borrower or Lender than the terms of the Indebtedness being
refinanced,(vi) any financing secured by any real estate owned by the
Borrowers and their Subsidiaries, and (vii) the unsecured financing by a
seller of product lines to Borrowers.

7.4 EMPLOYEE LOANS AND AFFILIATE TRANSACTIONS. (a) No Borrower
shall, or shall cause or permit any Subsidiary thereof to, enter into or be a
party to any transaction with an Affiliate except in the ordinary course of,
and pursuant to the reasonable requirements of, such Borrower's or such
Subsidiary's business and upon fair and reasonable terms that are fully
disclosed to Lender in advance and are no less favorable to such Borrower or
such Subsidiary than would be obtained in a comparable arm's length
transaction with a Person not an Affiliate of such Borrower or such
Subsidiary. All such transactions existing as of the date hereof are
described on SCHEDULE 7.4(a).

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(b) No Borrower shall, or shall cause or permit any
Subsidiary thereof to, enter into any lending or borrowing transaction with
any of its employees, except loans to its employees on an arm's-length basis
in the ordinary course of business consistent with past practice up to a
maximum of $250,000 in the aggregate at any one time outstanding.

7.5 CAPITAL STRUCTURE AND BUSINESS. No Borrower shall, or shall
cause or permit any Subsidiary thereof to, (i) make any changes in any of its
business objectives, purposes or operations which could in any way adversely
affect the repayment of the Loans or any of the other Obligations or could
have or result in a Material Adverse Effect, (ii) make any change in its
capital structure as described on SCHEDULE 4.9, or (iii) amend its
certificate or articles of incorporation or bylaws in a manner which would
adversely affect Lender or its duty or ability to repay the Obligations.
None of the Borrowers nor any Subsidiary thereof shall engage in any business
other than the businesses currently engaged in by such Borrower or such
Subsidiary or businesses reasonably related thereto.

7.6 GUARANTEED INDEBTEDNESS. No Borrower shall, or shall cause or
permit any Subsidiary thereof to, incur any Guaranteed Indebtedness except
(i) by endorsement of instruments or items of payment for deposit to the
general account of any Borrower, and (ii) for Guaranteed Indebtedness
incurred for the benefit of any Borrower or such Subsidiary if the primary
obligation is expressly permitted by this Agreement.

7.7 LIENS. No Borrower shall, or shall cause or permit any
Subsidiary thereof to, create, incur, assume or permit to exist any Lien on
or with respect to any of its properties or assets of any Borrower or any of
their Subsidiaries, whether now owned or hereafter acquired, except (i)
Permitted Encumbrances, (ii) presently existing or hereinafter created Liens
in favor of Lender, (iii) Liens created after the date hereof by conditional
sale or other title retention agreements (including, without limitation,
Capital Leases) or in connection with purchase money indebtedness with
respect to properties acquired by any Borrower or any of its Subsidiaries in
the ordinary course of business, involving the incurrence of an aggregate
amount of purchase money indebtedness and Capital Lease Obligations of not
more than $1,000,000 outstanding at any one time for all such Liens (provided
that such Liens attach only to the assets subject to such purchase money debt
and such Indebtedness is incurred within twenty (20) days following such
purchase and does not exceed 100% of the purchase price of the subject
assets), (iv) Liens in connection with any financing secured by any real
estate owned by the Borrowers and their Subsidiaries, (v) Liens not otherwise
permitted by the foregoing clauses of this Section securing Indebtedness or
other obligations not exceeding $250,000 in the aggregate at any time
outstanding,

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and (vi) Liens existing on the date hereof and described in SCHEDULE 7.7.

In addition, no Borrower shall, or shall cause or permit any
Subsidiary thereof to, become a party to any agreement, note, indenture or
instrument, or take any other action, which would prohibit the creation of a
Lien on any of its properties or other assets in favor of Lender, as
additional collateral for the Obligations, except operating leases, Capital
Leases or intellectual property licenses which prohibit liens upon the assets
that are subject thereto.

7.8 SALE OF ASSETS. No Borrower shall, or shall cause or permit
any Subsidiary thereof to, sell, transfer, convey, assign or otherwise
dispose of any of its properties or other assets, except in the ordinary
course of its business.

7.9 ERISA. No Borrower shall, or shall cause or permit any
Subsidiary or ERISA Affiliate thereof (without Lender's prior written
consent) to, (i) acquire any ERISA Affiliate that maintains or has an
obligation to contribute to a Pension Plan that has either an "accumulated
funding deficiency", as defined in Section 302 of ERISA, or any "unfunded
vested benefits", as defined in Section 4006(a)(3)(e)(iii) of ERISA, in the
case of any plan other than a Multiemployer Plan, and in Section 4211 of
ERISA in the case of a Multiemployer Plan, in excess of $250,000, (ii) permit
or suffer any representation set forth in SCHEDULE 4.13 to cease to be met
and satisfied at any time, (iii) terminate any Pension Plan that is subject
to Title IV of ERISA where such termination could reasonably be anticipated
to result in liability in excess of $250,000 to such Person, (iv) permit any
accumulated funding deficiency, as defined in Section 302(a)(2) of ERISA, to
be incurred with respect to any Pension Plan, in excess of $250,000, (v) fail
to make any material contributions or fail to pay any amounts due and owing
as required by the terms of any Plan before such contributions or amounts
become delinquent, (vi) make a complete or partial withdrawal (within the
meaning of Section 4201 of ERISA) from any Multiemployer Plan, or (vii) fail
to promptly provide Lender with copies of any Plan documents or governmental
reports or filings, if requested by Lender.

7.10 FINANCIAL COVENANTS. Borrowers shall not breach or fail to
comply with any of the financial covenants set forth below:

(a) MINIMUM NET INCOME. Borrowers and their Subsidiaries on
a consolidated basis shall maintain Net Income in each Fiscal Quarter of not
less than $1.00.

(b) MINIMUM NET WORTH. Borrowers and their Subsidiaries on a
consolidated basis shall maintain at all times Net Worth equal to or greater
than the sum of (a) $17,000,000, PLUS (b) an amount equal to 50% of Net Income
earned during each of its

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Fiscal Quarters beginning with its Fiscal Quarter commencing October 1, 1997
(without reduction for net losses, if any).

(c) CASH FLOW COVERAGE RATIO. Borrowers and their
Subsidiaries on a consolidated basis shall maintain a ratio of (a) EBIT,
measured at the end of each Fiscal Quarter for the four immediately preceding
Fiscal Quarters then ended, to (b) Debt Service, measured as of the end of
each Fiscal Quarter, of at least 1.2:1.0.

(d) RATIO OF FUNDED DEBT OF EBITDA. Borrowers and their
Subsidiaries on a consolidated basis shall maintain a ratio of (a) Funded
Debt to (b) EBITDA, measured at the end of each Fiscal Quarter for the four
immediately preceding Fiscal Quarters then ended, of not more than 3.0:1.0.

7.11 HAZARDOUS MATERIALS. No Borrower shall, or shall cause or
permit any Subsidiary thereof or any other Person within its control to,
cause or permit a Release or the presence, use, generation, manufacture,
installation, Release, discharge, storage or disposal of any Hazardous
Materials on, under, in, above or about any of its real estate or the
transportation of any Hazardous Materials to or from any real estate where
such Release or such presence, use, generation, manufacture, installation,
Release, discharge, storage or disposal would violate in any material
respect, or form the basis for any material liability under, any
Environmental Laws. If a Default or Event of Default shall have occurred and
be continuing, each Borrower, at its own expense, shall cause the performance
of such environmental audits and preparation of such environmental reports as
Lender may from time to time request as to any location at which Collateral
is then located, by reputable environmental consulting firms acceptable to
Lender, and in form and substance acceptable to Lender.

7.12 SALE-LEASEBACKS. No Borrower shall, or shall cause or permit
any Subsidiary thereof to, engage in any sale-leaseback or similar
transaction involving any of its assets.

7.13 CANCELLATION OF INDEBTEDNESS. No Borrower shall, or shall
cause or permit any Subsidiary thereof to, cancel any claim or debt owing to
it, except for reasonable consideration negotiated on an arm's-length basis
and in the ordinary course of its business consistent with past practices.

7.14 RESTRICTED PAYMENTS. No Borrower shall, or shall cause or
permit any Subsidiary thereof to, make any Restricted Payment (including, but
not limited to, dividends), other than payments necessary to enable such
Borrower (i) to satisfy its federal, state and local income tax obligations
to the extent such obligations are the result of the net consolidated income
of Borrowers and their Subsidiaries being attributed to such Borrower for tax
purposes, (ii) to pay the necessary fees and expenses to

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maintain its corporate existence and good standing,(iii) to pay legal and
accounting fees to the extent such fees relate to legal or accounting
services provided by entities which are not Affiliates of any Borrower and
which services are directly related to any Borrowers or their Subsidiaries,
and (iv) to pay any cash dividend in respect of its common stock so long as
no Event of Default or Default exists hereunder or would result after giving
effect thereto.

7.15 FISCAL YEAR. No Borrower shall, or shall cause or permit any
Subsidiary thereof to, change its Fiscal Year.

7.16 CHANGE OF CORPORATE NAME OR LOCATION. (a) No Borrower shall,
or shall cause or permit any Subsidiary thereof to, (i) change its corporate
name or (ii) change its chief executive office, principal place of business,
corporate offices or warehouses or Collateral locations, or the location of
its records concerning the Collateral, in any case without at least fifteen
(15) Business Days prior written notice to Lender and after Lender's written
acknowledgment that any reasonable action requested by Lender in connection
therewith, including, without limitation, to continue the perfection of any
Liens in favor of Lender in any Collateral has been completed or taken, and
provided that any such new location shall be in the continental United
States; (b) in furtherance of and without limiting the scope of CLAUSE (a)
above, no Borrower shall, or shall permit any of its Subsidiaries, to change
its name, identity or corporate structure in any manner which might make any
financing or continuation statement filed in connection herewith seriously
misleading within the meaning of Section 9-402(7) of the Code or any other
then applicable provision of the Code except upon prior written notice to
Lender and after Lender's written acknowledgment that any reasonable action
requested by Lender in connection therewith, including, without limitation,
to continue the perfection of any Liens in favor of Lender in any Collateral
has been completed or taken.

8. EVENTS OF DEFAULT: RIGHTS AND REMEDIES

8.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events (regardless of the reason therefor) shall constitute an
"EVENT OF DEFAULT" hereunder:

(a) Any Borrower shall fail to make any payment of principal of, or
interest on, or any other amount owing in respect of the Loans or any of the
other Obligations (other than as set forth in CLAUSE (b) below) when due and
payable or declared due and payable.

(b) Any Borrower shall fail to pay any Fees, costs or expenses
payable or reimbursable by Borrowers under this Agreement

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or under any other Loan Document, and such failure shall have remained
unremedied for a period of ten (10) days or more.

(c) Any Borrower shall fail or neglect to perform, keep or observe
any of the provisions of this Agreement (and not constituting an Event of
Default under any of the other subsections of this SECTION 8.1) and such
failure shall have remained unremedied for a period of ten (10) days or more
after notice thereof from the Lender.

(d) Any Borrower shall fail or neglect to perform, keep or observe
any provision of any of the other Loan Documents (other than any provision
embodied in or covered by any other clause of this SECTION 8.1) and
continuance of such default after the grace period (if any) set forth therein.

(e) A default or breach shall occur under any other agreement,
document or instrument to which any Borrower or any Subsidiary thereof is a
party and such default is not cured or waived within any applicable grace
period and such default or breach (i) involves the failure to make any
payment when due in respect of any Indebtedness (other than the Obligations)
of any Borrower or any Subsidiary of any Borrower in excess of $50,000 in the
aggregate, or (ii) causes such Indebtedness or a portion thereof in excess of
$100,000 in the aggregate to become due prior to its stated maturity or prior
to its regularly scheduled dates of payment, or (iii) entitles any holder of
such Indebtedness or a trustee to cause such Indebtedness or a portion
thereof in excess of $100,000 in the aggregate to become due prior to its
stated maturity or prior to its regularly scheduled dates of payment,
regardless of whether such right is exercised or waived by such holder or
trustee.

(f) Any representation or warranty herein or in any Loan Document
or in any written statement, report, financial statement or certificate made
or delivered to Lender by any Borrower shall be untrue or incorrect in any
material respect, as of the date when made or deemed made.

(g) Assets of any Borrower or any Subsidiary thereof with a fair
market value of $500,000 or more shall be attached, seized, levied upon or
subjected to a writ or distress warrant, or come within the possession of any
receiver, trustee, custodian or assignee for the benefit of creditors of any
Borrower or any Subsidiary thereof and shall such condition shall continue
for thirty (30) days or more after any such Borrower has knowledge thereof.

(h) A case or proceeding shall have been commenced against any
Borrower or any Subsidiary thereof in a court having competent jurisdiction
seeking a decree or order in respect of any Borrower or any Subsidiary
thereof (i) under Title 11 of the United States Code, as now constituted or
hereafter amended or any other applicable federal, state or foreign
bankruptcy or other similar

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law, (ii) appointing a custodian, receiver, liquidator, assignee, trustee or
sequestrator (or similar official) for any Borrower or any Subsidiary thereof
or of any substantial part of such Person's assets, or (iii) ordering the
winding-up or liquidation of the affairs of any Borrower or any Subsidiary
thereof and such case or proceeding shall remain undismissed or unstayed for
forty-five (45) days or more or such court shall enter a decree or order
granting the relief sought in such case or proceeding.

(i) Any Borrower or any Subsidiary thereof shall (i) file a
petition seeking relief under Title 11 of the United States Code, as now
constituted or hereafter amended, or any other applicable federal, State or
foreign bankruptcy or other similar law, (ii) consent to the institution of
proceedings thereunder or to the filing of any such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee or sequestrator (or similar official) of any Borrower or
any Subsidiary thereof or of any substantial part of such Person's assets,
(iii) make an assignment for the benefit of creditors, or (iv) take any
corporate action in furtherance of any such action.

(j) A final judgment or judgments for the payment of money in
excess of $250,000 in the aggregate shall be rendered against any Borrower or
any Subsidiary thereof and the same shall not (i) be fully covered by
insurance, or (ii) within thirty (30) days after the entry thereof, have been
discharged or execution thereof stayed pending appeal, or shall not have been
paid or otherwise discharged prior to the expiration of any such stay.

(k) With respect to any Plan: (i) which is a defined contribution
plan or Welfare Plan, any Borrower or any Subsidiary or ERISA Affiliate
thereof or any other party-in-interest or disqualified Person shall engage in
any transactions which in the aggregate results in a final assessment to any
Borrower or any Subsidiary thereof in excess of $250,000 under Section 409 or
502 of ERISA or IRC Section 4975 which assessment has not been paid within 30
days of final assessment and which is not being contested pursuant to SECTION
5.2 hereof; (ii) any Borrower or any Subsidiary or ERISA Affiliate thereof
shall incur any accumulated funding deficiency, as defined in IRC Section
412, in the aggregate in excess of $100,000, or request a funding waiver from
the IRS for contributions in the aggregate in excess of $100,000; (iii) any
Borrower or any Subsidiary or ERISA Affiliate thereof shall not pay any
withdrawal liability which involves annual withdrawal liability payments
which exceed $100,000 as a result of a complete or partial withdrawal within
the meaning of Section 4203 or 4205 of ERISA, within 30 days after the date
such payment becomes due; (iv) any Borrower or any Subsidiary or ERISA
Affiliate thereof shall fail to make a required contribution by the due date
under Section 412 of the IRC or Section 302 of ERISA which would result in
the imposition of a lien under Section 412 of the IRC or Section 302 of ERISA
within 30 days after the date such payment becomes due; or

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(v) an ERISA Event (other than an event described in 29 CFR Section 2615.23)
with respect to a Plan has occurred, and within thirty (30) days Borrowers
have not contested such ERISA Event by appropriate proceedings.

(l) Any material provision of any Loan Document shall for any
reason cease to be valid or enforceable in accordance with its terms (or any
Borrower or any Subsidiary thereof shall challenge the enforceability of any
Loan Document), or any security interest created under any Loan Document
shall cease to be a valid and perfected first priority security interest or
Lien (except as otherwise permitted herein or therein) in any of the
Collateral purported to be covered thereby.

(m) LIEN PRIORITY. Lender fails to have an enforceable first
priority Lien (except for any prior Liens to which Lender has consented in
writing) on, or security interest in, any property given as security for the
Obligations.

8.2 REMEDIES. If any Default or Event of Default shall have
occurred and be continuing, Lender may, without notice, terminate this
facility with respect to further Advances, whereupon any further Advances
shall be made in Lender's sole discretion. If any Event of Default shall
have occurred and be continuing, Lender may, without notice,(a) declare all
or any portion of the Obligations to be forthwith due and payable and require
that any Letter of Credit Obligation be cash collateralized, all without
presentment, demand, protest or further notice of any kind, all of which are
expressly waived by Borrowers; (b) increase the rate of interest applicable
to the Loan to the Default Rate; and (c) exercise any rights and remedies
provided to Lender under the Loan Documents and/or at law or equity,
including all remedies provided under the Code; PROVIDED, HOWEVER, that upon
the occurrence of an Event of Default specified in SECTIONS 8.1 (h) OR (i)
or, all of the Obligations shall become immediately due and payable without
declaration, notice or demand by Lender.

8.3 WAIVERS BY BORROWERS. Except as otherwise provided for in
this Agreement or by applicable law, each of the Borrowers, jointly and
severally, waive: (i) presentment, demand and protest and notice of
presentment, dishonor, notice of intent to accelerate, notice of
acceleration, protest, default, nonpayment, maturity, release, compromise,
settlement, extension or renewal of any or all commercial paper, accounts,
contract rights, documents, instruments, chattel paper and guaranties at any
time held by Lender on which any Borrower may in any way be liable, and
hereby ratifies and confirms whatever Lender may do in this regard, (ii) all
rights to notice and a hearing prior to Lender's taking possession or control
of, or to Lender's replevy, attachment or levy upon, the Collateral or any
bond or security which might be required by any court prior to allowing
Lender to exercise any of its remedies, and (iii) the benefit of all
valuation, appraisal and

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<PAGE>

exemption laws. Each of the Borrowers acknowledges that it has been advised
by counsel of its choice with respect to this Agreement, the other Loan
Documents and the transactions evidenced by this Agreement and the other Loan
Documents.

9. SUCCESSORS AND ASSIGNS

9.1 SUCCESSORS AND ASSIGNS. This Agreement and the other Loan
Documents shall be binding on and shall inure to the benefit of Borrowers,
Lender and their respective successors and assigns, except as otherwise
provided herein or therein. None of the Borrowers may assign, transfer,
hypothecate or otherwise convey its rights, benefits, obligations or duties
hereunder or under any of the other Loan Documents without the prior express
written consent of Lender. Any such purported assignment, transfer,
hypothecation or other conveyance by any Borrower without the prior express
written consent of Lender shall be void. The terms and provisions of this
Agreement are for the purpose of defining the relative rights and obligations
of Borrowers and Lender with respect to the transactions contemplated hereby
and there shall be no third party beneficiaries of any of the terms and
provisions of this Agreement or any of the other Loan Documents.

10. MISCELLANEOUS

10.1 SETOFF. In addition to any rights now or hereafter granted
under applicable law and not by way of limitation of any such rights, upon
the occurrence and during the continuance of any Event of Default, Lender and
each holder of any Term Note or Note is hereby authorized at any time or from
time to time, without notice to any Borrower or to any other Person, any such
notice being hereby expressly waived, to set off and to appropriate and to
apply any and all balances held by it at any of its offices for the account
of Borrowers (regardless of whether such balances are then due to Borrowers)
and any other properties or assets any time held or owing by Lender or such
holder to or for the credit or for the account of Borrowers against and on
account of any of the Obligations which are not paid when due.

10.2 COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT. The Loan
Documents constitute the complete agreement between the parties with respect
to the subject matter thereof and may not be modified, altered or amended
except as set forth in SECTION 10.3 below. Any letter of interest or
commitment letter and/or fee letter between Borrowers and Lender or any of
their respective affiliates, predating this Agreement and relating to a
financing of substantially similar form, purpose or effect shall be
superseded by this Agreement.

10.3 AMENDMENTS AND WAIVERS.(a) Except as otherwise provided
herein, no amendment, modification, termination or waiver of any provision of
this Agreement or any of the other Loan

55
<PAGE>

Documents or consent to any departure by any Borrower or any of its
Subsidiaries therefrom shall in any event be effective unless the same shall
be in writing and signed by Lender and Borrowers.

(b) Each amendment, modification, termination or waiver shall be
effective only in the specific instance and for the specific purpose for
which it was given. No amendment, modification, termination or waiver shall
be required for Lender to take additional Collateral pursuant to any Loan
Document. No notice to or demand on any Borrower in any case shall entitle
any Borrower to any other or further notice or demand in similar or other
circumstances.

10.4 FEES AND EXPENSES. Borrowers shall reimburse Lender for all
reasonable out-of-pocket expenses, incurred in connection with the
preparation of the Loan Documents (including the reasonable fees and expenses
of all of its special loan counsel, advisors, consultants and auditors
retained in connection with the Loan Documents and the transactions
contemplated thereby and advice in connection therewith). In addition,
Borrowers shall reimburse Lender for all fees, costs and expenses, including
the fees, costs and expenses of counsel or other advisors (including
environmental and management consultants) for advice, assistance, or other
representation in connection with:

(a) any amendment, modification or waiver of, or consent with
respect to, any of the Loan Documents or, advice in connection with the
administration of the loans made pursuant hereto or its rights hereunder or
thereunder;

(b) any litigation, contest, dispute, suit, proceeding or
action (whether instituted by Lender, any Borrower or any other Person) in
any way relating to the Collateral, any of the Loan Documents or any other
agreement to be executed or delivered in connection therewith or herewith,
whether as party, witness, or otherwise, including any litigation, contest,
dispute, suit, case, proceeding or action, and any appeal or review thereof,
in connection with a case commenced by or against any or all of Borrowers or
any other Person that may be obligated to Lender by virtue of the Loan
Documents;

(c) any attempt to enforce any rights of Lender against any
or all of Borrowers or any other Person that may be obligated to Lender by
virtue of any of the Loan Documents; and

(d) efforts to verify, protect, evaluate, assess, appraise,
collect, sell, liquidate or otherwise dispose of any of the Collateral;

including, without limitation, all reasonable attorneys' and other professional
and service providers' fees arising from such services, including those in
connection with any appellate

56
<PAGE>

proceedings; and all reasonable expenses, costs, charges and other fees
incurred by such counsel and others in any way or respect arising in
connection with or relating to any of the events or actions described in this
SECTION 10.4 shall be payable, on demand, by Borrowers to Lender. Without
limiting the generality of the foregoing, such expenses, costs, charges and
fees may include: fees, costs and expenses of accountants, environmental
advisors, appraisers, investment bankers, management and other consultants
and paralegals; court costs and expenses; photocopying and duplication
expenses; court reporter fees, costs and expenses; long distance telephone
charges; air express charges; telegram charges; secretarial overtime charges;
and reasonable expenses for travel, lodging and food paid or incurred in
connection with the performance of such legal or other advisory services.

10.5 NO WAIVER. Lender's failure at any time or times, to require
strict performance by Borrowers of any provision of this Agreement and any of
the other Loan Documents shall not waive, affect or diminish any right of
Lender thereafter to demand strict compliance and performance therewith. Any
suspension or waiver of an Event of Default under this Agreement or any of
the other Loan Documents shall not suspend, waive or affect any other Event
of Default under this Agreement and any of the other Loan Documents whether
the same is prior or subsequent thereto and whether of the same or of a
different type. None of the undertakings, agreements, warranties, covenants
and representations of any Borrower contained in this Agreement or any of the
other Loan Documents and no Default or Event of Default by any Borrower under
this Agreement and no defaults by any Borrower under any of the other Loan
Documents shall be deemed to have been suspended or waived by Lender unless
such waiver or suspension is by an Instrument in writing signed by an officer
of or other authorized employee of Lender and directed to Borrowers
specifying such suspension or waiver.

10.6 REMEDIES. Lender's rights and remedies under this Agreement
shall be cumulative and nonexclusive of any other rights and remedies which
Lender may have under any other agreement, including the other Loan
Documents, by operation of law or otherwise. Recourse to the Collateral
shall not be required.

10.7 SURVIVAL OF OBLIGATIONS UPON TERMINATION OF FINANCING
AGREEMENTS. Except as otherwise expressly provided for in the Loan Documents,
no termination or cancellation (regardless of cause or procedure) of any
financing arrangement under this Agreement shall in any way affect or impair
the obligations, duties and liabilities of Borrowers or the rights of Lender
relating to any unpaid portion of the Loan or any other Obligation, due or
not due, liquidated, contingent or unliquidated or any transaction or event
occurring prior to such termination, or any transaction or event, the
performance of which is required after the Termination Date. Except as
otherwise expressly provided herein or in any other Loan Document, all
undertakings, agreements, covenants,

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<PAGE>

warranties and representations of or binding upon Borrowers, and all rights
of Lender, all as contained in the Loan Documents shall not terminate or
expire, but rather shall survive such termination or cancellation and shall
continue in full force and effect until such time as all of the Obligations
have been paid in full in accordance with the terms of the agreements
creating such Obligations.

10.8 SEVERABILITY. Wherever possible, each provision of this
Agreement and the other Loan Documents shall be interpreted in such a manner
as to be effective and valid under applicable law, but if any provision of
this Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.

10.9 CONFLICT OF TERMS. Except as otherwise provided in this
Agreement or any of the other Loan Documents by specific reference to the
applicable provisions of this Agreement, if any provision contained in this
Agreement is in conflict with, or inconsistent with, any provision in any of
the other Loan Documents, the provision contained in this Agreement shall
govern and control.

10.10 AUTHORIZED SIGNATURE. Until Lender shall be notified by
Akorn to the contrary, the signature upon any document or Instrument
delivered pursuant hereto of an officer of any Borrower listed on SCHEDULE
10.10 shall bind such Borrower and be deemed to be the act of such Borrower
affixed pursuant to and in accordance with resolutions duly adopted by such
Borrower's Board of Directors.

10.11 GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF
CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS
ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, THE INTERNAL LAWS (WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS) OF THE
STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, AND
ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. EACH BORROWER HEREBY
CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN COOK COUNTY,
CITY OF CHICAGO, ILLINOIS, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, PROVIDED, THAT
LENDER AND BORROWERS ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO
BE HEARD BY A COURT LOCATED OUTSIDE OF COOK COUNTY, CITY OF CHICAGO, ILLINOIS
AND, PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO
PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER

58
<PAGE>

JURISDICTION TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF
LENDER. EACH BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER
HEREBY WAIVES ANY OBJECTION WHICH SUCH BORROWER MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY
CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE BY SUCH COURT. EACH BORROWER HEREBY WAIVES PERSONAL SERVICE OF
THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT
AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE
MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH BORROWER AT THE
ADDRESS SET FORTH IN SCHEDULE D OF THIS AGREEMENT AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH BORROWER'S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.

10.12 NOTICES. Except as otherwise provided herein, whenever
it is provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon
either of the parties by the other party, or whenever either of the parties
desires to give or serve upon the other party any communication with respect
to this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be deemed to
have been validly served, given or delivered (i) upon the earlier of actual
receipt and three (3) Business Days after deposit in the United States Mail,
registered or certified mail, return receipt requested, with proper postage
prepaid, (ii) upon transmission, when sent by telecopy or other similar
facsimile transmission (with such telecopy or facsimile promptly confirmed by
delivery of a copy by personal delivery or United States Mail as otherwise
provided in this SECTION 10.12), (iii) one (1) Business Day after deposit
with a reputable overnight courier with all charges prepaid or (iv) when
delivered, if hand-delivered by messenger, all of which shall be addressed to
the party to be notified and sent to the address or facsimile number
indicated on this SECTION 10.12 or to such other address (or facsimile
number) as may be substituted by notice given as herein provided. The giving
of any notice required hereunder may be waived in writing by the party
entitled to receive such notice. Failure or delay in delivering copies of
any notice, demand, request, consent, approval, declaration or other
communication to any Person (other than Borrowers or Lender) designated on
this SECTION 10.12 to receive copies shall in no way adversely affect the
effectiveness of such notice, demand, request, consent, approval, declaration
or other communication.

If to Lender, at

The Northern Trust Company
50 South LaSalle Street

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<PAGE>

Chicago, Illinois 60675
Attention: Brian D. Beitz, Vice President
Telecopier No.: (312) 444-7028
Telephone No.: (312) 444-3987

with copies to:

Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attention: Younghee Jin Ottley, Esq.
Telecopier No.: (312) 558-5700
Telephone No.: (312) 558-5600

If to any Borrower, at

Akorn, Inc.
100 Tri-State International
Suite 100
Lincolnshire, Illinois 60069-4404
Attention: Rita J. McConville, Vice President/Chief Financial Officer
Telecopier No.: (847) 236-3823
Telephone No.: (847) 236-3851

With copies to:

Burke, Warren, MacKay & Serritella
330 North Wabash Avenue
Suite 2200
Chicago, Illinois 60611
Attention: Christopher Manning, Esq.
Telecopier No.: (312) 840-7900
Telephone No.: (312) 840-7010

10.13 SECTION TITLES. The Section titles and Table of Contents
contained in this Agreement are and shall be without substantive meaning or
content of any kind whatsoever and are not a part of the agreement between
the parties hereto.

10.14 COUNTERPARTS. This Agreement may be executed in any
number of separate counterparts, each of which shall collectively and
separately constitute one agreement.

10.15 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN
CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND
ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES
WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION
RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF
THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHT TO TRIAL BY

60
<PAGE>

JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG LENDER AND BORROWERS
ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP
ESTABLISHED AMONG THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER
LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO.

10.16 REINSTATEMENT. This Agreement shall remain in full force
and effect and continue to be effective should any petition be filed by or
against any Borrower for liquidation or reorganization, should any Borrower
become insolvent or make an assignment for the benefit of any creditor or
creditors or should a receiver or trustee be appointed for all or any
significant part of any Borrower's assets, and shall continue to be effective
or be reinstated, as the case may be, if at any time payment and performance
of the Obligations, or any part thereof, is, pursuant to applicable law,
rescinded or reduced in amount, or must otherwise be restored or returned by
any obligee of the Obligations, whether as a "voidable preference,"
"fraudulent conveyance," or otherwise, all as though such payment or
performance had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Obligations shall
be reinstated and deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.

11. CROSS-GUARANTY

11.1 CROSS-GUARANTY. Each Borrower hereby acknowledges and agrees
that such Borrower is jointly and severally liable for, and hereby absolutely
and unconditionally guarantees to each other Borrower and Lender the full and
prompt payment of, all Obligations owed or hereafter owing to Lender by each
other Borrowers.

11.2 OBLIGATIONS ABSOLUTE. The liability of each Borrower to Lender
hereunder shall not be affected or impaired by any of the following acts by
Lender: (i) any acceptance of collateral security, guarantors, accommodation
parties or sureties for any or all Obligations; (ii) one or more extensions or
renewals of Obligations (whether or not for longer than the original period) or
any modification of the interest rates, fees, maturities or principal amount of,
or other contractual terms applicable to any Obligations; (iii) any waiver or
indulgence granted to a Borrower, any delay or lack of diligence in the
enforcement of Obligations, or any failure to institute proceedings, file a
claim, give any required notices or otherwise protect any Obligations; (iv) any
full or partial release of, compromise or settlement with, or agreement not to
sue a Borrower or any guarantor or other person liable in respect of any
Obligations; (v) any release, surrender, cancellation or other discharge of any
evidence of Obligations or the acceptance of any Instrument in renewal or
substitution therefore; (vi) any failure to obtain collateral security
(including rights of setoff) for Obligations, or to obtain or

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<PAGE>

maintain the proper or sufficient creation and perfection thereof, or to
establish the priority thereof, or to preserve, protect, insure, care for,
exercise or enforce any collateral security; or any modification, alteration,
substitution, exchange, surrender, cancellation, termination, release or
other change, impairment, limitation, loss or discharge of any collateral
security; (vii) any collection, sale, lease or disposition of, or any other
foreclosure or enforcement of or realization on, any collateral security;
(viii) any assignment, pledge or other transfer of any Obligations or any
evidence thereof; or (ix) any manner, order or method of application of any
payments or credits upon Obligations. Each Borrower hereby waives any and
all defenses and discharges available to a surety, guarantor, or
accommodation co-obligor.

11.3 WAIVER. EACH BORROWER HEREBY WAIVES PRESENTMENT, DEMAND FOR
PAYMENT, NOTICE OF DISHONOR OR NONPAYMENT, AND PROTEST OF ANY INSTRUMENT
EVIDENCING OBLIGATIONS.

11.4 RECOVERY. If any payment is applied by Lender to the
Obligations and is thereafter set aside, recovered, rescinded or required to
be returned for any reason (including, without limitation, the bankruptcy,
insolvency or reorganization of a Borrower or any other obligor), the
Obligations to which such payment was applied shall for the purposes of this
SECTION 11 be deemed to have continued in existence, notwithstanding such
payment and application and this cross guaranty shall be enforceable as to
such Obligations as fully as if such payment and application had never been
made.

11.5 LIABILITY CUMULATIVE. The liability of Borrowers under this
SECTION 11 is in addition to and shall be cumulative with all liabilities of
each Borrower to Lender under this Agreement and the other Loan Documents to
which such Borrower is a party or in respect of any Obligations or obligation
of the other Borrower, without any limitation as to amount, unless the
Instrument or agreement evidencing or creating such other liability
specifically provides to the contrary.

[signature page(s) follow]

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<PAGE>

IN WITNESS WHEREOF, this Agreement has been duly executed as of the
date first written above.

AKORN, INC.

By: /s/ Rita J. McConville
---------------------------------------------
Title: /s/ VP, CFO
------------------------------------------

TAYLOR PHARMACEUTICALS, INC.

By: /s/ Rita J. McConville
---------------------------------------------
Title: /s/ VP, Sec'y - Treas.
------------------------------------------

THE NORTHERN TRUST COMPANY

By: /s/ Brian D. Beitz
---------------------------------------------
Title: /s/ Vice President
------------------------------------------

<PAGE>
EXHIBIT A

FORM OF NOTICE OF ADVANCE

____________, _____

The Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60675
Attn: Ms. Edie Reed
Fax: (312) 630-1566
Telephone: (312) 444-3352

Re: ADVANCE

Ladies and Gentlemen:

The undersigned, Akorn, Inc., as agent for ____________ ("BORROWER"),
refers to the Credit Agreement, dated as of December 29, 1997 (as amended, the
"CREDIT AGREEMENT", the terms defined therein being used herein as therein
defined), among the undersigned, Borrower, the other "Borrowers" named therein,
and The Northern Trust Company ("LENDER"), and hereby gives you notice,
irrevocably, pursuant to SECTION 2.1 of the Credit Agreement, that the Borrower
hereby requests an Advance under the Credit Agreement, and in that connection
sets forth below the information relating to such Advance as required by SECTION
2.1(a) of the Credit Agreement:

(i) The date of the requested Advance is __________, ____.

(ii) The aggregate amount of the requested Advance is $__________
(minimum Revolving Credit Advance for a LIBOR Loan is
$250,000).

(iii) The Advance requested is [a Prime Rate Loan] [a Federal
Funds Rate Loan] [a LIBOR Loan and the LIBOR Period
applicable thereto is ________ months].

(iv) The requested Advance is to be sent to:

[Name of Bank]
[City of Bank]
Beneficiary: [______]
Account No.: [number]
ABA No.: [number]
Attn: [name]

1
<PAGE>

The undersigned hereby certifies that all of the statements
contained in SECTION 3.2 of the Credit Agreement and in SECTION 4 of the
Security Agreement are true and correct in all material respects on the date
hereof, and will be true in all material respects on the date of the
requested Advance, before and after giving effect thereto and to the
application of the proceeds therefrom.

Very truly yours,

AKORN, INC.

By:________________________________

Name:______________________________

Title:_______________________________

2
<PAGE>
EXHIBIT B

NOTE

$15,000,000 Chicago, Illinois
December 29, 1997

FOR VALUE RECEIVED, the undersigned, AKORN, INC., a Louisiana
corporation ("AKORN"), and TAYLOR PHARMACEUTICALS, INC., an Illinois
corporation ("TAYLOR"), jointly and severally, promise to pay to the order of
THE NORTHERN TRUST COMPANY (the "LENDER") on or before December 29, 1999, the
principal amount of FIFTEEN MILLION DOLLARS ($15,000,000), or the amount
outstanding as endorsed on the grid attached to this Note (or recorded in the
Lender's books and records, if the Lender is the holder hereof). Such
endorsement or recording by the Lender shall, absent manifest error, be
rebuttably presumptive evidence of the principal balance due on this Note.

This Note evidences indebtedness incurred under that certain Credit
Agreement, dated as of December 29, 1997 (as amended, restated, supplemented
or otherwise modified, the "CREDIT AGREEMENT"), among Akorn, Taylor and the
Lender, to which agreement reference is hereby made for a statement of its
terms and provisions, including those under which this Note may be paid prior
to its due date or have its due date accelerated, and pursuant to which the
applicable interest rate herein set forth may be reduced. All capitalized
terms used but not otherwise defined herein shall have the meanings assigned
to them in the Credit Agreement.

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

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

<PAGE>

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

AKORN, INC.

By:______________________________

Title:___________________________

TAYLOR PHARMACEUTICALS, INC.

By:______________________________

Title:___________________________

<PAGE>

Schedule attached to Note dated as of December 29, 1997 of AKORN, INC. AND
TAYLOR PHARMACEUTICALS, INC., payable to the order of THE NORTHERN TRUST
COMPANY.

LOANS AND PRINCIPAL PAYMENTS

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

The aggregate unpaid principal amount shown on this schedule shall be
rebuttable presumptive evidence of the principal amount owing and unpaid on
this Note. The failure to record the date and amount of any loan on this
schedule shall not, however, limit or otherwise affect the obligations of the
Borrowers under the Credit Agreement or under this Note to repay the
principal amount of the loan together with all interest accruing thereon.

<PAGE>
EXHIBIT C

SECURITY AGREEMENT

This SECURITY AGREEMENT, dated as of December 29, 1997 (this
"Agreement"), among AKORN, INC., a Louisiana corporation ("AKORN"), TAYLOR
PHARMACEUTICALS, INC., an Illinois corporation ("TAYLOR"; collectively with
Akorn, the "BORROWERS", and each a "BORROWER"), and THE NORTHERN TRUST
COMPANY, an Illinois banking corporation (the "SECURED PARTY"), entered into
pursuant to that certain Credit Agreement of even date herewith by and among
Borrowers and Secured Party (hereinafter, as the same may from time to time
be amended, restated, supplemented or otherwise modified, the "CREDIT
AGREEMENT").

W I T N E S S E T H:

WHEREAS, pursuant to the terms and conditions of the Credit Agreement,
it is a condition precedent to the obligations of Secured Party to extend
certain financial accommodations to Borrowers, including loans to be
evidenced by the promissory note of Borrowers (hereinafter, as the same may
from time to time be amended, restated, supplemented or otherwise modified,
the "NOTE"), that the payment of the Note and the satisfaction of any other
liabilities of Borrowers to Secured Party be secured by assets of Borrowers
as provided for in this Security Agreement;

NOW, THEREFORE, as an inducement to Secured Party to enter into the
Credit Agreement and to extend financial consideration to Borrowers, and to
secure the performance of Borrowers' obligations thereunder, the parties
agree as follows:

1. DEFINITIONS. Unless the context otherwise requires, all terms used
but not otherwise defined herein shall have the meanings given to them in the
Credit Agreement, or if not there but in the Uniform Commercial Code, as
enacted in Illinois (the "CODE"), they shall have the same meaning herein as
in the Code.

2. SECURITY INTEREST. Borrowers each jointly and severally do hereby
pledge, assign, transfer and deliver to Secured Party and do hereby grant to
Secured Party a continuing security interest in and to the following property
or types of property of Borrowers, whether presently owned or existing or
hereafter acquired or coming into existence, and all additions and accessions
thereto and all substitutions and replacements therefor and improvements
thereto, and all proceeds (whether or not cash), products and accounts

<PAGE>

thereof, including without limitation, all proceeds of insurance covering the
same and of any tort claim in connection therewith (the "COLLATERAL"):

(a) Accounts, accounts receivable (including without limitation all
rights to payment for services rendered or goods sold or leased, whether or
not evidenced by an instrument or chattel paper and whether or not yet
earned by performance, however arising), chattel paper, contract rights,
instruments, key-man life insurance policies, documents, and tax refunds
(the "ACCOUNTS");

(b) General intangibles (including without limitation inventions,
designs, copyrights, copyright applications, patents, patent applications,
trademarks, trademark applications, trade names, licenses, leasehold
interests, tax refund claims, guaranty claims and security interests or
other security held by Borrower to secure accounts);

(d) Goods (other than Inventory), equipment, vehicles and fixtures,
together with accessions thereto and replacement parts therefor, including
all such goods described in any schedule now or hereafter attached hereto
(the "EQUIPMENT");

(e) All monies, accounts, deposits and property now or at any time
hereafter in the possession or under the control of Secured Party or its
agent;

(f) All books and records, including without limitation, customer
lists, credit files, computer programs, printouts and other materials and
records, pertaining to any of the foregoing;

(g) All documents of title evidencing or issued with respect to any
of the foregoing;

(h) All proceeds and products of all of the foregoing, including
without limitation, proceeds of insurance policies insuring the foregoing;
and

(i) Any other property of any kind which any Borrower may hereafter
at any time deliver to Secured Party to secure the obligations of Borrowers
to Secured Party and any proceeds of any such property;

but excluding therefrom (x) any general intangibles which terminate or become
terminable if a security interest is granted therein (until such time as any
required third party consent to such security interest shall have been given,
Borrowers hereby agreeing

2
<PAGE>

to use their best efforts to obtain such consents) and (y) any other property
of any Borrower which respect to which such Borrower is prohibited from
granting a security interest by agreements existing and in effect on the date
hereof (until such time as any required third party consent to such security
interest shall have been given, Borrowers hereby agreeing to use their best
efforts to obtain such consents).

3. LIABILITIES. This Agreement secures the payment and performance of
the Obligations (as defined in the Credit Agreement) and all obligations of
Borrowers now or hereafter existing under this Agreement and the other Loan
Documents and all renewals, extensions, restructurings and refinancings of
any of the above (all such debts, obligations and liabilities of Borrowers,
now existing or hereafter arising, being individually called a "LIABILITY"
and collectively the "LIABILITIES").

4. WARRANTIES OF BORROWERS. Borrowers each jointly and severally
warrants and represents that:

(a) Except to the extent specifically permitted in the Credit
Agreement, no financing statement, mortgage, notice of judgment or any
similar instrument (other than any which may have been filed on behalf of
Secured Party) covering any of the Collateral is on file in any public
office.

(b) Except to the extent specifically permitted in the Credit
Agreement, Borrowers are and will be the lawful owner of all Collateral,
free and clear of all liens, pledges, charges, mortgages, and claims other
than the security interest hereunder or any other security interest created
in favor of Secured Party, with full power and authority to execute this
Agreement and perform Borrowers' obligations hereunder and to subject the
Collateral to the security interest hereunder.

(c) Except for goods covered by negotiable warehouse receipts which
have been delivered to Secured Party or as promptly disclosed to Secured
Party from time to time in writing, all of the Collateral is located as set
forth on SCHEDULE 4(f) attached hereto, and is not in transit, and except
as promptly disclosed to Secured Party from time to time in writing, all
Inventory shall be of good and merchantable quality, and free from any
defects which would affect the market value of such Inventory, except for
obsolete, damaged, or defective inventory, which is immaterial in amount,
or against which there exists a reserve for inventory write down set forth
on Borrowers' most recent balance sheet.

(d) (i) All accounts receivable of Borrowers are genuine, are in all
respects what they purport to be, are not

3
<PAGE>

evidenced by a judgment and represent undisputed, bona fide transactions
completed or to be completed in accordance with the terms and conditions
of any document related thereto; (ii) none of the Accounts have been sold
or pledged to any other person or entity; and (iii) Borrowers have no
knowledge of any fact or circumstance which would impair the validity or
collectability of the Accounts in excess of a bad debt reserve account or
other contra-receivable account maintained by Borrowers.

(e) The only names by which any Borrower is known or under which any
Borrower is conducting its business are set forth on SCHEDULE 4(e).

(f) Each Borrower's chief place of business and chief executive
office and the office where it keeps its records concerning the Collateral
is as set forth on SCHEDULE 4(f).

5. COVENANTS OF BORROWERS. Borrowers each jointly and severally agree
that until payment in full of the Liabilities, they will:

(a) Provide and maintain insurance against loss and damage of the
Collateral pursuant to the requirements of the Credit Agreement, and unless
Secured Party otherwise agrees, shall cause all proceeds to be payable to
Secured Party as its interests may appear and shall name Secured Party as
an additional insured; the proceeds of such insurance shall be part of the
Collateral subject to the security interest of Secured Party hereunder, and
shall be applied as provided in the Credit Agreement. At any time at the
request of Secured Party, Borrowers shall deliver any such policies to
Secured Party.

(b) Defend the Collateral against the claims and demands of all
persons other than Secured Party and promptly pay all taxes, assessments,
and charges upon the Collateral and not sign (or permit to be signed) any
financing statements or other documents creating or perfecting a lien upon
or security interest in any of the Collateral except in favor of Secured
Party, or, except as otherwise specifically permitted in the Credit
Agreement, otherwise create, suffer, or permit to exist any liens or
security interests upon any Collateral other than in favor of Secured
Party.

(c) At the request of Secured Party, execute and deliver to Secured
Party at any time or from time to time one or more financing statements
pursuant to the Code in form sufficient to perfect a lien on all of the
Collateral, and will pay the cost of filing the same in all public offices
wherever filing is, or is deemed by Secured Party to be, reasonably
necessary or desirable. Borrowers hereby authorize Secured Party to

4
<PAGE>

prepare and to file, or cause to be filed, financing statements signed only
by Secured Party covering the Collateral and, in jurisdictions where any
Borrower's signature is required, Borrowers hereby authorize Secured Party
to sign such Borrower's signature to such financing statements on such
Borrower's behalf, and Borrowers agree to pay Secured Party all reasonable
fees and expenses (including attorneys' fees) incurred in filing the
financing statements, which fees and expenses shall become a part of the
Liabilities. A carbon, photographic or other reproduction of this Security
Agreement or of any financing statements shall be sufficient as financing
statement.

(d) Upon Secured Party's request, deliver any such certificates or
other documents of title representing or issued with respect to any of the
Collateral, with Secured Party's security interest and lien endorsed
thereon, to Secured Party and record such certificates or documents with
all appropriate regulatory agencies.

(e) Furnish to Secured Party, immediately upon the request of Secured
Party, any evidence of ownership of the Collateral, including without
limitation bills of sale, paid invoices, certificates of title, or
applications for title.

(f) Keep at its principal place of business its records concerning
the Collateral. Borrowers shall not, unless Secured Party shall otherwise
consent in writing, which consent shall not be unreasonably withheld,
duplicate any such records at any other addresses, except for back-up
copies created in the ordinary course of business, and Borrowers will
furnish to Secured Party such information concerning Borrower, the
Collateral, and the account debtors as Secured Party may from time to time
reasonably request and Secured Party will keep such information
confidential except from state or federal regulators of Secured Party and
Secured Party's auditors or accountants, or others to whom Secured Party
has a legal obligation to disclose such information; and Borrowers shall,
subject to the terms of the Credit Agreement, permit Secured Party from
time to time to inspect the Collateral and to inspect, audit, and make
copies of, and extracts from, all records and all other papers in the
possession of any Borrower pertaining to the Collateral and the accounts
debtors. After the occurrence and during the continuance of an Event of
Default, Secured Party shall have the right at any time or times to make
direct verification with the account debtors of any and all of the
Accounts.

(g) Except for transactions in the ordinary course of Borrowers'
business or otherwise expressly permitted by this Agreement and the other
Loan Documents or by Secured Party in writing, Borrowers and their
respective agents, servants or

5
<PAGE>

employees will not sell or assign or otherwise transfer the Collateral,
either in whole or in part, or any interest therein, nor, except for
transactions in the ordinary course of Borrowers' business, or otherwise
expressly permitted by this Agreement and the other Loan Documents or by
Secured Party in writing, will it remove or permit removal of any of the
Collateral from the locations where it now is, without the written
consent of Secured Party. Borrowers shall provide Secured Party at any
time at Secured Party's request with a reasonably complete, specific
description of all the Collateral and the locations thereof and shall,
subject to the terms of the Credit Agreement, at all reasonable times
give Secured Party, its agents and representatives full access to the
Collateral.

(h) Keep and maintain the Equipment in good operating condition and
repair (ordinary wear and tear excepted) and make all commercially and
reasonably necessary replacements and renewals to the Equipment so that the
value and operating efficiency thereof shall at all times be maintained and
preserved.

(i) Make appropriate entries upon its financial statements and its
books and records disclosing Secured Party's security interest in the
Collateral.

(j) If at any time any of the Collateral shall be or become evidenced
by any instrument, immediately notify Secured Party thereof, and, at the
request of Secured Party, deliver such instrument to Secured Party,
endorsed as requested by Secured Party.

(k) Immediately notify Secured Party of any material loss, damage,
destruction, or depreciation in the value of the Collateral.

(l) Except as permitted by SECTION 5(g) or SECTION 6 hereof or in the
Credit Agreement, not sell, transfer or otherwise dispose of any Collateral
without Secured Party's prior written consent.

(m) Immediately notify Secured Party if any Borrower (i) is known by
or conducting business under any name other than the name described in
SECTION 4(e) of this Agreement, (ii) is conducting any of its business or
operations at or out of offices or locations other than as described in
SCHEDULE 4(f) of this Agreement, or (iii) changes the location of its
principal office from the location described in SCHEDULE 4(f) of this
Agreement.

(n) Use its best efforts to obtain (i) a landlord's agreement in form
and substance acceptable to Secured Party

6
<PAGE>

from the lessor of each leased property currently being used by any
Borrower where Collateral is located, (ii) a bailee letter in form
and substance acceptable to Secured Party and with respect to any
warehouse where Collateral is located and (iii) a mortgagee's agreement
in form and substance satisfactory to Secured Party from the mortgagee
(if other than Secured Party) of each property owned by any Borrower
where Collateral is located. No real property or warehouse space shall
be leased or acquired by any Borrower after the Closing Date,
unless and until a landlord or mortgagee agreement or bailee letter, as
appropriate, shall first have been obtained with respect to such location.

6. USE OF THE COLLATERAL. Until notice to the contrary is given by
Secured Party after the occurrence and during the continuance of an Event of
Default, Borrowers may conduct their business in the ordinary course of business
substantially in the same manner as now conducted and may use, consume, or sell
the Collateral for such purposes, but a sale in the ordinary course of business
shall not include any transfer or sale in satisfaction, partial or complete, of
a debt owed by any Borrower.

7. COLLECTIONS.

(a) At any time and from time to time, after the occurrence and
during the continuance of an Event of Default, Secured Party may, upon
notice to Akorn and at Borrowers' reasonable expense, or, upon request of
Secured Party, Borrowers shall (i) notify any account debtors of the
existence of this Agreement, and (ii) direct such account debtors to pay
directly to Secured Party the amounts due or to become due from such
account debtors. Each account debtor so notified and directed may accept
the receipt of Secured Party for any such payment as a full release of any
amounts so paid; and

(b) If an Event of Default shall have occurred and be continuing,
Secured Party may enforce collection of any or all of the Collateral by
suit or otherwise, and surrender, release or exchange all or any part
thereof, or compromise or extend or renew for any period (whether or not
longer than the original period) any indebtedness thereunder; and

(c) Secured Party shall upon direction of Borrowers or may upon the
happening and during the continuance of an Event of Default, apply all
payments received from account debtors to the Liabilities when due (whether
by acceleration or otherwise) and may credit any balance after such payment
to the account of Borrowers.

7
<PAGE>

8. EVENTS OF DEFAULT. The occurrence of an Event of Default as defined in
the Credit Agreement or the Loan Documents, shall constitute an Event of Default
hereunder.

9. REMEDIES ON DEFAULT. If an Event of Default shall have occurred and be
continuing, Secured Party, in addition to any other rights set forth in the
Credit Agreement or other Loan Documents or as set forth herein, shall have all
the rights and remedies of a secured party under the Code, as to any Collateral
located in Illinois, and under the Uniform Commercial Code of any other
jurisdiction as to any Collateral therein located (whether or not the Code or
such other Uniform Commercial Code applies to the affected Collateral) and shall
further have, in addition to all other rights and remedies provided herein or by
law, the following rights and powers:

(a) Secured Party shall have the right to take possession of the
Collateral and, for that purpose, may enter, with the aid and assistance of
any person or persons, any premises where the Collateral, or any part
thereof, is, or may be, placed and remove the same.

(b) Secured Party may require Borrowers to assemble the Collateral
and to make it available to Secured Party at a place designated by Secured
Party which is reasonably convenient to Secured Party and Borrowers.

(c) Secured Party shall have the right from time to time to sell,
resell and deliver all or any part of the Collateral, at public or private
sale or otherwise, at the option of Secured Party, for cash or on credit or
for future delivery, in such parcel or parcels and at such time or times
and at such place or places, and upon such terms and conditions as Secured
Party may deem proper, all without (except as shall be required by
applicable statute and which cannot be waived) advertisement or demand upon
or notice to Borrowers or right of redemption of Borrowers, which are
hereby expressly waived to the fullest extent permitted by law and any
purchaser of Collateral at any such sale (including Secured Party) shall
acquire the same absolutely free from any right or claim of any kind,
including without limitation any equity of redemption which, together with
all rights of redemption, stay or appraisal which Borrowers may have under
any rule or statute Borrower hereby specifically and unconditionally waives
to the fullest extent permitted by law; Secured Party shall give to Akorn
at least fifteen (15) days' prior written notice, in the manner specified
in SECTION 15(b) hereof of the time and place of any public sale or the
time after which any private sale or any other intended disposition is to
be made, and any such notice shall be deemed to satisfy any requirement of
reasonable notice. Borrowers shall at all times remain liable for any
deficiency on the Liabilities.

8
<PAGE>

(d) Upon each such sale, Secured Party may, unless prohibited by
applicable statute which cannot be waived, purchase all or any part of the
Collateral being sold, free from and discharged of all trusts, claims,
right of redemption and equities of Borrowers, which are hereby waived and
released.

(e) Secured Party may, in its discretion, apply all proceeds received
by Secured Party in respect of any sale of, collection from or other
realization upon all or any part of the Collateral (after payment of any
amounts payable to Secured Party pursuant to SECTION 11 hereof) in whole or
in part against all or any part of the Liabilities in accordance with the
terms of the Credit Agreement and any amount remaining after payment in
full of all of the Liabilities shall be paid to Borrowers or to whomsoever
may be lawfully entitled to receive such surplus.

(f) Secured Party shall have the absolute right, in its sole
discretion, to dishonor checks drawn on deposit accounts maintained by
Borrowers with Secured Party and to hold such deposit accounts as cash
collateral to secure payment of the Liabilities. Notwithstanding the
foregoing, nothing contained herein shall interfere with the right of
Secured Party under law to set off the balances of any such deposit account
against the Liabilities.

10. RIGHTS OF SECURED PARTY. Secured Party may, from time to time, at its
option (but shall have no duty to):

(a) Perform any agreement of Borrowers hereunder which Borrowers
shall, after reasonable prior notice to Akorn thereof from Secured Party,
have failed to perform; and

(b) Take any other action which Secured Party deems necessary or
desirable for the preservation of the Collateral or Secured Party's
interest therein, including, after the occurrence and during the
continuance of an Event of Default: (i) any action to collect or realize
upon the Collateral; (ii) the discharge of taxes, liens, security
interests, or other encumbrances at any time levied or placed on the
Collateral; or (iii) the discharge or keeping current of any obligation of
Borrowers having effect on the Collateral.

11. INDEMNITY AND EXPENSE. Borrowers agrees to indemnify Secured Party
from and against any and all claims, losses and liabilities growing out of or
resulting from this Security Agreement (including, without limitation,
enforcement of this Security Agreement and any actions taken pursuant to
SECTIONS 9 and 10 hereof or any failure to act thereunder), except only for
claims, losses or liabilities resulting from Secured Party's willful misconduct
or gross negligence. Borrowers will, as

9
<PAGE>

provided in and pursuant to SECTION 10.4 of the Credit Agreement, pay to
Secured Party the amount of any and all reasonable expenses, including
reasonable fees and disbursements of its counsel and of any agents not
regularly in its employ, which Secured Party may incur in connection with (i)
the custody, preservation, use or operation of, or the sale of, collection
from or other realization upon, any of the Collateral, (ii) the exercise by
Secured Party of any of its rights or powers hereunder, or (iii) any failure
by Borrowers to perform or observe the provisions hereof. All such expenses
shall be deemed a part of the Liabilities for all purposes of this Security
Agreement and Secured Party may apply the Collateral hereunder to payment of
or reimbursement of itself for such expenses.

12. RESPONSIBILITY FOR COLLATERAL. Borrowers assume all liabilities
and responsibility in connection with all Collateral, and the obligations of
Borrowers hereunder, under the Notes and under the other Loan Documents,
shall in no way be affected or diminished by reason of the loss, destruction,
damage or theft of any of the Collateral or its unavailability for any reason.

13. POWER OF ATTORNEY. Each Borrower hereby irrevocably appoints
Secured Party, and any officer or agent of Secured Party, with full power of
substitution, its true and lawful attorney-in-fact with full, irrevocable
power and authority in such Borrower's place and stead and in such Borrower's
name and on its behalf or in Secured Party's own name, from time to time and
at any time in Secured Party's absolute discretion to do any and all things
required to be done to carry out the terms or to accomplish the purposes of
this Security Agreement as fully and effectually as such Borrower could do
but for this appointment, including without limitation the power to (i) sign
such Borrower's name to, and to file financing statements as provided in
SECTION 5(c) hereof, (ii) to execute, in connection with any sale under
SECTION 9 hereof, any endorsements, assignments or other instruments of
conveyance or transfer with respect to the Collateral, (iii) if an Event of
Default has occurred and is continuing, to notify and direct the United
States Post Office authorities by notice given in the name of such Borrower
and signed by Secured Party on behalf of such Borrower, to change the address
for delivery of all mail addressed to such Borrower relating to the
Collateral to an address to be designated by Secured Party, and to cause such
mail to be delivered to such designated address where Secured Party may open
all such mail and remove therefrom any notes, checks, acceptances, drafts,
money orders or other instruments included in the Collateral, (iv) if an
Event of Default has occurred and is continuing, to endorse the name of such
Borrower upon any notes, checks, acceptances, drafts, money orders,
instruments or other documents relating to the Collateral and to effect the
deposit and collection thereof, and (v) if an Event of Default has occurred
and is continuing, to endorse the name of such Borrower on any other
documents relating to the Collateral. Each Borrower hereby ratifies all
actions taken

10
<PAGE>

by or on behalf of Secured Party pursuant to this power of attorney or
otherwise as provided in this Security Agreement and neither Secured Party
nor any of its officers, employees or agents shall be liable for any acts or
omissions or for any error of judgment or mistake of fact or law except for
gross negligence or willful misconduct in its or their capacity as such
attorney-in-fact. This power of attorney is coupled with an interest and
shall be irrevocable until all of the Liabilities are paid in full and this
Security Agreement is terminated. The powers conferred upon Secured Party
hereunder are solely to protect its interests and shall not impose any duty
upon it to exercise any of such powers.

14. CONTINUING SECURITY INTEREST. This Security Agreement shall create a
continuing and, except as otherwise permitted hereunder and under the Credit
Agreement, first security interest in the Collateral and shall remain in full
force and effect until the payment in full in cash of the Liabilities and
termination of the Credit Agreement.

15. GENERAL.

(a) NONWAIVER; CUMULATIVE REMEDIES. No delay or omission on the part
of Secured Party in the exercise of any right or remedy shall operate as a
waiver thereof, and no single or partial exercise by Secured Party of any
right or remedy shall preclude other or further exercise thereof or the
exercise of any other right or remedy. All options, powers and rights
granted to Secured Party hereunder or under the Credit Agreement, the
Notes, or any other agreements, documents or instruments or under law shall
be cumulative and shall be in addition to any other options, powers and
rights of Secured Party under other applicable law or otherwise.

(b) NOTICES. Except as otherwise permitted herein, any notices or
consents required or permitted by this Agreement shall be in writing and
delivered as provided in SECTION 10.11 of the Credit Agreement.

(c) RETURN OR RELEASE OF COLLATERAL. At such time as Borrowers shall
pay all of the Liabilities and the Credit Agreement shall be terminated,
Secured Party shall return or release its interest in all Collateral upon
Akorn's request.

(d) SUCCESSORS AND ASSIGNS. This Agreement shall, upon execution and
delivery by Borrowers, become effective and shall be binding upon and inure
to the benefit of Borrowers and Secured Party and their respective
successors and assigns, except that no Borrower may transfer or assign any
of its rights or interest hereunder without the consent of Secured Party.
If at any time or times, by sale, assignment, negotiation, pledge or
otherwise, Secured Party transfers any Liability or Liabilities, which,
subject to the terms of the

11
<PAGE>

Credit Agreement, Secured Party may do, such transfer shall carry with
it Secured Party's rights, powers and remedies under this Security
Agreement with respect to the Liability transferred, and the transferee
shall become vested with such rights and remedies whether or not they
are specifically referred to in the transfer, unless, and then only to
the extent, that the terms of such transfer otherwise provide. If and
to the extent Secured Party retains any other Liability and Liabilities,
Secured Party shall continue to have the rights, powers and remedies
herein set forth with respect thereto.

(e) CAPTIONS. Captions in this Agreement are for convenience of
reference only and shall not define or limit any of the terms or provisions
hereof. References herein to sections and subsections without reference to
the document in which they are contained are references to this Agreement.

(f) SINGULAR AND PLURAL. Unless the context requires otherwise,
wherever used herein the singular shall include the plural and the plural
shall include the singular, and the use of one gender shall denote the
others where appropriate.

(g) COUNTERPARTS. This Agreement may be executed by the parties on
any number of separate counterparts, and by each party on separate
counterparts and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.

(h) CONSTRUCTION. This Agreement and the rights and obligations of
the parties hereunder shall be governed by, and construed and interpreted
in accordance with, the internal laws of the State of Illinois (without
regard to conflict of law provisions thereof).

(i) ENFORCEMENT COSTS. Each Borrower agrees to pay or reimburse
Secured Party as provided in and pursuant to SECTION 10.4 of the Credit
Agreement for all costs, expenses and fees (including reasonable legal fees
and reasonable time charges of attorneys who may be employees of Secured
Party) incurred by Secured Party in preparing, negotiating, enforcing or
preserving its rights under, this Agreement or any note, document, or other
instrument executed in connection herewith.

(j) SUBMISSION TO JURISDICTION; VENUE; JURY WAIVER. BORROWERS
IRREVOCABLY AGREE THAT, SUBJECT TO SECURED PARTY'S SOLE AND ABSOLUTE
ELECTION, ALL SUITS, ACTIONS OR OTHER PROCEEDINGS IN ANY WAY, MANNER OR
RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT OR ANY
DOCUMENT EXECUTED IN CONNECTION HEREWITH, SHALL BE SUBJECT TO LITIGATION IN
COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS.
BORROWERS HEREBY CONSENT AND SUBMIT TO THE JURISDICTION OF ANY

12
<PAGE>

LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID CITY AND STATE. BORROWERS
HEREBY WAIVE ANY RIGHT TO TRANSFER OR CHANGE THE VENUE OF ANY SUIT, ACTION
OR OTHER PROCEEDING BROUGHT AGAINST BORROWER BY SECURED PARTY IN ACCORDANCE
WITH THIS SECTION. EACH BORROWER AND SECURED PARTY HEREBY WAIVES ANY RIGHT
TO A TRIAL BY JURY WITH RESPECT TO ANY SUITS, ACTIONS OR OTHER PROCEEDINGS
IN ANY WAY, MANNER OR RESPECT ARISING OUT OF OR FROM OR RELATED TO THIS
AGREEMENT OR ANY DOCUMENT EXECUTED IN CONNECTION HEREWITH, INCLUDING
WITHOUT LIMITATION ANY CLAIMS UNDER LAWS GOVERNING CONTRACTS OR TORTS.

[Signature page follows]

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<PAGE>

IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.

BORROWERS:

AKORN, INC.

By:_________________________________

Title:_____________________________

TAYLOR PHARMACEUTICALS, INC.

By:_________________________________

Title:______________________________

SECURED PARTY:

THE NORTHERN TRUST COMPANY

By:_________________________________

Title: Vice President
<PAGE>

EXHIBIT D

FORM OF NOTICE OF CONVERSION/CONTINUATION

____________, _____

The Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60675
Attn: Ms. Edie Reed
Fax: (312) 630-1566
Telephone: (312) 444-3352

Re: ADVANCE

Ladies and Gentlemen:

The undersigned, Akorn, Inc., as agent for ____________
("BORROWER"), refers to the Credit Agreement, dated as of December 29, 1997
(as amended, the "CREDIT AGREEMENT", the terms defined therein being used
herein as therein defined), among the undersigned, Borrower, the other
"Borrowers" named therein, and The Northern Trust Company ("LENDER"), and
hereby gives you notice, irrevocably, pursuant to SECTION 2.14 of the Credit
Agreement, that the Borrower hereby requests a [conversion] [continuation] of
Loans under the Credit Agreement, and in that connection sets forth below the
information relating to such [conversion] [continuation] as required by
SECTION 2.14 of the Credit Agreement:

1. The date of the proposed [conversion] [continuation] is
______________, 199__ (which shall be a Business Day).

2. The aggregate amount of the Loans proposed to be [converted]
[continued] is $______________. [Specify which part is to be
converted and which part is to be continued, if appropriate.]

3. The type of Loans to be [continued] [converted] are [Prime Rate
Loans] [Federal Funds Rate Loans] [LIBOR Loans] and the type of
Loans resulting from the proposed [conversion] [continuation] are
[Prime Rate Loans] [Federal Funds Rate Loans] [LIBOR Loans].

4. The duration of the requested LIBOR Period for each LIBOR Loan
made as part of the proposed [conversion] [continuation] is
___________ months (which shall be 1, 2 or 3 months).

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<PAGE>

The undersigned hereby certifies that all of the statements contained
in SECTION 3.2 of the Credit Agreement and in SECTION 4 of the Security
Agreement are true and correct in all material respects on the date hereof, and
will be true in all material respects on the date of the requested Advance,
before and after giving effect thereto and to the application of the proceeds
therefrom.

Very truly yours,

AKORN, INC.

By:________________________________

Name:______________________________

Title:_______________________________

<PAGE>

SCHEDULE B
TO
CREDIT AGREEMENT
----------------

SCHEDULE OF ADDITIONAL CLOSING DOCUMENTS
----------------------------------------

In addition to, and not in limitation of, the conditions described in SECTION
3.1 of the Agreement, pursuant to SECTION 3.1(b), the following items must be
received by Lender in form and substance satisfactory to Lender on or prior
to the Closing Date (each capitalized term used but not otherwise defined
herein shall have the meaning ascribed thereto in the Agreement):

A. EXHIBITS AND SCHEDULES. All Exhibits and Schedules to the
Agreement, in form and substance satisfactory to Lender.

B. NOTE. One (1) duly executed original of the Note in favor of
Lender, dated the date hereof.

C. SECURITY AGREEMENT. Duly executed originals of the Security
Agreement, dated as of the date hereof, and all instruments, documents and
agreements executed pursuant thereto.

D. SECURITY INTERESTS AND UCC FILINGS. (a) Evidence satisfactory to
Lender that Lender has a valid and perfected first priority security interest
in the Collateral, including (i) such documents duly executed by Borrowers
(including financing statements under the UCC and other applicable documents
under the laws of any jurisdiction with respect to the perfection of Liens)
as Lender may request in order to perfect its security interests in the
Collateral and (ii) copies of UCC search reports listing all effective
financing statements that name any Borrower, as debtor, together with copies
of such financing statements, none of which shall cover the Collateral.

(b) Evidence satisfactory to Lender, including copies of all
UCC-1 and other financing statements filed in favor of any Borrower, with
respect to each location, if any, at which Inventory may be consigned.

E. TERMINATION STATEMENTS. (a) UCC-3 or other appropriate
termination statements, in form and substance satisfactory to Lender,
manually signed and releasing all liens of any existing lienholder upon any
of the personal property of Borrowers and any Subsidiary thereof, and (b)
termination of all blocked account agreements, bank agency agreements or
other similar agreements or arrangements except such agreements or
arrangements in favor of Lender.

<PAGE>

F. PAY-OFF LETTERS. Duly executed originals of pay-off letters from
First National Bank of Commerce ("FNBC") with respect to loans outstanding to
Borrowers and their Subsidiaries from FNBC and releases of mortgages
encumbering the real estates located at __________________, and UCC-3 or
other appropriate termination statements filed in connection therewith, in
form and substance satisfactory to the Lender.

G. INITIAL NOTICE OF ADVANCE. Duly executed originals of a Notice of
Advance, dated the Closing Date, with respect to the initial Advance to be
requested by any Borrower on the Closing Date.

H. LETTER OF DIRECTION. Duly executed originals of a letter of
direction from Akorn addressed to Lender, with respect to the disbursement of
the proceeds of the initial Advance.

I. OFFICER'S CERTIFICATE. Duly executed originals of a certificate
of the chief executive officer and chief financial officer of Akorn, dated
the date hereof, certifying, to the best of his knowledge after diligent
inquiry, to the fulfillment of all conditions precedent to closing of the
Agreement and to the truth and accuracy, as of the Closing Date, of the
representations and warranties of Borrowers contained in the Agreement and
each other Loan Document.

J. CHARTER AND GOOD STANDING. For Borrowers and each of their
Subsidiaries, such Person's (a) certificate or articles of incorporation and
all amendments thereto, (b) good standing certificates (including
verification of tax status) in its state of incorporation and (c) good
standing certificates (including verification of tax status) and certificates
of qualification of Borrower to conduct business in each jurisdiction where
its ownership or lease of property or the conduct of its business requires
such qualification, each of the foregoing dated a recent date prior to the
Closing Date and certified by the applicable Secretary of State or other
authorized governmental entity.

K. BYLAWS AND RESOLUTIONS. For Borrowers and each of their
Subsidiaries, such Person's (a) bylaws, together with all amendments thereto,
and (b) resolutions of such Person's Board of Directors, approving and
authorizing the execution, delivery and performance of the Loan Documents to
which such Person is a party and the transactions to be consummated in
connection therewith, each of the foregoing certified as of the date hereof
by such Person's corporate secretary or an assistant secretary as being in
full force and effect without any modification or amendment.

L. INCUMBENCY CERTIFICATES. For each Borrower and each of its
Subsidiaries, signature and incumbency certificates of the officers of each
such Person executing any of the Loan Documents, certified as of the date
hereof by such Person's corporate

<PAGE>

secretary or an assistant secretary as being true, accurate, correct and
complete.

M. OPINIONS OF COUNSEL. Duly executed originals of opinions of
Burke, Warren & MacKay, counsel for Borrowers and their Subsidiaries,
together with any local counsel opinions requested by Lender, each in form
and substance satisfactory to Lender and its counsel, dated the Closing Date,
and each accompanied by a letter addressed to such counsel from Borrowers and
their Subsidiaries authorizing and directing such counsel to address its
opinion to Lender and to include in such opinion an express statement to the
effect that Lender is authorized to rely on such opinion.

N. INSURANCE POLICIES AND ENDORSEMENTS. Copies of policies of
insurance, required hereby together with loss payable endorsements on
Lender's standard form, duly executed, and evidence of the payment of the
first year's premium therefor.

O. ACCOUNTANTS' LETTER. A letter authorizing Borrowers' independent
certified public accountants to communicate with Lender in accordance with
SECTION 5.2 hereof and acknowledging Lender's reliance on past and future
financial statements.

P. OTHER DOCUMENTS. Such other certificates, documents and
agreements respecting Borrowers or any Subsidiary thereof as Lender may, in
its sole discretion, request.

<PAGE>

FIRST AMENDMENT TO CREDIT AGREEMENT

THIS FIRST AMENDMENT (this "First Amendment"), dated as of March 27,
1998, is among AKORN, INC., a corporation organized under the laws of the
State of Louisiana ("Akorn"), TAYLOR PHARMACEUTICALS, INC., a corporation
organized under the laws of the State of Illinois ("Taylor"; collectively
with Akorn, the "Borrowers", and each a "Borrower") and THE NORTHERN TRUST
COMPANY, an Illinois banking corporation (the "Lender"), and shall amend that
certain Credit Agreement dated as of December 29, 1997 among the Borrowers
and the Lender (the "Credit Agreement").

WITNESSETH:

WHEREAS, the Borrowers and the Lender are parties to the Credit
Agreement; and

WHEREAS, the Borrowers and the Lender desire to amend the Credit
Agreement in certain respects as set forth herein;

NOW, THEREFORE, the parties hereto hereby agree as follows:

1. AMENDMENT TO THE CREDIT AGREEMENT.

1.1 TERMS USED. Terms used but not otherwise defined herein are used
with the same meanings as provided therefor in the Credit Agreement.

1.2 SECTION 2. Section 2.3 of the Credit Agreement is hereby deleted
in its entirety and the following is hereby inserted in lieu thereof:

2. REPRESENTATIONS AND WARRANTIES.

The Borrowers hereby remake, as at the date of execution hereof, all
of the representations and warranties set forth in Section 4 of the Credit
Agreement as amended hereby and

<PAGE>

additionally represents and warrants that: (a) the borrowings under the
Credit Agreement as amended hereby, the execution and delivery by the
Borrowers of this First Amendment and the performance by the Borrowers of
their obligations under this First Amendment and the Credit Agreement as
amended hereby are within the Borrowers' corporate powers, have been
authorized by all necessary corporate action, have received all necessary
governmental approval (if any shall be required) and do not and will not
contravene or conflict with any provision of law or of the charter or by-laws
of either of the Borrowers or any subsidiary or of any agreement binding upon
the Borrowers or any subsidiary; and (b) no Default or Event of Default under
the Credit Agreement as amended hereby has occurred and is continuing on the
date of execution hereof.

3. CONDITIONS OF EFFECTIVENESS.

The effectiveness of this First Amendment is subject to the
conditions precedent that the Lender shall have received all of the
following, each duly executed and dated the date hereof, in form and
substance satisfactory to the Lender and its counsel, at the expense of the
Borrowers, and in such number of signed counterparts as the Lender may
request:

(a) FIRST AMENDMENT. This First Amendment;

(b) BRING-DOWN STATEMENT. A signed statement on behalf of each
Borrower certifying that (1) the resolutions of the Board of Directors of
each Borrower, dated as of December 23, 1997 and delivered to Lender
pursuant to the Credit Agreement, approving and authorizing the execution,
delivery and performance of the Loan Documents, including any amendments
thereto, have not been revoked, modified, amended or rescinded and remain
in full force and effect, and (2) the incumbency certificates of each
Borrower, delivered to Lender pursuant to the Credit Agreement, setting
forth the signature and incumbency of each person authorized to execute the
Loan Documents, including any amendments thereto, remain true, accurate,
correct and complete.

4. MISCELLANEOUS.

4.1 COUNTERPARTS. This First Amendment may be executed by the parties on
any number of separate counterparts and by each party on separate counterparts;
each counterpart shall be deemed an original instrument; and all of the
counterparts taken together shall be deemed to constitute one and the same
instrument.

4.2 SUCCESSORS AND ASSIGNS. This First Amendment and the Credit Agreement
as amended hereby shall be binding upon and inure to the benefit of the
Borrowers, the Lender and their respective successors and assigns, except that
the Borrowers may not transfer or assign any of its rights or interest hereunder
or thereunder without the prior written consent of the Lender.

-2-
<PAGE>

4.3 CAPTIONS. Captions in this First Amendment are for convenience of
reference only and shall not define or limit any of the terms or provisions
hereof.

4.4 FEES. The Borrowers agree to pay or reimburse the Lender for all
reasonable costs and expenses of preparing and seeking advice in regard to
this First Amendment and any document or instrument executed in connection
herewith and therewith (including legal fees and reasonable time charges of
attorneys who may be employees of the Lender, whether in or out of court, in
original or appellate proceedings or in bankruptcy).

4.5 GOVERNING LAW. THIS AGREEMENT AND THE OBLIGATIONS ARISING
HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, THE INTERNAL LAWS (WITHOUT REGARD TO CONFLICT OF LAW PROVISIONS) OF THE
STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE,
AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. EACH BORROWER
HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN COOK
COUNTY, CITY OF CHICAGO, ILLINOIS, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR
AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING
TO THIS FIRST AMENDMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS, PROVIDED, THAT LENDER AND BORROWERS ACKNOWLEDGE THAT ANY APPEALS
FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF COOK
COUNTY, CITY OF CHICAGO, ILLINOIS AND PROVIDED, THAT NOTHING IN THIS
AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE
COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. EACH BORROWER EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND EACH BORROWER HEREBY WAIVES ANY OBJECTION
WHICH SUCH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF
SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH
BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINTS AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINTS OR OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO SUCH BORROWER AT THE ADDRESS SET FORTH IN THE CREDIT
AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER
OF SUCH BORROWER'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN
THE U.S. MAILS, PROPER POSTAGE PREPAID.

-3-
<PAGE>

4.6 AMENDMENT TO CREDIT AGREEMENT. This First Amendment shall be deemed
to be an amendment to the Credit Agreement. All references to the Credit
Agreement in any other document or instrument shall be deemed to refer to the
Credit Agreement as previously amended and amended hereby. As hereby amended,
the Credit Agreement is hereby ratified and confirmed in each and every respect.

[signature page to follow]

-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be executed by their duly authorized officers as of the day and
year first written above.

AKORN, INC.,
a Louisiana corporation

By: /s/ Rita J. McConville
-----------------------------------
Name: Rita J. McConville
Title: CFO

TAYLOR PHARMACEUTICALS, INC.,
an Illinois corporation

By: /s/ Rita J. McConville
-----------------------------------
Name: Rita J. McConville
Title: Secretary

THE NORTHERN TRUST COMPANY,
an Illinois banking corporation

By: /s/ Brian D. Beitz
-----------------------------------
Name: Brian D. Beitz
Title: Vice President

<PAGE>

SECOND AMENDMENT TO CREDIT AGREEMENT

THIS SECOND AMENDMENT (this "Second Amendment"), dated as of June 30,
1998, is among AKORN, INC., a corporation organized under the laws of the
State of Louisiana ("Akorn"), TAYLOR PHARMACEUTICALS, INC., a corporation
organized under the laws of the State of Illinois ("Taylor"; collectively
with Akorn, the "Borrowers", and each a "Borrower") and THE NORTHERN TRUST
COMPANY, an Illinois banking corporation (the "Lender"), and shall amend that
certain Credit Agreement dated as of December 29, 1997 among the Borrowers
and the Lender, as previously amended by a First Amendment thereto dated as
of March 27, 1998 (the "Credit Agreement").

W I T N E S S E T H :

WHEREAS, the Borrowers and the Lender are parties to the Credit Agreement;
and

WHEREAS, the Borrowers and the Lender desire to amend the Credit Agreement
in certain respects as set forth herein;

NOW, THEREFORE, the parties hereto hereby agree as follows:

1. AMENDMENT TO THE CREDIT AGREEMENT.

1.1 TERMS USED. Terms used but not otherwise defined herein are used with
the same meanings as provided therefor in the Credit Agreement.

1.2 INCREASE IN COMMITMENT. The definition of "Commitment" in Section 1.1
is hererby amended by deleting the amount "Fifteen Million United States Dollars
($15,000,000)" appearing therein and substituting therefor the amount
"Twenty-Five Million United States Dollars ($25,000,000)".

1.3 FED FUNDS MARGIN. The definition of "Federal Funds Rate" in Section
1.1 is hereby amended by inserting the phrase "one eighth of one percent (1/8%),
plus (c)" immediately following "(b)" and prior to "the Applicable Percentage"
in the last line thereof.

1.4 LIBOR INTEREST PERIODS. Item (5) in the definition of "LIBOR Period"
in Section 1.1 is hereby amended by deleting the number "five (5)" appearing in
the last line thereof and substituting therefor the number "eight (8)".

1.5 NEW NOTE. The Loan shall be evidenced by a new promissory note (the
"New Note") of the Borrowers, substantially in the form of Exhibit A hereto,
dated as of June 30, 1998, payable to the order of the Lender. The New Note
constitutes a renewal and restatement of, and a replacement and substitute for,
the $15,000,000 Note of the Borrowers payable to the Lender and dated as if
December 29, 1997 (the "Original Note"). The indebtedness evidenced by the
Original Note is continuing indebtedness, and nothing herein or in the New Note
shall be deemed

<PAGE>

to constitute a payment, settlement or novation of the Original Note or to
release or otherwise adversely affect any lien, mortgage or security interest
securing such indebtedness or any rights of the Lender against any guarantor,
surety or other party primarily or secondarily liable for such indebtedness.
The term "Note", wherever used in the Credit Agreement with respect to the
note evidencing the Loan, shall be deemed to refer to the New Note. The form
of Note appearing in Exhibit B to the Credit Agreement is hereby deleted and
replaced in its entirety by the form of Note appearing as Exhibit A hereto.

2. REPRESENTATIONS AND WARRANTIES.

The Borrowers hereby remake, as at the date of execution hereof, all of the
representations and warranties set forth in Section 4 of the Credit Agreement as
amended hereby and additionally represents and warrants that: (a) the borrowings
under the Credit Agreement as amended hereby, the execution and delivery by the
Borrowers of this Second Amendment and the performance by the Borrowers of their
obligations under this Second Amendment and the Credit Agreement as amended
hereby are within the Borrowers' corporate powers, have been authorized by all
necessary corporate action, have received all necessary governmental approval
(if any shall be required) and do not and will not contravene or conflict with
any provision of law or of the charter or by-laws of either of the Borrowers or
any subsidiary or of any agreement binding upon the Borrowers or any subsidiary;
and (b) no Default or Event of Default under the Credit Agreement as amended
hereby has occurred and is continuing on the date of execution hereof.

3. CONDITIONS OF EFFECTIVENESS.

The effectiveness of this Second Amendment is subject to the conditions
precedent that the Lender shall have received all of the following, each duly
executed and dated the date hereof, in form and substance satisfactory to the
Lender and its counsel, at the expense of the Borrowers, and in such number of
signed counterparts as the Lender may request:

(a) SECOND AMENDMENT. This Second Amendment;

(b) AUTHORIZING RESOLUTIONS. Copies, certified by the Secretary or
an Assistant Sectretary of each Borrower, of Resolutions of the Boards
of Directors of each Borrower authorizing the execution and delivery
by the duly authorized officers of each Borrower of this Second
Amendment, the New Note and any related documents and instruments, and
the performance by each Borrower of its obligations thereunder.

(c) BRING-DOWN STATEMENT. A signed statement on behalf of each
Borrower certifying that the incumbency certificates of each Borrower,
delivered to Lender pursuant to the Credit Agreement, setting forth
the signature and incumbency of each person authorized to execute the
Loan Documents, including any amendments thereto, remain true,
accurate, correct and complete.

(d) MISCELLANEOUS. Such other documents as the Lender may request.

-2-
<PAGE>

4. MISCELLANEOUS.

4.1 COUNTERPARTS. This Second Amendment may be executed by the parties on
any number of separate counterparts and by each party on separate counterparts;
each counterpart shall be deemed an original instrument; and all of the
counterparts taken together shall be deemed to constitute one and the same
instrument.

4.2 SUCCESSORS AND ASSIGNS. This Second Amendment and the Credit
Agreement as amended hereby shall be binding upon and inure to the benefit of
the Borrowers, the Lender and their respective successors and assigns, except
that the Borrowers may not transfer or assign any of its rights or interest
hereunder or thereunder without the prior written consent of the Lender.

4.3 CAPTIONS. Captions in this Second Amendment are for convenience of
reference only and shall not define or limit any of the terms or provisions
hereof.

4.4 FEES. The Borrowers agree to pay or reimburse the Lender for all
reasonable costs and expenses of preparing and seeking advice in regard to this
Second Amendment and any document or instrument executed in connection herewith
and therewith (including legal fees and reasonable time charges of attorneys who
may be employees of the Lender, whether in or out of court, in original or
appellate proceedings or in bankruptcy).

-3-
<PAGE>

PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY
CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE BY SUCH COURT. EACH BORROWER HEREBY WAIVES PERSONAL SERVICE OF
THE SUMMONS, COMPLAINTS AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT
AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS OR OTHER PROCESS MAY BE MADE
BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH BORROWER AT THE ADDRESS SET
FORTH IN THE CREDIT AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED
COMPLETED UPON THE EARLIER OF SUCH BORROWER'S ACTUAL RECEIPT THEREOF OR THREE
(3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

4.6 AMENDMENT TO CREDIT AGREEMENT. This Second Amendment shall be deemed
to be an amendment to the Credit Agreement. All references to the Credit
Agreement in any other document or instrument shall be deemed to refer to the
Credit Agreement as previously amended and amended hereby. As hereby amended,
the Credit Agreement is hereby ratified and confirmed in each and every respect.

IN WITNESS WHEREOF, the parties heretohave caused this First Amendment to
be executed by their duly authorized officers as of the day and year first
written above.

AKORN, INC.,
a Louisiana corporation

By: ________________________________
Name: ______________________________
Title: _______________________________

TAYLOR PHARMACEUTICALS, INC.,
an Illinois corporation

By: ________________________________
Name: ______________________________
Title: _______________________________

THE NORTHERN TRUST COMPANY
an Illinois banking corporation

By: ________________________________
Name: ______________________________
Title: _______________________________

-4-
<PAGE>

EXHIBIT A TO SECOND AMENDMENT

NOTE

$25,000,000 Chicago, Illinois
June 30, 1998

FOR VALUE RECEIVED, the undersigned, AKORN, INC., a Louisiana corporation
("AKORN"), and TAYLOR PHARMACEUTICALS, INC., an Illinois corporation ("TAYLOR"),
jointly and severally, promise to pay to the order of THE NORTHERN TRUST COMPANY
(the "Lender") on or before December 29, 1999, the principal amount of
TWENTY-FIVE MILLION DOLLARS ($25,000,000), or the amount outstanding as endorsed
on the grid attached to this Note (or recorded in the Lender's books and
records, if the Lender is the holder hereof). Such endorsement or recording by
the Lender shall, absent manifest error, be rebuttably presumptive evidence of
the principal balance due on this Note.

This Note evidences indebtedness incurred under that certain Credit
Agreement, dated as of December 29, 1997, as amended by a First Amendment
thereto dated as of March 27, 1998, and a Second Amendment thereto dated as of
June 30, 1998 (as the same may be subsequently further amended, restated,
supplemented or otherwise modified, the "CREDIT AGREEMENT"), among Akorn, Taylor
and the Lender, to which agreement reference is hereby made for a statement of
its terms and provisions, including those under which this Note may be paid
prior to its due date or have its due date accelerated, and pursuant to which
the applicable interest rate herein set forth may be reduced. All capitalized
terms used but not otherwise defined herein shall have the meanings assigned to
them in the Credit Agreement. This Note constitutes a renewal and restatement
of, and a replacement and substitute for, the Note dated as of December 29,
1997, of the undersigned payable to the order of the Lender in the principal
amount of $15,000,000 (the "Original Note"). The indebtedness under the
Original Note is continuing indebtedness hereunder, and nothing herein shall be
deemed to release or otherwise adversely affect any lien, mortgage or security
interest securing such indebtedness or any rights of the Lender against any
guarantor, surety or other party primarily or secondarily liable for such
indebtedness.

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

Subject to the terms and conditions of the Credit Agreement, the
undersigned agree to pay

<PAGE>

all reasonable expenses, including reasonable attorneys' fees and legal
expenses, incurred by the holder of this Note in attempting to collect any
amounts payable hereunder. The undersigned irrevocably waive presentment,
protest, demand and notice of any kind in connection herewith.

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

AKORN, INC.,
a Louisiana corporation

By: ________________________________
Title: _______________________________

TAYLOR PHARMACEUTICALS, INC.,
an Illinois corporation

By: ________________________________
Title: _______________________________

-2-

<PAGE>

Schedule attached to Note dated as of June 30, 1998 of AKORN, INC. and TAYLOR
PHARMACEUTICALS, INC., payable to the order of THE NORTHERN TRUST COMPANY.

LOANS AND PRINCIPAL PAYMENTS

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

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

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

The aggregate unpaid principal amount shown on this schedule shall be rebuttable
presumptive evidence of the principal amount owing and unpaid on this Note. The
failure to record the date and amount of any loan on this schedule shall not,
however, limit or otherwise affect the obligations of the Borrowers under the
Credit Agreement or under this Note to repay the principal amount of the loan
together with all interest accruing thereon.

<PAGE>

EXHIBIT 11.1

COMPUTATION OF NET INCOME PER SHARE
(In Thosands, Except Per Share Data)

<TABLE>
<CAPTION>
Six months
Three months ended Six months ended Year ended ended
June 30, June 30, December 31, December 31, Years ended June 30,
1998 1997 1998 1997 1997 1996 1996 1995
---- ---- ---- ---- ---- ---- ---- ----

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings
Income applicable to common stock $ 1,101 $ 742 $ 2,149 $ 164 $ 1,792 $ 44 $ 788 $ 2,506
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Shares
Weighted average number of shares outstanding 17,850 16,598 17,769 16,596 16,614 16,580 16,383 16,236

Net income per share, basic $ 0.06 $ 0.04 $ 0.12 $ 0.01 $ 0.11 $ 0.00 $ 0.05 $ 0.15

Addional shares assuming conversion of options 1,244 202 1,068 206 311 183 405 563
------- ------- ------- ------- ------- ------- ------- -------
Pro forma shares 19,094 16,800 18,837 16,802 16,925 16,763 16,788 16,799
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Net income per share, diluted $ 0.06 $ 0.04 $ 0.11 $ 0.01 $ 0.11 $ 0.00 $ 0.05 $ 0.15
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>

<PAGE>

Exhibit 21.1

Subsidiaries of Akorn, Inc.

Name State of Incorporation
---- -----------------------
<S> <C>
1. Akorn Manufacturing, Inc. Illinois
2. Spectrum Scientific Pharmaceuticals, Inc. Louisiana
3. Walnut Pharmaceuticals, Inc. Louisiana
4. Compass Vision, Inc. Louisiana

</TABLE>

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the use in this Registration Statement of Akorn, Inc. on Form
S-1 of our report dated February 25, 1998, appearing in the Prospectus, which
is part of this Registration Statement.

We also consent to the reference to us under the headings "Selected
Consolidation Financial Data" and "Experts" in such Prospectus.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois
July 28, 1998